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Issue 30 – July 2008

Contents

Cases
Features

Articles
News
Events

Offers (how to claim book discounts)

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Cases

1. SpC 687 The executors of Mr D W C Piercy (deceased) v Revenue and Customs Commissioners

Cite: SpC 687
Court: Special Commissioners
Judges: Howard M Nowlan
Hearing date: 9 June 2008
Representation: Michael Collins; Colin Ryder.
Summary: inheritance tax – whether the shares in a company that claimed always to have been a land development company were shares in a company "making or holding investments" so as to preclude business property relief under section 105(3) Inheritance Tax Act 1984 – substantial amount of rent received in respect of properties that had been let – appeal allowed

This was an appeal raising the single question of whether the shares in a company, Temple Lodge Limited (Temple Lodge), were shares in a company "whose business consisted wholly or mainly [...] in making or holding investments".

The question has to be answered as at the date of the death of Mr David Piercy, the managing director and a major shareholder in the company, on 24 October 1999.

If the shares were shares in such an investment company then section 105(3) Inheritance Tax Act (IHTA) 1984 would deny business property relief in relation to the value of the shares on the relevant death.

If the appellants sustained the argument that the company was a property development company whose holdings of land ranked as stock, and if the substantial amounts of rental income received by the company did not undermine this claim, then the shares will have qualified for 100 per cent relief from inheritance tax.

The judge stated: “It therefore seems to me that, reverting to the two possible rationales for retention of properties, with the resultant significant receipt of rents, the explanation lies far more in the sphere of various motives geared to protecting and eventually later realising future development potential, rather than the alternative explanation of the company simply being ‘landed with various unsaleable interests’ such that various residues of developments had to be let.

“In light of this and because I consider that the first explanation is utterly inconsistent with any contention that the properties were appropriated from stock to investment, my decision is that this company held none of its properties as investments, and, as I have already said, the rather self-evident point is then that a company with stock, but not investments, can hardly be treated as conducting the business of acquiring and holding investments”.
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2. Bailhache Labesse Trustees Limited and others v Revenue and Customs Commissioners

Cite: SpC 688
Court: Special Commissioners
Judge: Howard M Nowlan
Hearing date: 10 June 2008
Representation: Dr David Southern; Bruce Carr
Summary: inheritance tax – interpretation of sections 23 and 144 Inheritance Tax Act (IHTA) 1984 – Whether the appointment of 25 per cent shares in the remainder interests in settled property within 12 months of the death of the life tenant to each of two charities ranked as exempt transfers on the death of the life tenant – Whether such appointments were deemed to be appointments by discretionary trustees of "property settled by his will" on the death of the life tenant, by virtue of section 49 IHTA 1984, so as to bring section 144 IHTA 1984 into operation – Purposive constructions of statutory provisions – Lliability of non-resident trustees for inheritance tax in relation to settlements created by UK domiciled persons and other technical arguments – Appeals dismissed

The main points in dispute were points on the interpretation of sections 23 and 144 Inheritance Tax Act (IHTA) 1984. Several other technical points were also in dispute, but these were relatively minor and were virtually withdrawn by counsel for the appellants.

The judge stated: “I agree with the respondents that the territorial ambit of inheritance tax is geared to the domicile of the deceased, donor or settlor, and the situs of the property. There is no occasion to treat non-resident trustees who hold property that is within the charge as themselves not being chargeable. I find nothing in the provisions for the secondary recovery of tax as offensive such that the provisions should be struck out on vestey lines. The provisions indeed seem to be sensible and necessary provisions for the proper collection of tax that might well otherwise be avoided, and since they ensure that tax is only collected on a ‘limited recourse’ basis out of relevant inherited assets, there seems nothing unduly burdensome about the machinery.

“As to the human rights point, the conclusion in paragraph 53 effectively answers this, but I accept that all that I am required to do is to interpret domestic legislation, where possible, in accordance with human rights principles. Since there is no ambiguity in the domestic legislation and since the provisions of the legislation anyway seem to me to be manifestly required for the protection of the exchequer, there is no interpretation point that I can take, and none that I feel even required to take.”
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3. Knowles v Knowles

Cite: [2008] All ER (D) 168 (Jun)
Court: Court of Appeal, Civil Division
Judge: Mummery, Dyson and Maurice Kay LJJ
Hearing date: 13 June 2008
Representation: Emily Campbell (instructed by Hill Dickinson LLP) for the claimant; Adam Smith (instructed by the Bar Pro Bono Unit) for the defendant
Summary: Executor and administrator – Dealings with assets of estate – Possession – Action for possession against executrix's severely mentally disabled brother – Brother and litigant in person failing to comply with consent order – Judge making order for possession and striking out defence and counterclaim – Application to suspend possession order refused – Whether judge erring

The claimant and her severely mentally disabled defendant brother were in dispute about a property that belonged to their deceased mother. The claimant commenced possession proceedings against the defendant in her capacity as sole executrix of the mother's estate. The defendant lived on the property.

The defendant, as a litigant in person, served a defence and counterclaim that stated his mother had promised to leave the property to him in return for the financial support that he provided to her. On 7 April 2006, a consent order was made by the judge. The order provided that the defendant was to deliver possession of the property to his sister and that the order would be suspended if he provided her with certain information by 28 April. The defendant failed to comply with that order. An unless order was therefore made in the absence of the defendant.

The defendant did not comply with it. Further hearings were scheduled, including one on 24 July 2006. At that hearing, the judge was informed that the defendant's wife had telephoned the court stating that the defendant was seriously ill and that neither she nor the defendant would be able to attend.

The judge observed that the defendant had not complied with the unless order and had not filed the list of documents that he had been required to serve. The judge concluded that the defendant had been on notice of the hearing and was satisfied that there had been non-compliance with the orders, and that there was no alternative but to strike out the defence and counterclaim on the basis of non-compliance with the provisions of the consent order. The judge, therefore, struck out the defence and counterclaim and made an order for possession of the property.

The defendant made an application to set aside the order of 24 July 2006. The judge dealt with that application on 11 May 2007. He referred to the history of the proceedings; the non-attendance of the defendant at two hearings; and his disability. The judge stated that the defendant was “fluid, lucid and articulate”.

He concluded that there was no reason for the delay in the defendant serving further information. He said that the defendant had continually failed to comply with orders, and as a litigant in person was responsible for ensuring compliance with orders. He, therefore, concluded that the order for possession was justified and that it was not appropriate to stay or suspend the order for possession. He accordingly refused the application. The defendant appealed against that decision.

He submitted that the judge had not paid sufficient regard to the fact that he was mentally disabled; and that he had been unrepresented and was therefore unaware of the necessity of compliance with orders. The claimant contended that the fact that someone was a litigant in person could not be a ground for setting aside an order. The defendant submitted fresh evidence to the court.

The appeal would be dismissed.

The fresh evidence indicated that the defendant suffered from a serious disability, but it did not show that by reason of his mental disability he was unable to comply with the provisions of the consent order, and that was fatal to the defendant's argument that there were grounds for setting aside the order of 24 July 2006.

It was clear from the judgments of 24 July 2006 and 11 May 2007, that the judge had been fully alive to the problems that the defendant had. The judge had had the opportunity to see the defendant and was satisfied of his ability. In all the circumstances, there were no grounds upon which the exercise of the judge's discretion could be upset. The judge had exercised his discretion lawfully at 24 July 2006 and 11 May 2007 hearings, and the exercise of his discretion was therefore not vitiated.
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4. Kwawagen and another v Royal National Lifeboat Institution

Cite: [2008] All ER (D) 76 (Jun)
Court: Chancery Division
Judge: Sarah Asplin QC (sitting as a Deputy High Court Judge
Hearing date: 9 June 2008
Representation: Mark Jones (instructed by Abbot Beresford) for the claimants; Elspeth Talbot Rice QC (instructed by Wilsons) for the defendants
Summary: Will – Evidence – Existence of will – Claimants contending deceased dying intestate – Defendants arguing extant will naming them as beneficiaries – Whether will relied upon by defendants valid

The claimants were respectively the widow and the daughter of the deceased, who died in January 2005 while domiciled in England. Both claimants were Dutch nationals who lived in Holland. The first claimant acted through the second, whom it was alleged was the only child of the deceased. They sought a declaration that the deceased died intestate (which would have the effect of the estate passing solely to the claimants) and a grant of letters of administration in his estate. The defendants contended that the deceased did in fact leave a will and counterclaimed seeking a declaration in favour of the will. They put the claimants to strict proof that the second claimant was the only child of the deceased.

The court ruled:
On the facts, having regard, inter alia, to the witness evidence, there had been a valid will made as asserted by the defendants. There was accordingly no need to determine whether the second claimant was the deceased's only child.

The claim would be dismissed, and the court would pronounce in favour of the will in solemn form.
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Features

1. Yielding tax

HM Revenue & Customs (HMRC) have made significant changes to the Inland Revenue inheritance tax (IHT) manual, in areas including guidance on the recording of yield for staff working in IHT. Jon Golding believes staffing cutbacks at HMRC makes sense to profile cases for enquiry.

HMRC have updated their IHT manuals regarding enquiry cases and the assessment of yield and interest yield. Initially HMRC will assess risk and after conducting background research then set an enquiry plan to proceed. Some examples of HMRC opening enquiries are asking a taxpayer for additional information about an area of risk identified in the account or an instrument of variation (IOV), disputing the taxpayer's interpretation of the facts, the value of an asset, liabilities claimed, exemptions or reliefs claimed or the effect of an IOV, asking why items have been omitted or understated in accounts. However, there are cases that are not categorised as enquiry cases such as the voluntary delivery of an account outside the statutory period which does not constitute an enquiry even though HMRC seek a penalty for late delivery.

Having decided what constitutes an enquiry case, HMRC then considers the case in terms of yield. Yield is the additional tax HMRC receive as a result of their enquiry and interest yield is the interest obtained on that yield. Therefore denying or limiting an exemption or relief that is claimed after the initial delivery of the account, resulting in the tax saved on the amount of the exemption or relief denied is yield. As part of HMRC's governance requirements they will conduct quality checks to review their highest-yielding cases. Cases will be considered to be “high-yielding” where the combined intervention yield for tax, interest and penalties is equal to or more than £150,000 for lifetime and settlement cases, £200,000 for primary compliance and support cases, £400,000 for compliance and litigation cases.

Jon Golding says, "HMRC give an example of investigating a claim for a farmhouse (Seaview Cottage) to be 100 per cent exempt due to agricultural property relief but the deceased's cousin appears to occupy it therefore HMRC decide to query the facts and possibly deny relief. Interestingly the HMRC strategy is to “Investigate with agents the extent of the deceased's farming activity, if any. If none seek to deny relief on Seaview Cottage. Clarify on what basis relief claimed on farmhouse. Check tenancy to clarify appropriate rate of relief. Review deceased's tax papers and the farm accounts. All properties to District Valuer in due course.

"There may of course be a totally appropriate reason for the cousin being in residence of Seaview Cottage that would not be reported on IHT 200 such as the farmer has, due to unforeseen circumstances, been unable to maintain himself through old age, infirmity or otherwise, and, the interest in land represents reasonable care and maintenance provided by the donee, who is a relative. Alternatively, the cousin may be acting as a manager of the farm in the circumstances or running a bed and breakfast business.

“HMRC state: ‘There must be a realistic chance of collecting a worthwhile amount of tax, and at every stage of your investigation you must consider whether it is still worthwhile continuing with it in terms of tax. This decision is a judgement call based on the individual facts, the amount involved, the likelihood of success, and the probable time it would take.' Farmhouses appear to be a good source of denying relief and the yield will be big based on the value of most farmhouses now, but this is not necessarily an area in which HMRC will necessarily be successful!"
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2. HMRC clearances

Non-statutory clearance applications will be accepted where there is demonstrable material uncertainty about the inheritance tax / business property relief (IHT-BPR) consequences of a transfer of value that follows a transaction affecting business on areas of material uncertainty from four Finance Acts, after the introduction of new legislation.

Alternatively, clearance applications will also be accepted where legislation preceding the last four Finance Acts where there is material uncertainty around the tax outcome of a real issue of commercial significance to the business itself, determined by reference to the scale of the business and the impact of the issue upon it. For a clearance to be binding on HM Revenue & Customs (HMRC) the taxpayer must provide the IHT-BPR clearances team, at the time the clearance is sought, with the full facts and context of the transaction, and set out the legislative uncertainty in question. If the taxpayer has applied for a non-statutory clearance, but has not received it by the time that an IHT account is due to be submitted, then the account must still be sent in before the time limit. If this occurs the taxpayer should complete the account according to their own view of the correct tax treatment of the particular transaction. The normal interest and penalty rules will apply if an account is incorrect, whether or not the transactions have been the subject of a clearance.

HMRC aim to provide clearances within 28 calendar days that will give certainty to business owners as to the IHT-BPR consequences of their transactions. HMRC consider the taxpayer is able to rely on any clearance, however for a clearance to be considered binding on HMRC, all the relevant facts should be set out and attention drawn to all the issues in the application. HMRC expect businesses to interpret this relatively broadly, for example, by providing information on related transactions where relevant. IHT does not arise as a consequence of the commercial transaction itself but of a later event if that event is a transfer of value. In these circumstances, HMRC's view of the application of inheritance tax law to the availability of business property relief for a business, an interest in a business, certain shares and securities or certain business assets applies to the facts and circumstances existing at the date of the commercial transaction. HMRC will not be bound by a clearance given if there is a change in circumstances between the date of the commercial transaction and a later transfer of value. A change of circumstances includes a change in the nature of the business or the structure of the business, a change in the nature of the interest held by the person to whom the application applies or a change in the legislation relating to business property relief. This extension of the non-statutory clearance procedure is for a trial period from 1 May 2008 to 31 October 2008.

Jon Golding of Golding Taxation Services said: "A question may arise whether the cash on deposit at the time of death was required for the purposes of the business and is consequently relevant business property. In considering also IHTA 1984, section 112(2)(b), ie, whether the cash is a category of excepted assets that is left out of account when calculating whether there is an entitlement to business property relief, surplus cash notwithstanding it is held in a limited company is an excepted asset but the monies should be earmarked or used for ‘some palpable business purpose' and a clearance in such a situation may be appropriate."
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3. IHT farming threat

In a recent development linked into a claim for business property relief (BPR), a widow let farmland to local farmers under conacre or agistment agreements that business may now consist mainly of making or holding investments so that the land is not “relevant business property” for inheritance tax (IHT) purposes.

Jon Golding of Golding Taxation Services said: "Conacre, a derivation from 'corn acre', is a specifically Irish tradition of letting small parcels land for a single crop. It is part and parcel of the business of small farming there and it is temporary by its very nature as lettings are always limited to 11 months. The rents the lets earn are very low returns and it is essentially a way of maintaining land for which a farming family has no plans in a particular season.

"However, following PN McCall & BJA Keenan (Personal representatives of Mrs E McClean) v HM Revenue & Customs [2008] Sp C 678, that business may now consist of mainly of making or holding investments where farmland has development potential but is still farmed by letting in conacre. In a claim for BPR a widow inherited 33 acres of farmland on the death of her husband. She did not farm the land herself, but let it to local farmers under conacre agreements. She died in 1999. HMRC [HM Revenue & Customs] then issued a notice of determination charging IHT on her estate. Her personal representatives appealed, contending that the farmland qualified for BPR. The Special Commissioner rejected this contention and dismissed the appeal, holding that although the widow was carrying on a business on the land, that business consisted mainly of making or holding investments, within IHTA 1984, section 105(3), so that the land was not 'relevant business property'. The Commissioner observed that 'the activities of the business consisted of the making available of its major asset to other persons for payment without the separate provision of any substantial other goods or services'."

It seems now where farmland has development potential but is still farmed by letting in conacre, it had seemed to attract a second relief – business property relief – also at 100 per cent on that additional development value but following the above case that business may now consist of mainly of making or holding investments, within Inheritance Tax Act (IHTA) 1984, section 105(3). There has also been the suggestion that such similar situations in England may also now be subject to similar treatment.

Jon Golding said: "I would have thought that the small 'lifestyle farming' enterprises used as an IHT avoidance scheme with latent development value are already under threat anyway so that the land is not 'relevant business property', however, while land let out in England is attributable to the lessor in Northern Ireland land let out under the conacre scheme is attributable to the lessee. This along with the conditions for APR relief that farmland is owned by the transferor for the period of seven years ending with the date of transfer and has been occupied throughout that period (by him or another person) for the purposes of agriculture within IHTA 1984, section 117 will still attract relief. This is a case that will develop already complicated rules on APR or BPR where small farms with potential development value are reviewed by HMRC."
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4. HMRC publishes guidance on transfers of unused nil-rate bands

HM Revenue & Customs (HMRC) has published draft guidance on transfers of unused nil-rate bands. The guidance will be incorporated into the inheritance tax manual in due course. Comments should be received by 31 August 2008.

The ability to transfer nil-rate band (TNRB) between the estates of husband and wife or civil partners was introduced in the Finance Act 2008 (FA08). The legislation relating to the transfer of unused nil-rate band is contained within Inheritance Tax Act (IHTA) 1984/S8A-C.

The effect of TNRB is that when a surviving spouse or civil partner dies, the nil-rate band available at their death will be increased by the proportion of the nil-rate band that was not used on the death of their spouse or civil partner.

TNRB is available where the death of the surviving spouse or civil partner occurs on or after 9 October 2007. For spouses, the first death can have occurred at any time before or after that date and the relief therefore applies where the first death occurred under inheritance tax (IHT), capital transfer tax or estate duty and there was unused nil-rate band.

For civil partnerships the first death must have occurred on or after 5 December 2005, the date the Civil Partnership Act became law in the UK. While it was possible to enter into a civil partnership in other countries prior to this date, the Act states that where a relationship was recognised under overseas law before the UK Act came into force, the parties to the relationship are to be treated as having formed a civil partnership recognised in the UK on the date the Act came into force.

While the benefit of the unused nil-rate band accrues to the estate of the surviving spouse or civil partner, there is no requirement for assets to have passed to the spouse or civil partner on the first death.

The legislation refers to unused nil-rate band rather than property passing to the surviving spouse or civil partner. So property that passed as an exempt or relievable transfer (for example, a transfer to charity or for national purposes or property that attracted business or agricultural relief) will not use up the nil-rate band. And where the value of an estate is below the IHT nil-rate band at the date of the first death, the full amount of the nil-rate band that is not used is available for transfer.
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5. Updates made to inheritance tax manual

Amendments have been made to take account of the need to get a reference for all tax-paying inheritance tax (IHT) accounts before submitting the account to the HM Revenue & Customs (HMRC).

There has also been a substantial rewrite to provide more thorough guidance on the recording of yield and interest yield for all staff working in IHT. New pages have been added on general IHT governance practices, and the independent validation and high-yield review procedures. Information on penalties have also been added.

Amendments have been made to the following sections.

  • IHTM05055: Amendments have been made to this page and others in this section to take account of the need to get a reference for all tax-paying IHT accounts before submitting the account.
  • IHTM29000 onwards: This section of the manual has been substantially rewritten to provide more thorough guidance on the recording of yield and interest yield for all staff working in IHT.
  • IHTM29150 onwards: New pages have been added to give guidance on general IHT governance practices, and the independent validation and high-yield review procedures.
  • IHTM34140: The Bermuda Stock Exchange has been added to the list of foreign stock exchanges on which investments will qualify for the purposes of loss on sale of shares relief, with effect from 4 December 2007.
  • IHTM36023: This guidance has been amended to include detailed instructions for calculating penalties under section 245(4A).
  • IHTM36166: This guidance has been amended to show that we cannot now collect penalties from the personal representatives of an individual who was liable to a penalty but died before the issue was resolved, and any such penalties already collected need to be repaid.
  • IHTM40001: This guidance has been amended to show our current practice of notifying customers that we have no further enquiries.

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Views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Articles

1.Who can sue

Journal name: New Law Journal
Author: Andrew Blair and Tim Shepherd
Citation: 158 NLJ 771
Issue date: 30 May 2008
Summary: This article looks at the question of whether a solicitor owes duties of care to third parties when advising a client, as considered in the House of Lords' decision in White v Jones. A solicitor provided negligent advice to a testator in connection with the preparation of a will, causing a beneficiary to suffer loss. There was no contractual relationship between that beneficiary and the solicitor. Nevertheless, in a decision underpinned by social justice considerations, the House of Lords held that the solicitor did owe a duty of care to the beneficiary, principally because the absence of any other remedy against the solicitor gave rise to an "undesirable lacuna" in the law.
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Books

1. How to book and claim discounts
  • Law Society Publishing: quote “Probate Section” to receive a 20 per cent discount off related titles (excluding directories) via Prolog at The Law Society, PO Box 99, Sudbury Suffolk CO10 2SN, telephone 0870 850 1422, fax 01787 313 995 or email lawsociety@prolog.uk.com.
  • LexisNexis Butterworths: quote “Law Society Section discount offer” when ordering via www.lexisnexis.co.uk, customer.services@lexisnexis.co.uk or 020 8662 2000.

This e-alert is not intended to provide comprehensive records of information concerning the probate sector. If you have any feedback or suggestions, please email probatesection@lawsociety.org.uk. This e-alert was created in conjunction with LexisNexis UK Legal Updater Service. For further information about any of the articles, please contact claire.melvin@lexisnexis.co.uk. The views expressed by the Legal Analysis interviewees are not necessarily those of the proprietor.
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