Journals
Wills & Probate: What is a will?
New Law Journal, Issue 7382: When are cohabitees man and wife?
Published date: 17 August 2009
Author: Michael Tringham
Journal name: New Law Journal
Journal date: 14 August 2009
Journal citation: 159 NLJ 1169
Jurisdiction: England; Wales; Australia
Related legislation: Inheritance Act 1833
Summary: Says court decisions are interpreting statute in ways that may surprise. Brisbane law firm Mullins has successfully argued that an unsigned and undated document may be treated as the deceased's will. In the UK the High Court has granted a woman's Inheritance Act 1833 claim against her alleged cohabitee's estate, even though she had a different main postal address from the deceased.
Negotiable inheritance tax?
Trusts and Estates Law & Tax Journal, July/ August 2009: Useful pointers for negotiating with HMRC
Published date: 13 August 2009
Author: Peter Nellist
Journal name: Trusts & Estates Journal
Journal date: 1 August 2009
Journal citation: Trust and Estates Law & Tax Journal, August 2009, 8
Jurisdiction: England; Scotland; Northern Ireland; Wales
Summary: Tells of HMRC's helpful website with tax manual. Revenue's risk research and Liason team's duties are described. Different sections of the manual are explored; normal expenditure out of income, and tax evasion.
Rest assured
Taxation, 6 August 2009: Using life assurance to pay inheritance tax
Published date: 6 August 2009
Author: Penny Bates
Journal name: Taxation
Journal date: 6 August 2009
Journal citation: Taxation, 6 August 2009, 146
Jurisdiction: England; Scotland; Northern Ireland; Wales
Summary: Has a practical look at how to use life assurance in tax planning. There are strictly three classifications of life policies: term assurance, whole of life and endowment policies. This article considers some uses of term and whole of life assurance for tax planning purposes.
Wills & probate: Wills overturned
New Law Journal, Issue 7378: Wills are not always black & white
Published date: 21 July 2009
Author: Michael Tringham
Journal name: New Law Journal
Journal date: 17 July 2009
Journal citation: 159 NLJ 1024
Jurisdiction: England; Wales; Australia
Related cases: Underwood v Underwood
Summary: Reports Australian courts are demonstrating a propensity for changing legacies following Family Provision Applications. Comments on two recent cases in which the court considers "the applicant's financial position, the size and nature of the deceased's estate, the totality of the relationship between the deceased and other persons who have a claim upon his or her bounty". In Underwood v Underwood the Supreme Court of Queensland considered an application by a de-facto spouse and three of the deceased's four adult children.
Cast out the mote
Trusts and Estates Law & Tax Journal, 1 June 2009: The conflict between morality and following the strict letter of the law
Published date: 21 July 2009
Author: Geoffrey Shindler
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 2
Jurisdiction: England; Wales
Related legislation: Inheritance (Provision for Family and Dependants) Act 1975
Summary: Highlights the conflict between following the strict letter of rules or the law and conscience or morality. One of the problems of dealing with difficult pieces of legislation - for example, the Inheritance (Provision for Family and Dependants) Act 1975 - is the question of what is reasonable provision. What is fair and reasonable is not absolute but relative and depends on what is fair and reasonable for everybody else concerned.
The time of your life
Trusts and Estates Law & Tax Journal, 1 June 2009: When is it appropriate to use a survivorship clause?
Published date: 21 July 2009
Author: Nick Acomb
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 6
Jurisdiction: England; Wales
Summary: Looks at immediate post-death interests (IPDIs), common accidents and the survivorship clause. IPDIs offer one of the very few opportunities to create a trust governed by the pre-22 March 2006 life interest rules, whereby the trust capital is counted with the life tenant's estate for inheritance tax purposes on their death, but there are no periodic or exit charges while the trust subsists. But where deaths occur in a common accident, it is possible that the opportunity to create an IPDI is squandered, and while solving this by way of a blanket survivorship clause may work in many cases, there are problems.
Paying the penniless
Trusts and Estates Law & Tax Journal, 1 June 2009: How a recent case highlights the need for vigilance when making distributions to beneficiaries of a deceased's estate
Published date: 21 July 2009
Author: Fiona Smith
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 10
Jurisdiction: England; Wales
Related cases: Raymond Saul & Co (a firm) v Holden (as personal representative of Hemming (decd)) [2008] EWHC 8565 (Ch), [2008] All ER (D) 168 (Dec)
Summary: Examines the implications of Raymond Saul v Holden for making distributions to beneficiaries who have been insolvent. The case concerned a residuary beneficiary who was bankrupt at the time of the death of the testatrix, but whose bankruptcy had been discharged by the time the distribution was proposed. The question that came before the High Court was whether that distribution should be made to the trustee in bankruptcy or to the beneficiary.
A distinct lack of quality
Trusts and Estates Law & Tax Journal, 1 June 2009: Why a recent case should act as a warning to those undertaking the duties of a professional trustee
Published date: 21 July 2009
Author: Tim Harrison
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 13
Jurisdiction: England; Wales
Related cases: Jones v Firkin-Flood [2008] EWHC 2417 (Ch), [2008] All ER (D) 175 (Oct)
Summary: Suggests that the case of Jones v Firkin-Flood provides some valuable reminders about the role of trustees. The case has provided a salutary reminder to trust and estate practitioners of the duties imposed on those who hold the position of trustee, and the extent of the administrative powers that are available to them. It also provided an opportunity for the judge to examine a related decision which concerned the function of the court when asked by trustees to approve a proposed exercise of their discretion.
Articles
Advisers start to plan for expected IHT nil rate band hike
The Conservatives will still be hoping to raise the inheritance tax (IHT) nil rate band despite the state of the public finances, says Stephen Herring of BDO Stoy Hayward, as he explains to Neasa MacErlean
Published date: 14 August 2009
Jurisdiction: UK
Related digests: Low Asset Values Produce Favourable Climate for IHT Planning LNB News 10/08/2009 13; Tax Planning for Non Domiciliaries LNB News 12/08/2009 33
Analysis: The inheritance tax nil rate band could be in for a large hike to £1m within the next two or three years. This is the view of Stephen Herring, senior tax partner at business adviser BDO Stoy Hayward.
If, as the polls suggest, the Conservatives win the next general election (which must be held on 3 June 2010 at the latest), then they are expected to stay faithful to shadow chancellor's stated intent of raising the nil rate band to £1m. But the state of the public finances means that they will be highly unlikely to do that straightaway, says Herring. "They will have to wait until the second or third Budget," he says. "Whoever wins the election will be faced with the need for significant tax increases."
Shadow chancellor George Osborne promised to put up the threshold in 2007, telling the Conservative party conference: "The next Conservative government will raise the inheritance tax threshold to £1m. That means we will take the family home out of inheritance tax." Since then the credit crunch, recession and the deteriorating public finances have made that aim much more difficult to fulfill. Experts are agreed that the tax take needs to increase overall, and may have to stay higher than it is today for several years.
The inheritance tax nil rate band now stands at £325,000. Herring believes that the Conservatives are still convinced of the logic of their stated position even if the practicalities of delivering on their goal are much harder. The Conservatives have been particularly alarmed at the way rising house prices have potentially brought more families into the IHT net. When Osborne made his statement, one in ten properties was above the IHT threshhold. Herring says: "The IHT regime might return to being more focused on the very wealthy."
People whose estates could be liable to the tax may well be perplexed now as to what they should do. Herring believes that many could still find the establishment of a nil rate band trust "very sensible tax planning". If, for instance, a couple set up a trust under their combined nil rate band threshold of £650,000, then there are likely to be no extra tax charges on that for ten years. (They could face capital gains tax on assets they transfer into the trust and, on the 10th anniversary of the establishment of the trust, a 6% charge would be applied on amounts over their combined nil rate band.)
Herring adds: "If you are doing a nil rate band trust, you could make sure that you have the flexibility under the trust arrangements to put in an additional sum in two or three years time." This would enable the donors to take advantage of an increase in the nil rate band if the Conservatives come to power and decide to do this. Assets given away by a donor (and put into one of these trusts, for instance) escape IHT if the donor lives seven years beyond the date of the gift.
The Conservatives may well also try to get the top rate of income tax back down from 50 to "45 or even 40%", according to Herring. But, he adds, this would not happen for at least a couple of years.
This year's Conservative party conference, taking place between 5 and 8 October in Manchester, will be the last before the general election. The party leadership may well decide to give more clarity on the IHT issue, as the restatement of the commitment to put up the nil rate band would play well with the party faithful even if it has to be couched carefully and put off for a couple of years.
Lords uphold property ruling
A recent ruling on who should benefit from the proceeds of the sale of a house shows that courts will construe a document in such a way as to give effect to all of it, rather than exclude a specific clause because it is inconsistent. Alan Langleben, partner and head of the property litigation department at Rochman Landau, explains the case to Jonathan Watson
Published date: 13 August 2009
Jurisdiction: UK
Related legislation: Wills Act 1837
Related cases: Bindra v Chopra [2009] EWCA Civ 203, [2009] All ER (D) 219 (Mar)
Analysis: A widow has been refused permission to take her battle for 75 per cent of the proceeds from the sale of her late husband's house to the House of Lords. In a recent ruling, the Law Lords refused Jennifer Chopra's petition for leave to appeal the Court of Appeal's decision that her late husband's younger sister, Angela Bindra, rather than her, is entitled to the whole sum.
"The case revolved around a unique form of declaration of trust drafted by the conveyancing solicitor," says Alan Langleben, partner and head of the property litigation department at Rochman Landau, which acted for Angela Bindra." A couple of principles of law were reinforced by the Court of Appeal's decision. The first was that where possible, the court will construe a document in such a way as to give effect to all of it rather than exclude a specific clause because it's inconsistent.
In this case, we had a declaration of trust in which the first three relevant clauses stated that the brother and sister would hold the property as beneficial tenants in common and set out what was to happen on the sale and how the proceeds of sale were to be divided between them. However, clause four said that if one of the siblings died while the property remained unsold, the property would vest in the survivor absolutely.
The brother's widow, Jennifer Chopra, tried to argue that this should be rectified, claiming that it was not what the parties intended. That argument failed and the judge held that it was clear that the declaration of trust did accurately reflect the parties' intentions.
The issue therefore was really how to reconcile clauses one to three, which created on the face of it an absolute tenancy in common in possession, with a clause [4] that stated that if one of them dies without the property being sold, then there is effectively a right of survivorship. Ms Chopra was arguing that, once you have created an absolute tenancy in common, you cannot then detract from that. That would mean that clause four should be struck out. But the judge at first instance and the Court of Appeal said that if the declaration as a whole was considered, the first three clauses could be interpreted as creating a life interest, which makes them consistent with clause four.
That was the first point: if the court can give effect to the whole of the document, without doing too much violence to the language, then as a matter of general principle it should try to do so.
The second issue arose from the widow's argument that clause four was a testamentary disposition. She argued that because Ms Bindra and her brother had created an absolute interest--they each had a separate interest as a tenant in common--they then in clause four effectively tried to dispose of their interest in the event of death, so that should be treated as though it were a will. This would mean it had to comply with the formalities of the Wills Act, which it did not. The Court of Appeal dealt with that quite simply by ruling that if the construction argument succeeded, which it did, then this point did not arise, because it was life interest not an absolute interest."
Low asset values produce favourable climate for IHT planning
The time could be right for the wealthy to reduce potential inheritance tax bills by giving away assets. But Stuart Skeffington explains to Neasa MacErlean some of the obstacles
Published date: 10 August 2009
Jurisdiction: UK
Analysis: Many wealthy people are currently considering giving away assets to children in a way that would lower potential capital gains tax (CGT) bills but a far smaller number have actually done so. The long-term aim is to save on inheritance tax by taking assets out of large, potentially taxable estates. The short-term problem is that the donor can run up a CGT bill--unless they give assets away at a time, like the present, when share, property and other asset prices are low.
"In my experience, some people are doing things but there is not a huge swathe," says Stuart Skeffington, partner at Stevens & Bolton. People who die in the current tax year will not leave a taxable estate if their taxable assets are under their available 'nil rate band' (currently £325,000 if fully unused). But the basic rule is that taxable assets above that level will be subject to a 40 per cent levy unless an exemption applies.
Many people with assets above this level do try to give some of their property away to reduce the likely bill. If they survive seven years or more after the gift is made then there is no IHT on the transaction. But the immediate problem with giving is that they can be subject to CGT in the process. The current personal allowance for 2009/10 is £10,100.
For example, a mother giving away a buy-to-let property to a son which she bought for £150,000 and is now worth £160,000 would potentially face a CGT bill of 18 per cent of the £10,000 increase in the value. If she had not already taken advantage of her 2009/10 personal allowance of £10,100 she could, therefore, escape having to pay any CGT on the transaction. But if she had bought the property for £140,00, even after using her personal allowance she would face a CGT bill of £1,782 (£20,000-£10,100 = £9,900; £9,900 x 18 per cent = £1,782).
The average domestic property is now worth £153,000 in England and Wales, according to Land Registry figures for June. This is down 14%on the year. However, prices rose during the month of June by 0.1%. If this is the start of a sustained rise, then this may focus the minds of people wanting to keep their CGT bills down on gifts to heirs.
But what puts off many parents is that they can no longer use the asset for free without repercussions. "If you give a house away you can't go and stay in it without paying market value rent," says Skeffington, explaining the stipulations of the IHT rules that gifts must be without reservation to be effective.
Another off-putting factor for parents is not wanting to give away assets to children who might spend, rather than preserve, them. "We do quite a lot of work looking at structures where they can give an asset away but without giving away the keys to the asset," he says. The most common way of doing this is to set up a trust.
If a person puts assets below the value of their IHT nil rate band (£325,000) into a trust then there should not be tax consequences for the first 10 years. After that there will be a tax charge, every years, of up to 6% on the assets above the nil rate band. Similar charges can also arise if assets leave a trust. If both parents set up a trust they have both their nil rate bands to use--£650,000 between them.
Some very successful people take advantage of their right to set up a nil rate band trust every seven years. "It's a very good idea," says Skeffington for people who are sufficiently wealthy. If a couple start in their 40s they can leave a fund of millions this way to their offspring.
One issue that is holding back some people from this kind of tax planning now is political uncertainty. Skeffington says: "People are wondering what the Conservatives would do with IHT." If they win the general election, they are expected to push up the nil rate band substantially, possibly even to £1m.
Wills & Probate: What is a will?
New Law Journal, Issue 7382: When are cohabitees man and wife?
Published date: 17 August 2009
Author: Michael Tringham
Journal name: New Law Journal
Journal date: 14 August 2009
Journal citation: 159 NLJ 1169
Jurisdiction: England; Wales; Australia
Related legislation: Inheritance Act 1833
Summary: Says court decisions are interpreting statute in ways that may surprise. Brisbane law firm Mullins has successfully argued that an unsigned and undated document may be treated as the deceased's will. In the UK the High Court has granted a woman's Inheritance Act 1833 claim against her alleged cohabitee's estate, even though she had a different main postal address from the deceased.
Negotiable inheritance tax?
Trusts and Estates Law & Tax Journal, July/ August 2009: Useful pointers for negotiating with HMRC
Published date: 13 August 2009
Author: Peter Nellist
Journal name: Trusts & Estates Journal
Journal date: 1 August 2009
Journal citation: Trust and Estates Law & Tax Journal, August 2009, 8
Jurisdiction: England; Scotland; Northern Ireland; Wales
Summary: Tells of HMRC's helpful website with tax manual. Revenue's risk research and Liason team's duties are described. Different sections of the manual are explored; normal expenditure out of income, and tax evasion.
Rest assured
Taxation, 6 August 2009: Using life assurance to pay inheritance tax
Published date: 6 August 2009
Author: Penny Bates
Journal name: Taxation
Journal date: 6 August 2009
Journal citation: Taxation, 6 August 2009, 146
Jurisdiction: England; Scotland; Northern Ireland; Wales
Summary: Has a practical look at how to use life assurance in tax planning. There are strictly three classifications of life policies: term assurance, whole of life and endowment policies. This article considers some uses of term and whole of life assurance for tax planning purposes.
Wills & probate: Wills overturned
New Law Journal, Issue 7378: Wills are not always black & white
Published date: 21 July 2009
Author: Michael Tringham
Journal name: New Law Journal
Journal date: 17 July 2009
Journal citation: 159 NLJ 1024
Jurisdiction: England; Wales; Australia
Related cases: Underwood v Underwood
Summary: Reports Australian courts are demonstrating a propensity for changing legacies following Family Provision Applications. Comments on two recent cases in which the court considers "the applicant's financial position, the size and nature of the deceased's estate, the totality of the relationship between the deceased and other persons who have a claim upon his or her bounty". In Underwood v Underwood the Supreme Court of Queensland considered an application by a de-facto spouse and three of the deceased's four adult children.
Cast out the mote
Trusts and Estates Law & Tax Journal, 1 June 2009: The conflict between morality and following the strict letter of the law
Published date: 21 July 2009
Author: Geoffrey Shindler
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 2
Jurisdiction: England; Wales
Related legislation: Inheritance (Provision for Family and Dependants) Act 1975
Summary: Highlights the conflict between following the strict letter of rules or the law and conscience or morality. One of the problems of dealing with difficult pieces of legislation - for example, the Inheritance (Provision for Family and Dependants) Act 1975 - is the question of what is reasonable provision. What is fair and reasonable is not absolute but relative and depends on what is fair and reasonable for everybody else concerned.
The time of your life
Trusts and Estates Law & Tax Journal, 1 June 2009: When is it appropriate to use a survivorship clause?
Published date: 21 July 2009
Author: Nick Acomb
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 6
Jurisdiction: England; Wales
Summary: Looks at immediate post-death interests (IPDIs), common accidents and the survivorship clause. IPDIs offer one of the very few opportunities to create a trust governed by the pre-22 March 2006 life interest rules, whereby the trust capital is counted with the life tenant's estate for inheritance tax purposes on their death, but there are no periodic or exit charges while the trust subsists. But where deaths occur in a common accident, it is possible that the opportunity to create an IPDI is squandered, and while solving this by way of a blanket survivorship clause may work in many cases, there are problems.
Paying the penniless
Trusts and Estates Law & Tax Journal, 1 June 2009: How a recent case highlights the need for vigilance when making distributions to beneficiaries of a deceased's estate
Published date: 21 July 2009
Author: Fiona Smith
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 10
Jurisdiction: England; Wales
Related cases: Raymond Saul & Co (a firm) v Holden (as personal representative of Hemming (decd)) [2008] EWHC 8565 (Ch), [2008] All ER (D) 168 (Dec)
Summary: Examines the implications of Raymond Saul v Holden for making distributions to beneficiaries who have been insolvent. The case concerned a residuary beneficiary who was bankrupt at the time of the death of the testatrix, but whose bankruptcy had been discharged by the time the distribution was proposed. The question that came before the High Court was whether that distribution should be made to the trustee in bankruptcy or to the beneficiary.
A distinct lack of quality
Trusts and Estates Law & Tax Journal, 1 June 2009: Why a recent case should act as a warning to those undertaking the duties of a professional trustee
Published date: 21 July 2009
Author: Tim Harrison
Journal name: Trusts and Estates Law & Tax Journal
Journal date: 1 June 2009
Journal citation: Trusts and Estates Law & Tax Journal, June 2009, 13
Jurisdiction: England; Wales
Related cases: Jones v Firkin-Flood [2008] EWHC 2417 (Ch), [2008] All ER (D) 175 (Oct)
Summary: Suggests that the case of Jones v Firkin-Flood provides some valuable reminders about the role of trustees. The case has provided a salutary reminder to trust and estate practitioners of the duties imposed on those who hold the position of trustee, and the extent of the administrative powers that are available to them. It also provided an opportunity for the judge to examine a related decision which concerned the function of the court when asked by trustees to approve a proposed exercise of their discretion.
Articles
Advisers start to plan for expected IHT nil rate band hike
The Conservatives will still be hoping to raise the inheritance tax (IHT) nil rate band despite the state of the public finances, says Stephen Herring of BDO Stoy Hayward, as he explains to Neasa MacErlean
Published date: 14 August 2009
Jurisdiction: UK
Related digests: Low Asset Values Produce Favourable Climate for IHT Planning LNB News 10/08/2009 13; Tax Planning for Non Domiciliaries LNB News 12/08/2009 33
Analysis: The inheritance tax nil rate band could be in for a large hike to £1m within the next two or three years. This is the view of Stephen Herring, senior tax partner at business adviser BDO Stoy Hayward.
If, as the polls suggest, the Conservatives win the next general election (which must be held on 3 June 2010 at the latest), then they are expected to stay faithful to shadow chancellor's stated intent of raising the nil rate band to £1m. But the state of the public finances means that they will be highly unlikely to do that straightaway, says Herring. "They will have to wait until the second or third Budget," he says. "Whoever wins the election will be faced with the need for significant tax increases."
Shadow chancellor George Osborne promised to put up the threshold in 2007, telling the Conservative party conference: "The next Conservative government will raise the inheritance tax threshold to £1m. That means we will take the family home out of inheritance tax." Since then the credit crunch, recession and the deteriorating public finances have made that aim much more difficult to fulfill. Experts are agreed that the tax take needs to increase overall, and may have to stay higher than it is today for several years.
The inheritance tax nil rate band now stands at £325,000. Herring believes that the Conservatives are still convinced of the logic of their stated position even if the practicalities of delivering on their goal are much harder. The Conservatives have been particularly alarmed at the way rising house prices have potentially brought more families into the IHT net. When Osborne made his statement, one in ten properties was above the IHT threshhold. Herring says: "The IHT regime might return to being more focused on the very wealthy."
People whose estates could be liable to the tax may well be perplexed now as to what they should do. Herring believes that many could still find the establishment of a nil rate band trust "very sensible tax planning". If, for instance, a couple set up a trust under their combined nil rate band threshold of £650,000, then there are likely to be no extra tax charges on that for ten years. (They could face capital gains tax on assets they transfer into the trust and, on the 10th anniversary of the establishment of the trust, a 6% charge would be applied on amounts over their combined nil rate band.)
Herring adds: "If you are doing a nil rate band trust, you could make sure that you have the flexibility under the trust arrangements to put in an additional sum in two or three years time." This would enable the donors to take advantage of an increase in the nil rate band if the Conservatives come to power and decide to do this. Assets given away by a donor (and put into one of these trusts, for instance) escape IHT if the donor lives seven years beyond the date of the gift.
The Conservatives may well also try to get the top rate of income tax back down from 50 to "45 or even 40%", according to Herring. But, he adds, this would not happen for at least a couple of years.
This year's Conservative party conference, taking place between 5 and 8 October in Manchester, will be the last before the general election. The party leadership may well decide to give more clarity on the IHT issue, as the restatement of the commitment to put up the nil rate band would play well with the party faithful even if it has to be couched carefully and put off for a couple of years.
Lords uphold property ruling
A recent ruling on who should benefit from the proceeds of the sale of a house shows that courts will construe a document in such a way as to give effect to all of it, rather than exclude a specific clause because it is inconsistent. Alan Langleben, partner and head of the property litigation department at Rochman Landau, explains the case to Jonathan Watson
Published date: 13 August 2009
Jurisdiction: UK
Related legislation: Wills Act 1837
Related cases: Bindra v Chopra [2009] EWCA Civ 203, [2009] All ER (D) 219 (Mar)
Analysis: A widow has been refused permission to take her battle for 75 per cent of the proceeds from the sale of her late husband's house to the House of Lords. In a recent ruling, the Law Lords refused Jennifer Chopra's petition for leave to appeal the Court of Appeal's decision that her late husband's younger sister, Angela Bindra, rather than her, is entitled to the whole sum.
"The case revolved around a unique form of declaration of trust drafted by the conveyancing solicitor," says Alan Langleben, partner and head of the property litigation department at Rochman Landau, which acted for Angela Bindra." A couple of principles of law were reinforced by the Court of Appeal's decision. The first was that where possible, the court will construe a document in such a way as to give effect to all of it rather than exclude a specific clause because it's inconsistent.
In this case, we had a declaration of trust in which the first three relevant clauses stated that the brother and sister would hold the property as beneficial tenants in common and set out what was to happen on the sale and how the proceeds of sale were to be divided between them. However, clause four said that if one of the siblings died while the property remained unsold, the property would vest in the survivor absolutely.
The brother's widow, Jennifer Chopra, tried to argue that this should be rectified, claiming that it was not what the parties intended. That argument failed and the judge held that it was clear that the declaration of trust did accurately reflect the parties' intentions.
The issue therefore was really how to reconcile clauses one to three, which created on the face of it an absolute tenancy in common in possession, with a clause [4] that stated that if one of them dies without the property being sold, then there is effectively a right of survivorship. Ms Chopra was arguing that, once you have created an absolute tenancy in common, you cannot then detract from that. That would mean that clause four should be struck out. But the judge at first instance and the Court of Appeal said that if the declaration as a whole was considered, the first three clauses could be interpreted as creating a life interest, which makes them consistent with clause four.
That was the first point: if the court can give effect to the whole of the document, without doing too much violence to the language, then as a matter of general principle it should try to do so.
The second issue arose from the widow's argument that clause four was a testamentary disposition. She argued that because Ms Bindra and her brother had created an absolute interest--they each had a separate interest as a tenant in common--they then in clause four effectively tried to dispose of their interest in the event of death, so that should be treated as though it were a will. This would mean it had to comply with the formalities of the Wills Act, which it did not. The Court of Appeal dealt with that quite simply by ruling that if the construction argument succeeded, which it did, then this point did not arise, because it was life interest not an absolute interest."
Low asset values produce favourable climate for IHT planning
The time could be right for the wealthy to reduce potential inheritance tax bills by giving away assets. But Stuart Skeffington explains to Neasa MacErlean some of the obstacles
Published date: 10 August 2009
Jurisdiction: UK
Analysis: Many wealthy people are currently considering giving away assets to children in a way that would lower potential capital gains tax (CGT) bills but a far smaller number have actually done so. The long-term aim is to save on inheritance tax by taking assets out of large, potentially taxable estates. The short-term problem is that the donor can run up a CGT bill--unless they give assets away at a time, like the present, when share, property and other asset prices are low.
"In my experience, some people are doing things but there is not a huge swathe," says Stuart Skeffington, partner at Stevens & Bolton. People who die in the current tax year will not leave a taxable estate if their taxable assets are under their available 'nil rate band' (currently £325,000 if fully unused). But the basic rule is that taxable assets above that level will be subject to a 40 per cent levy unless an exemption applies.
Many people with assets above this level do try to give some of their property away to reduce the likely bill. If they survive seven years or more after the gift is made then there is no IHT on the transaction. But the immediate problem with giving is that they can be subject to CGT in the process. The current personal allowance for 2009/10 is £10,100.
For example, a mother giving away a buy-to-let property to a son which she bought for £150,000 and is now worth £160,000 would potentially face a CGT bill of 18 per cent of the £10,000 increase in the value. If she had not already taken advantage of her 2009/10 personal allowance of £10,100 she could, therefore, escape having to pay any CGT on the transaction. But if she had bought the property for £140,00, even after using her personal allowance she would face a CGT bill of £1,782 (£20,000-£10,100 = £9,900; £9,900 x 18 per cent = £1,782).
The average domestic property is now worth £153,000 in England and Wales, according to Land Registry figures for June. This is down 14%on the year. However, prices rose during the month of June by 0.1%. If this is the start of a sustained rise, then this may focus the minds of people wanting to keep their CGT bills down on gifts to heirs.
But what puts off many parents is that they can no longer use the asset for free without repercussions. "If you give a house away you can't go and stay in it without paying market value rent," says Skeffington, explaining the stipulations of the IHT rules that gifts must be without reservation to be effective.
Another off-putting factor for parents is not wanting to give away assets to children who might spend, rather than preserve, them. "We do quite a lot of work looking at structures where they can give an asset away but without giving away the keys to the asset," he says. The most common way of doing this is to set up a trust.
If a person puts assets below the value of their IHT nil rate band (£325,000) into a trust then there should not be tax consequences for the first 10 years. After that there will be a tax charge, every years, of up to 6% on the assets above the nil rate band. Similar charges can also arise if assets leave a trust. If both parents set up a trust they have both their nil rate bands to use--£650,000 between them.
Some very successful people take advantage of their right to set up a nil rate band trust every seven years. "It's a very good idea," says Skeffington for people who are sufficiently wealthy. If a couple start in their 40s they can leave a fund of millions this way to their offspring.
One issue that is holding back some people from this kind of tax planning now is political uncertainty. Skeffington says: "People are wondering what the Conservatives would do with IHT." If they win the general election, they are expected to push up the nil rate band substantially, possibly even to £1m.
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