Wealth, Health and Inheritance Briefing

Transcription

1 September 2018 Wealth, Health and Inheritance Briefing Welcome to the autumn edition of WHIB. In today s geographically mobile world the question of a person s domicile becomes ever more complicated to determine and yet it is a vital concept for determining tax liabilities, and in which country s courts an individual can bring proceedings. Our lead article this month looks at the importance of domicile in a matrimonial case. Also in this edition we profile the residential property team which recently joined our Bristol office and the partner in charge, Samantha Grimwood, outlines a recent capital gains tax case which should be of interest to any of your clients who are embarking on a self-build project. We also look at an Inheritance Act claim and the relevant time limits which apply to such claims, and the investment principles that apply to attorneys. Any queries and comments please do get in touch or connect with us on Anthony Fairweather Managing director anthony.fairweather@clarkewillmott.com The importance of domicile In English law domicile is a vitally important concept which can have important ramifications affecting the succession of assets, tax liabilities and whether an individual is entitled to pursue certain proceedings in the English courts. Everyone is born with a domicile of origin which, if your father is alive and your parents are married at the time of your birth, will be determined by your father s domicile. This domicile of origin can be displaced by a domicile of choice, although a domicile of origin has been said to be more tenacious than other types of domicile. A recent case in the Court of Appeal demonstrated how vital domicile can be in determining other rights and obligations, and reiterated the conditions that have to be established before being able to successfully claim the replacement of a domicile of origin with a domicile of choice. A mobile marriage Una Kelly was born to an Irish father in Ireland, where she lived until she was aged 23 when she moved to England to study for a Masters degree at the University of Manchester. After 18 months, in March 1997, Ms Kelly left England to take up an internship at the European Commission before becoming a permanent employee at the Commission. Ms Kelly subsequently worked abroad, apart from 11 months in 2001/02 when she returned to clarkewillmott.com A domicile of origin is harder to lose than a domicile of choice. London on a temporary contract, successfully applying after four months in the UK for a job in Albania. She married John Pyres in Italy in 2005 and her only periods in London after 2002 were in 2006 to give birth to their first child and in 2009 to attend marriage counselling. The marriage broke down in 2015 and Ms Kelly claimed that she had acquired a domicile of choice in England, displacing her Irish domicile of origin, which would entitle her to bring divorce and financial remedy proceedings in the English courts. The judge at first instance decided that Ms Kelly had maintained strong practical, financial and fiscal links with the UK and that London had been her centre of gravity. As such it was held that Ms Kelly had established a domicile of choice in England and thus was entitled to bring divorce and financial remedy proceedings in the UK. Mr Pyres appealed this decision. Continued on page 2

2 02 Wealth, Health and Inheritance Briefing September 2018 The importance of domicile: continued The Appeal domicile of choice in a country they regard as their home but in Ms Kelly s case this had not been demonstrated so she retained her Irish domicile. The Court of Appeal stated that it is more difficult to prove that someone has abandoned their domicile of origin than to prove that they have abandoned a domicile of choice, and that the burden of proof was on Ms Kelly to show that she had lost her Irish domicile of origin. A domicile of choice can be acquired by a combination of residence and an individual s intention to make the new country their permanent or indefinite residence. The court pointed out that the period of residence does not have to be long, what is important is the individual s intention. Lady Justice King said Residence without intention or intention without residence will not do to establish a domicile of choice. In the court s view the fact of residence and the intention to remain at least indefinitely must co-exist. As such, the court found that during her two periods of residence in England Ms Kelly did not have the requisite intention to remain. The court emphasised that an intention to retire to England in the future was not sufficient to establish a domicile of choice. In summary Domicile is a key legal concept; it affects many other rights and obligations and can determine a person s tax position. A domicile of origin is harder to lose than a domicile of choice To establish a domicile of choice an individual must be resident in the country chosen (even for a short period), and, during that period of residence, they must prove that they had a clear intention to remain in the country, permanently or indefinitely. Working outside of the chosen country will not necessarily affect the establishment of a domicile of choice provided residence and intention at the same time can be shown, and the individual can prove that they regard the chosen country as their home. Carol Cummins Consultant carol.cummins@clarkewillmott.com Ms Kelly did not marry in England, did not spend her holidays or maternity leave here and gave birth to her second child abroad. She had shown no personal nexus to this country. The court said, however, that another individual who worked extensively or exclusively abroad could establish a Attorneys and investments An attorney appointed under a Property and Financial affairs lasting power of attorney (LPA) has a number of different obligations and duties imposed on him or her in their capacity as attorney. The over-riding principle to be borne in mind by an attorney in discharging their functions is that they must act in the best interests of the incapable person (the donor) and this applies to management of the donor s investments as it does in relation to all other decisions made on the donor s behalf. available, and the risk involved. Investments such as investing in the attorney s own business (as occurred in the case under consideration) would require an application to the court for consent as would any other investment which caused the donor s interests and those of the attorney to come into conflict. Senior Judge Lush also stated that attorneys should consider the standard investment criteria laid down by statute for trustees. These provide that the investor should consider the suitability of the type of investment and the desirability of investment diversification. Advice should be taken from an appropriately qualified person unless the attorney reasonably concludes that this would be inappropriate or unnecessary. Best interests decision making In making any decision on behalf of a donor, the Mental Capacity Act 2005 requires the attorney to consider what would be in the donor s best interests, to allow the donor to participate in the decision in so far as they are able and to consider the donor s past and present wishes and feelings, beliefs and values in reaching the decision. Any investments should be kept separate from the donor s own property and should be made in the donor s name or an appropriate declaration of trust drawn up. As reiterated by a court of protection judge, it is a common misconception that as far as investment is concerned an attorney can do anything that the donor could have done if he had capacity. This is not the case as the attorney has to act in the donor s best interests; by comparison a person who has capacity to make a particular decision has the freedom to make an unwise decision or one adverse to his interests. For example a capable donor can choose to invest in a highly risky, unregulated venture while an attorney could not justify such an investment as being in the donor s best interests. Investments for inheritance tax saving In a 2015 case where the attorney had invested in inheritance tax saving investments it was stated that the saving of inheritance tax is not automatically in [the donor s] best interests. It would be dependent on all the circumstances and on the donor s wishes and feelings, beliefs and values as to whether such an investment could be suitable. It should be borne in mind that inheritance tax saving will not directly benefit the donor and the usual factors such as risk, potential returns, suitability and diversification should be taken into account in determining whether an investment should be made. Choice of investments Senior Judge Lush in a 2013 court of protection judgment indicated that investments should be made in products regulated by the Financial Services Authority (now the Financial Conduct Authority) and investments services should be provided by FCA regulated firms. This ensures that the investments will be covered by the Financial Services Compensation Scheme up to the limit then in force. He laid out a number of factors that should be taken into account including planned expenditure, the return Birmingham Bristol Cardiff London Anne Minihane anne.minihane@clarkewillmott.com Manchester Southampton Ta u n t o n

3 03 Wealth, Health and Inheritance Briefing September 2018 Tax Tribunal s capital gains tax decision and self-builders The exemption from capital gains tax (CGT) that applies when selling your only and main residence is a very valuable one. In common with many other exemptions there are, however, a number of rules governing its applicability, and absences from the property (other than for reasons permitted in the legislation) can adversely affect the amount of relief that can be claimed. In the case of self-builders there may be a considerable delay between acquiring the land on which to build and then moving into the completed house. In these situations extra-statutory concession D49 provides that the period before the owner begins residence will be treated as a period of occupation provided the delay is not more than one year, or, if there are good reasons for it, not more than two years. In a recent case heard by the First Tier Tax Tribunal (FTT) the applicability of extra-statutory concession D49 was considered. The FTT concluded that it had been wrongly applied by HMRC, and that the example set out in HMRC s CGT manual as to its use was simply wrong. Given the increase in demand for self-build projects in recent years claims for relief under D49 may rise in the future making this decision of particular interest to prospective self-builders. A longer than permitted delay George and Mary McHugh built a new house for themselves between November 2004 and December They lived in the house from its completion until September 2010 when they sold it. They did not declare the disposal of the property in their tax returns for 2010/2011 resulting in HMRC imposing demands for CGT of over 22,000 on each of them together with penalties of over 11,000 each. HMRC argued that D49 was not applicable as the concession states that the maximum period of delay in taking up residence that it can cover is two years. In HMRC s view, because the delay in question in this case was in excess of two years, none of the period before December 2007 was exempt from CGT. In support of this, HMRC cited an example in their CGT manual where the owner of a house purchased in January 2011, renovated the property but did not occupy it until May The manual stated that the owner would only be able to claim exemption from CGT from May 2014 as the maximum two year period had been exceeded. The FTT found that the example in the manual was wrong and should not be applied or followed and that it would be startling that someone who bought a plot of land, built on it and moved in within 364 days should be able to claim additional exemption under D49, while someone who took two days longer to build their house would lose the ability to claim the exemption for the entire period before moving in. Consequently, the FTT decided that the period of Mr and Mrs McHugh s ownership subject to CGT should be reduced by 24 months, HMRC should re-calculate the CGT due and the penalties should be quashed. Imogen Lea Consultant imogen.lea@clarkewillmott.com Samantha Grimwood samantha.grimwood@clarkewillmott.com Introduction to our new residential property team in Bristol We were pleased to recently welcome two new additions to our Private Property and Agriculture team. Samantha Grimwood and Samantha Dodd specialise in providing legal services to the residential property market in Bristol and its surrounding areas, providing expert, locally based legal advice to property buyers and sellers in the region. Samantha Grimwood joined the firm as a partner, having gained invaluable residential property experience in her 12 years practising as a solicitor, including in her role as head of the residential property team at Burroughs Day, Bristol. She is supported by Samantha Dodd, a paralegal with 11 years experience in this area of law who previously worked for Burroughs Day and Wards. Samantha Grimwood said: I am very much looking forward to the challenge of building a residential property team in Bristol and enhancing the already extensive offering of this well-respected and growing firm. Follow our blog at

4 04 Wealth, Health and Inheritance Briefing September 2018 Reasonable financial provision: deadline for bringing Will claims The Inheritance (Provision for Family and Dependents) Act 1975 ( the 1975 Act ) gives certain family members and dependents of the deceased the ability to apply for reasonable financial provision from a deceased s estate where the terms of the Will or the intestacy rules fail to do so. The 1975 Act has a time limit to bring these claims of no more than six months from the date on which representation (either a grant of probate or letters of administration) in respect of the deceased s estate is taken out. Anyone wishing to make a claim after six months must apply to the Court for permission to do so. In the recent 2018 case of Sargeant v Sargeant, the widow, Mary Sargeant who was married to the deceased, Joe Sargeant, for 45 years, issued a claim for reasonable provision from her late husband s estate more than ten years following the grant of probate. She was subsequently refused permission by the Court. This article examines that decision and the implications for those looking to bring a claim under the 1975 Act. Sargeant: the facts Mary Sargeant and her husband had one daughter, Jane, and a son, Jeff (Mary s child from a previous relationship and subsequently adopted by Joe). Under the terms of Joe s 2002 Will, he left his guns his guns and fishing equipment to Jeff and the balance of his personal belongings and the benefit of a life policy worth 75,000 to Mary. The residue of his estate was left in a discretionary trust with the class of potential beneficiaries limited to Mary, Jane and Jane s children. Outside of the Will, land worth approximately 2 million passed to Jane under the terms of her partnership agreement with Joe. The value of Joe s estate was sworn in at just over 3.2 million. Jane argued that the farm land should pass to her outside the terms of the Will by virtue of the partnership agreement, prompting a claim from Mary that these assets should form part of the estate. Floating in the background to the 1975 Act proceedings were a number of other related claims. Sargeant: The decision Mary s 1975 Act claim was brought ten years after the expiry of the six month period; the longest delay in any reported case in which permission of this kind has been granted. However, the Court was more concerned with the context and the reasons for the delay; the length of the delay by itself was not sufficient to defeat the claim. Mary s claim was based on a number of key points: 1. That she did not understand her position as a discretionary beneficiary or the financial implications for her until she sought assistance from Jeff in She maintained that she believed she was the owner of half of all the matrimonial assets from Joe s death. 2. That at no point until receiving professional advice in 2016 had she been separately advised of her right to make a claim under the 1975 Act. Although the Judge recognised that Mary was struggling to get by on the income she was receiving from the trust assets, he found that she had not made out a sufficient case that it was right and just to permit the claim to proceed. He did not accept that any material facts as to her position as a discretionary beneficiary had been concealed from her; that she certainly knew the implications of the discretionary trust by 2011 and that it was very likely indeed that she appreciated them from as early as Sargeant: the conclusion Had Mary sought legal advice when probate was granted then she would have been advised of her rights under the 1975 Act and been able to bring a claim within the six month deadline. On account of her lengthy 45 year marriage, she would have been in a strong position to claim a significant award for reasonable provision. Mary s options are now limited and we wait to see whether she pursues any of the other related claims. This case is a salient reminder for relatives and dependents to consider whether they need to take professional advice as to their legal rights as soon as representation has been taken out in respect of the estate of a deceased loved one. If you have any questions regarding this article or will and trust disputes generally then please contact: Bonita Walters bonita.walters@clarkewillmott.com Sarah O Grady Senior Associate sarah.o grady@clarkewillmott.com Jodie Coles Solicitor jodie.coles@clarkewillmott.com Birmingham Bristol Cardiff London Manchester Southampton Taunton

5 05 Wealth, Health and Inheritance Briefing September 2018 Tax planning during the administration of an estate Tax planning is more often associated with action taken during an individual s lifetime than with the administration of estates, but opportunities do exist to ensure that the tax position for both an estate and its beneficiaries is as advantageous as possible. We look at some ways of achieving this. Maximising reliefs and exemptions There are many exemptions and reliefs that can be claimed to reduce the taxable value of an estate, from the most well known and valuable reliefs, such as the surviving spouse exemption, to the more recent, such as a claim for the reduced rate of inheritance tax for charity gifts. Each applicable exemption and relief should be considered, evidence collated in support and a claim made. Occasionally a relief can be increased by changing the terms of the Will, so it may be advisable in those circumstances to consider a Deed of Variation of the Will if the beneficiaries affected agree to this. Deeds of Variation Deeds of Variation continue to be possible despite occasional political rumblings about their abolition. They can be used for a variety of purposes in estate tax planning including remedying defects in Will drafting which make the Will less tax efficient than it should be. For example, the Will might include legacies to charity which amount to just less than the 10% of the chargeable estate required to qualify for the reduced rate of IHT of 36%. If the residuary beneficiaries agree, increasing the legacy amounts to at or above the 10% threshold can result in a tax saving for the estate due to the reduced rate of IHT and also lead to the charity receiving a bigger legacy. A deed of variation can also be used to rectify gifts which reduce the claimable amount of the residence nil rate band. Perhaps, for example, a gift of a property has been made to non-lineal descendants; as the residence nil rate band is now in force it would generally be more tax efficient for those beneficiaries to receive a cash legacy, and for the property to pass to the deceased s lineal descendants. If everyone affected is in agreement a change can generally be made within two years of the deceased s death (although it is more complicated if minor or as yet unascertained beneficiaries are involved.) More sophisticated uses of deeds of variation include tax planning for future generations by the replacement of absolute entitlements with discretionary trusts for a particular branch of the family and creating excluded property trusts for non-uk property belonging to non UK domiciled testators or beneficiaries. Losses on sale In falling markets quoted shares or property might be sold during the administration of the estate for less than the probate value on which inheritance tax has been paid. The ability to substitute sale values for higher date of death values should not be forgotten. The share sales must take place within one year of the deceased s death and the property sale within four years. It is essential that the shares in question are sold by the personal representatives and not by the beneficiaries. More sophisticated uses of deeds of variation include tax planning for future generations... Appropriation of assets to beneficiaries before sale If assets have increased significantly in value during the estate administration there will be potential capital gains tax to pay on their sale. If the assets are not required for the discharge of estate liabilities then it is worth considering whether they should be appropriated to the beneficiaries so that any capital gains tax liability falls on them. Some beneficiaries may have capital losses that they can offset against the gain and each beneficiary may have a full capital gains tax annual exemption that could be used. Charity beneficiaries will usually request appropriation in their favour as charities are not liable for capital gains tax. Stamp Duty Land Tax (SDLT) Before assenting property the beneficiaries SDLT position should be considered. For example, a beneficiary may never have owned a property and the proceeds of sale of their legacy may be intended to put them onto the property ladder. If the estate property is assented to them before sale they will lose First Time Buyers SDLT relief on their purchase (worth up to a maximum of 5000) as they will not qualify as a first time buyer. In addition, if they buy their own property before the estate property is sold they will become liable for the SDLT surcharge payable on the purchase of an additional property. Income distributions Finally the timing of income distributions to beneficiaries is worth considering. Distributions are taxed in the year of receipt so if a large distribution is planned it may be beneficial to make this either side of the tax year, perhaps to avoid a beneficiary being inadvertently taken into a higher income tax band. Take advice As can be seen, there are plenty of opportunities for an estate to be administered in a tax efficient manner and our specialist probate practitioners can ensure that these are taken where appropriate. Emma Pope emma.pope@clarkewillmott.com If you would like to receive future editions of Wealth, Health and Inheritance Briefing or if you have any comments or suggestions for the newsletter please contact: news@clarkewillmott.com clarkewillmott.com Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC It is authorised and regulated by the Solicitors Regulation Authority (SRA number ), whose rules can be found at Its registered office is 138 Edmund Street, Birmingham, West Midlands, B3 2ES. Any reference to a partner is to a member of Clarke Willmott LLP or an employee or consultant who is a lawyer with equivalent standing and qualifications and is not a reference to a partner in a partnership. The articles in this briefing are not intended to be definitive statements of the law but instead provide general guidance.