Wealth, Health and Inheritance Briefing. what to do on death?

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1 July 2018 Wealth, Health and Inheritance Briefing Welcome to the July 2018 issue of WHIB. good spirits. The summer has got off to a surprising start with a heatwave and an uplifting World Cup campaign so I hope that this issue finds all our readers in In this edition our specialists examine the actions that should be taken on death in relation to gift and loan plans, look at the significance of letters of wishes accompanying Wills and trust deeds and consider whether in the light of a recent case trustees can withhold information from a trust s beneficiaries. We look at a case that illustrates some of the technical tax problems that can arise when making lifetime gifts and consider how your unmarried clients can protect their property interests. Any queries and comments please do get in touch or connect with us on Enjoy the rest of your summer. Anthony Fairweather Managing director anthony.fairweather@clarkewillmott.com Gift and loan plans: what to do on death? Gift and loan plans, or loan plans, are regularly used in estate inheritance tax (IHT) planning, particularly if an individual wishes to reduce the IHT liability on their estate but also wishes to retain the ability to receive an income from the amount gifted through repayments of the loan. In this article we look at what happens on the death of the person who has set up the gift and loan plan (the donor). Gift and loan plans/loan plans: what are they? Most readers will be familiar with this type of estate planning. In a gift and loan plan the individual wishing to save IHT gives a small amount (typically 3000, equivalent to the IHT annual exemption) to a discretionary trust. They then loan a much larger sum to the trustees of the discretionary trust who invest it in an investment bond, often held offshore. Repayments of the loan are subsequently made to the donor utilising the 5% tax free withdrawal facility. The expected capital growth on the amount invested takes place outside of the donor s estate and the donor is free to spend the loan repayments as they wish. In a loan plan no initial gift is made. The IHT position on the donor s death On the donor s death the value of the investment bond in the trust is outside of their estate but any unspent loan repayments, and the balance of the undischarged loan, will be potentially subject to IHT in their estate. Some donors include provisions in their Will as to what is to happen to the unrepaid loan, and this is advisable as the loan is not then available to pay estate expenses; but what happens if the Will is silent? If no specific provision is included in the donor s Will, the benefit of the loan will fall into the residue of the donor s estate. The burden of the loan will rest with the discretionary trust, the beneficiaries of which may differ from the residuary beneficiaries. If the executors of the estate or the residuary beneficiaries ask for the whole balance of the loan to be repaid, the discretionary trust trustees will have to surrender part of the investment bond to do this with a possible charge to income tax under the chargeable events legislation. What other options exist on death? In the absence of any specific provision in the will, if it is wished to avoid a forced surrender of part of the investment bond, the best course of action will inevitably depend on the individual circumstances of the particular estate and trust, but broadly there are three potential courses of action: 1. Leave the loan in place: the residuary beneficiaries would have to agree to this course of action but the loan could remain in place with the trustees making repayments to the beneficiaries in the same way as before the donor s death. The loan would be appropriated to the residuary beneficiaries of the estate. The existence of the loan would continue to be a liability of the trust which could reduce any potential IHT periodic charges on the trust (see below). The loan would be an asset of the residuary beneficiaries estates, depreciating as repayments are made, provided these are spent. Continued on page 2 clarkewillmott.com

2 02 Wealth, Health and Inheritance Briefing July 2018 Gift and loan plans: continued 2. The residuary beneficiaries could, once the loan has been appropriated to them from the estate, waive the benefit of the loan in favour of the discretionary trust: this would be a chargeable transfer for IHT purposes by the beneficiaries and so would need careful consideration. 3. A deed of variation could be drawn up within two years of the deceased s death incorporating a gift into the donor s Will, leaving the benefit of the loan to the discretionary trust trustees for the benefit of the trust. The gift would use some of the deceased s IHT nil rate band but would mean that the loan would be outside of the residuary beneficiaries estates. If the deceased had made substantial gifts in the seven years before their death then there may be insufficient of their nil rate band to use against the gift. As this would potentially give rise to an IHT charge on an estate (which might otherwise be free from IHT because of the spouse exemption) care would need to be taken in these circumstances. The trustees and the beneficiaries will need to consider the comparative tax position of the above options and of all those involved in order to make the best decision. It should also be noted that if the assets in the trust exceed 80% of the IHT nil rate band then an IHT return will be required every ten years on the anniversary of the trust s creation. If the value of the trust assets at that point exceeds the IHT nil rate band there will be an IHT charge at a maximum rate of 6%. We are increasingly seeing cases where loan plans have not been considered during deceased client s will planning nor during the administration of the estate. This is generally where the solicitors dealing with the wills or estates are unfamiliar with loan plans and the consequences of them. The preferred course is for the Wills to make provision for the loan plans. This simplifies the administration of the estate and the taxation consequences for the loan plan and means that there is no need to disturb the underlying loan plan investments. We recommend that the Wills of clients with loan plans are reviewed to ensure that there is adequate provision. If there is insufficient provision a codicil is a cost effective remedy if a full will review is not otherwise appropriate. Carol Cummins Consultant carol.cummins@clarkewillmott.com The significance of letters of wishes Letters of wishes (LoWs) are commonly used in private client legal practice, usually in conjunction with Wills or trusts. They are useful for providing a full picture of the author s wishes and can cover topics ranging from how a testator would like their minor children to be brought up to how the settlor hopes that a discretionary trust will be administered. LoWs are inherently flexible and can be easily updated as circumstances change. The fact that they do not become a public document after the testator s death (unlike a Will) can also be advantageous ensuring that privacy is retained for sensitive information. The legal effect of LoWs The legal effect of a letter of wishes was recently considered by the High Court. The case in question concerned a three page homemade Will accompanied by a two page LoW. The Will provided that the residue of the estate was to pass to a new charity for the benefit of persons with severe facial disfigurements. The LoW, however, expressed the wish that the deceased s friend might receive a legacy of 95,000 from the charity funds (provided there were sufficient) if she were widowed or divorced (subject to certain conditions). The estate became contested and a number of issues were brought before the court including the question of whether the LoW was incorporated into the Will and, if so, whether its provisions were legally binding. If the LoW was not incorporated it could not be a legally binding testamentary document and would have moral force only on the executors. In order to be incorporated the LoW had to satisfy three conditions: 1. It must be in existence at the time the Will was signed 2. It must be referred to in the Will as existing 3. It must be described in a way which makes it clear that it is the document referred to in the Will The judge decided that in this case the LoW was pre-existing, as it had the We recommend that the Wills of clients with loan plans are reviewed to ensure that there is adequate provision. same date as the Will, the deceased referred to the Letter of Wishes in the Will, described it as an attachment to the Will and the LoW itself was entitled Attachment to my Will dated 17/3/2013. The judge concluded that the LoW was incorporated, but on further construction of its language, it was not legally enforceable. Does this case affect LoWs made in conjunction with Wills? The case provides a useful summary of the conditions that have to be fulfilled before a LoW can be incorporated in a Will but it will not affect how LoWs are generally used. In many cases the LoW is not referred to in the Will at all and therefore does not meet the second of the above conditions for incorporation. One of the most common uses of a LoW is in connection with the distribution of personal effects when the executors are directed to a LoW stating how they should be divided. The drafting of this clause usually makes it clear that the LoW may be a future document which is not yet necessarily in existence, and that the gift is not intended to create any kind of legally binding obligation. Such LoWs remain as documents conferring moral obligations on their addressees only and the inherent advantages of LoWs as outlined above remain. Erica Burt-Moore erica.burt-moore@clarkewillmott.com Birmingham Bristol Cardiff London Manchester Southampton Taunton

3 03 Wealth, Health and Inheritance Briefing July 2018 Can trustees withhold information from beneficiaries? In Lewis v Tamplin 2018 EWHC 777 (Ch) the High Court has ruled that trust beneficiaries should not have had their request for more information dismissed by their trustees simply on the basis that they already had enough information. Gladys Tamplin left her farm in her Will on trust for her six children and their children. Thirty years later the land had greatly increased in value due to housing development potential and there was interest from possible developers. What rights to information do beneficiaries have? Two of the original beneficiaries were trustees along with one of Gladys s grandchildren. Three other grandchildren were also beneficiaries. Those three grandchildren sought information from the trustees about: 1. the distributions of income made to other beneficiaries but not to them; and 2. in connection with various dealings and usage relating to the farm land. When the trustees response was unsatisfactory they took the matter to the High Court. The court held that the beneficiaries had the right to hold trustees to account for their stewardship of the trust fund and the performance of the trust obligations. The beneficiaries could ask the court to order the disclosure of the information in the exercise of the court s jurisdiction to supervise the activities of trustees. It was noted that the court will not be satisfied with the say-so of the trustees that the beneficiaries have had sufficient information already, but will make up its own mind as to whether the information sought should be disclosed. How should trustees handle the disclosure of information? The court held that the trustees had taken an extreme and indefensible approach to disclosure, first by denying (on a very weak basis) that the three grandchildren were beneficiaries at all, and then by putting forward a series of hopeless arguments against giving information to the beneficiaries. The court commented that if the trustees had taken a less confrontational and more co-operative approach at the outset the litigation could have been avoided and fewer documents (perhaps none at all) would need to have been disclosed. One of the arguments raised by the trustees against disclosure was that legal professional privilege applied. The court s response to this was that where advice has been sought for the benefit of the trust as a whole, and the trustees pay for that advice out of trust funds, such advice is not privileged as against the beneficiaries and could be ordered to be produced. This case sends a very clear message to trustees to be aware of blasé dismissals of beneficiaries requests for information. The trustees were ordered to provide a range of documentation including advice given to the trust, retainers with professionals, information relating to the use and exploitation of the land and option agreements entered into with potential developers. Advice for trustees When the court considered the circumstances and history of this trust they found that what had been given to the beneficiaries was given very late, it had only been given under threat of legal proceedings (or after they had been started) and it remained inadequate. The beneficiaries were entitled to much more than they had so far received. This case sends a very clear message to trustees to be aware of blasé dismissals of beneficiaries requests for information. Trustees have obligations as outlined in this and previous cases and also statutory duties imposed on them under data protection law including GDPR. Therefore a trustee who receives a request for information about the trust from a beneficiary should not reject the request immediately, but should consider taking legal advice before responding. Bonita Walters bonita.walters@clarkewillmott.com Sarah O Grady Senior Associate sarah.o grady@clarkewillmott.com Follow our blog at

4 04 Wealth, Health and Inheritance Briefing July 2018 Lifetime gift rules cause confusion Following the Office of Tax Simplification s call for evidence into the proposed simplification of inheritance tax (IHT) professional bodies have been submitting their responses. Many responses have called for the much disliked residence nil rate band to be replaced by an increase to the general nil rate band which, according to the Law Society, would now stand at 450,000 if it had risen in the usual way since it was frozen in In addition, the grandchildren s trust will be subject to IHT charges on every tenth anniversary of its creation and when capital leaves the trust. In calculating those charges the failed PET to George will be brought into account meaning that, as the trust fund grows in value, it is likely to become liable to pay IHT on those occasions. The Law Society s response also highlights various difficulties arising around lifetime gifts, including some technical rules, the effects of which may be misunderstood by the general public. These complexities can perhaps be best illustrated by an example. By comparison if the trust had been set up before the potentially exempt transfers then there would be no failed PETs to take into account. Consequently the trust would be unlikely to pay IHT at any point (unless the value of its assets did very well and exceeded the IHT nil rate band in force when the charges are calculated). Anthony s estate planning Anthony is divorced with two children. He wishes to reduce the IHT liability on his 3 million estate and makes the following arrangements: In 2014 he makes an outright gift of 200,000 to his son, George, to enable him to buy a property. In 2016 he sets up a discretionary trust for his grandchildren with an initial gift of 125,000. In July 2019, he makes a gift of 200,000 to his daughter, Louise. Louise is alarmed to discover that, as Anthony s nil rate band was fully used by the gifts to her brother and the trust, the gift to her is fully chargeable to IHT with a tax bill payable of 80,000, which she is liable to pay. As Louise has no children she feels that her brother has unduly benefitted from their father s estate. George refuses to agree that the residue of the estate should pay the IHT due on the gift to Louise, which causes a falling out between the two siblings. Louise refuses to pay the IHT due on the gift to her. Having distributed most of the estate, Anthony s executors find themselves personally liable (to the extent of Anthony s estate s assets) for the 80,000 due on the failed gift to Louise, with no statutory right of recovery from her. Anthony dies in March 2020 leaving his estate equally between his two children. His brother and sister are executors of the estate. Anthony believed that the gifts to his children would taper in value after he had survived them by three years. He has made no provision in his Will for the payment of IHT on any failed lifetime gifts and did not take advice before beginning his estate planning. He believed that he had treated his children equally. The Law Society s suggestions The Law Society suggests that better information for the public might deal with some of these difficulties, although whether that information will be digested and followed will be another matter. The Law Society states that taper relief should perhaps taper the value of the gift rather than the tax due and that executors should be given a statutory right of recovery against beneficiaries who fail to pay the IHT due on lifetime gifts. In the meantime it is clear that even fairly straightforward tax planning can have the potential to cause problems, so we would recommend that your clients always seek advice. The IHT position Anthony has died within seven years of all of the gifts. Consequently, the two gifts to his children are failed potentially exempt transfers (PETs); the gift to the grandchildren s trust was a chargeable transfer when made but this fell within his IHT nil rate band at the time so no immediate lifetime charge to IHT was due. David Maddock david.maddock@clarkewillmott.com On Anthony s death there is no IHT due on the gift to George as its value falls within Anthony s IHT nil rate band. This is also the case with the gift to the trust. However, taper relief does not operate (as Anthony had believed) to reduce the value of these gifts. It in fact reduces the IHT payable on the gift and, as there was no IHT due on these first two gifts, they are brought into account at their full value when calculating the IHT on Anthony s estate. Birmingham Bristol Cardiff London Manchester Southampton Ta u n t o n

5 05 Wealth, Health and Inheritance Briefing July 2018 Unmarried couples: protection of your client s interest In a recent case in the High Court the judge was at pains to emphasise the different law that applies when considering property dispute cases arising on the breakdown of a relationship, dependent on whether the couple in dispute were married or unmarried. The case in question concerned the purchase of a Devon farmhouse in The farmhouse was occupied by an unmarried couple, Jacqueline Dobson and Matthew Griffey, although purchased with the aid of a mortgage in the sole name of Mr Griffey. Following renovation and improvements to the farmhouse, the relationship broke down in 2011 and the farm was subsequently sold in Ms Dobson then alleged that, although the property was in her former partner s sole name this was for mortgage purposes only and that at the time of its purchase the couple had agreed to split any profits on sale equally. The court s decision In his judgment Matthews J emphasised that in such disputes between an unmarried couple the court s function is limited. It has no power to reallocate assets between the couple to, for example, meet financial need. Property law alone, which does not include any element of judicial discretion, would determine the outcome. As the property in question was in the sole name of Mr Griffey, Ms Dobson (as the non-owner who was claiming an interest in the land), must show evidence of a trust imposed by law which would mean that Mr Griffey would then have held the property as legal owner upon trust for the two of them....if the couple were married it would not matter who had legal ownership of the matrimonial home... The court concluded that there was no evidence of any agreement as to the property s ownership, or an agreement that the sale proceeds should be divided between the couple, and thus Ms Dobson s claim for a share of the sale proceeds failed. Protecting your client s property interests This type of case is relatively common. As the judge pointed out, if the couple were married it would not matter who had legal ownership of the matrimonial home, its ownership could be split between the couple as the court in its discretion decided, taking into account all relevant factors including their relative needs. No such system of financial adjustment applies in the case of unmarried couples. If your unmarried client is intending to purchase a property with their partner it is essential that any agreement as to beneficial ownership of the property is documented by way of a written declaration of trust. This should be explicit about all aspects of the property ownership including what happens if one of the couple wishes to sell, and how capital and income property outgoings are to be split. One of the arguments advanced by Ms Dobson was that Mr Griffey had said he would leave the property to her on his death. Given that unmarried partners have no automatic right at present to benefit from their partner s estate, it is also essential that thought is given to each partner making a Will so the position is protected should one of them die. Ultimately, drawing up the requisite legal documents is a much less stressful and expensive route for your client than a High Court dispute over ownership. Jane Halton jane.halton@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.