Lifetime giving: tips and traps

Transcription

1 Lifetime giving: tips and traps John D. Bunker LL.B CTA TEP Solicitor, tax adviser & lecturer STEP UK TAX, TRUSTS AND ESTATES CONFERENCE 2018 Bristol 16 October 2018

2 Lifetime giving: tips and traps Contents I. When not to make gifts Intro and Professional concerns: who is the client? Issues which may militate against lifetime gifts II. Tax issues: 3.1 IHT Lifetime exemptions 3.2 PET or Chargeable Transfer? 3.3/4 Bare trusts 4. Reservation of benefit and exceptions to GWROB 5. Deathbed giving to beat RNRB taper threshold 6. Stamp Duty Land Tax (SDLT) 7. the new IHT DOTAS Regulations III. Reasons for invalidity 8. Formalities 9. The legal test of capacity 10. Undue influence 11. Unauthorised gifts on behalf of P

3 I. When not to make gifts 1.1 Introduction: Lifetime gifts are attractive So many good reasons to make gifts:- Generosity & helping out need e.g. to start on housing ladder; Saving Probate fees Tax planning saving income tax if pass income to those with lower marginal rates; & CGT splintering gains to use different CGT exemptions/lower rates; especially to save IHT: Use of exemptions; PETs to save IHT if live 7 years; Assets that may increase in value; RNRB planning e.g. around the 2m taper threshold; Owning land with non-spouses to secure co-ownership discounts

4 I. When not to make gifts 1.2 Lifetime gifts: other issues to consider But we need to consider other issues That may mean gifts should not be made: Professional concerns: who is the Client? See Issues that may militate against gifts See

5 I. When not to make gifts 1.3 Professional concerns: who is the client? Take care re professional obligations, especially if issues arise with property lawyer not used to these aspects Does client:- understand implications of gift? have capacity? Is client under undue influence? Professionals often good at considering these aspects of Wills But sometimes less clear when arises in a property purchase/transfer E.g. buying property & told to buy in name of child = gift It can be difficult to be certain but if in doubt it s better not to act

6 I. When not to make gifts 1.4 Professional concerns: Cases Litigation following gifts by elderly donor Hackett v. CPS & Hackett (2011) profoundly deaf, couldn t speak, read or write Transfer of prop set aside as only son to translate for mother; and client couldn t read Solicitor s advice letter = undue influence Pearce v. Beverley (2013) elderly man with Parkinsons & cancer Transfer of house to joint names with Def set aside Also will and nomination as beneficiary of life policy Lack of capacity & undue influence Kicks v. Leigh (2014) Sale of elderly lady s house, Solicitor instructed by Daughter +son-in-law All correspondence & net proceeds to Daughter +son-in-law Conveyancing solicitor gave no advice on implications of gift

7 I. When not to make gifts 2.1 Issues which may militate against lifetime gifts 1. PETs only fully exempt if survive 7 years & Taper Relief after 3 years: only if gift exceeds NRB at time of death Is buying BPR eligible assets a better option? so IHT free after 2 years. Watch financial planning e.g. risk tolerance. 2. RNRB planning? Gifts of a residence to descendants won t qualify for RNRB Unless within Downsizing provisions So be careful gifting any of residence

8 I. When not to make gifts 2.2 Other pitfalls -may militate against lifetime gifts 3. Be careful with salami sliced gifts: IHT value is loss to transferor s estate, not its value in donee s hands Green v RCC [23% share gifted & 77% retained] Value of transfer is not 23% of value of house less 10% ( 341,550) but difference between 100% and 77% ( 583,000). 4. Dangers of retaining benefit: GROB & POAT

9 I. When not to make gifts 2.3 Other pitfalls -may militate against lifetime gifts 5. CGT: a gift is a disposal: no general H/O relief & lose tax free uplift on death 6. Gifts may be invalid for: lack of capacity, undue influence, incorrect formalities, Lack of authority for gifts on behalf of P; See part III

10 I. When not to make gifts 2.4 Other pitfalls -may militate against lifetime gifts 7. Gifts may be attacked by creditors. 8. Deliberate deprivation rules may mean: gifted property is treated as notional capital of donor Local authorities should consider (a) whether avoiding the care and support charge was a significant motivation in the timing of the disposal of the asset; at the point the capital was disposed of could the person have a reasonable expectation of the need for care and support?

11 I. When not to make gifts 2.5 Asset Protection trusts? Family home settled on life interest trusts. Charge to IHT if value exceeds available NRB. Deliberate deprivation? Further away from need for care the lower the risk. Can be attacked under Insolvency Act 1986 s.423: putting assets beyond reach of potential creditors. Big disadvantage is uncertainty.

12 I. When not to make gifts 2.6 Care home wills First spouse to die leaves their share of the house on trust. NRB discretionary trust or IPDI trust for survivor With power to advance capital to top up fees Interest of first spouse is protected. Interest of survivor s is not. Co-ownership discount may reduce: the IHT value of the survivor s interest.

13 II. Tax Issues: 3.1 Common lifetime exemptions Small gifts, Annual exemption Normal expenditure out of income. Gifts in consideration of marriage. Gifts for family maintenance.

14 II. Tax Issues: 3.2 PET or chargeable transfer? Lifetime transfers to all trusts except trusts for a disabled beneficiary or genuine bare trusts are immediately chargeable at half rates. But, may not matter: A couple could each settle 325K + 6K without an entry charge. Exits tax free in first 10 years. Anniversary charges relatively low.

15 II. Tax Issues: 3.3 Bare Trusts (1) A trust where one person is entitled to income and capital Trustee is a fiduciary. A bare trust is not a settlement for IHT or CGT. The property is the child s. Income is taxed as child s unless parental settlements rule applies. 15

16 II. Tax Issues: 3.4 Bare Trusts (2) Useful for Grandparents & anyone who doesn t want a trust proper. Disadvantage is entitlement at 18. BUT trustees can use Trustee Act 1925, s32 power to defer entitlement: creates relevant property settlement, no transfer of value but a disposal, settlor interested for CGT and income tax. 16

17 II. Tax Issues: 4.1 Exceptions to GWROB Rules Sharing arrangements (1) FA 1986, s102b(4) Gift of an undivided share of an interest in land, GWROB rules do not apply where: donor and donee occupy the land, & the donor does not receive any benefit, other than a negligible one, at the expense of the donee. 17

18 II. Tax Issues: 4.2 Exceptions to GWROB Rules Sharing arrangements (2) There must be a gift of a share in the land, not the whole. Not limited to 50% but consider carefully how much to give: donor makes a PET and value transferred is reduction in estate; If donee dies before donor = IHT payable on his share of residence. 18

19 II. Tax Issues: 4.3 Exceptions to GWROB Rules Sharing arrangements (3) Occupation must be shared. Evidence is crucial. Doesn t matter if donor moves out but can be fatal if donee does unless pay a market rent. Expenses: Donee must not pay a disproportionate share, Or Donor would be receiving a benefit but donor can pay more- or all- of the expenses. 19

20 II. Tax Issues: 4.4 Exceptions to GWROB Rules Other escapes FA 1986 s 102B(3) Where there is a gift of an undivided share of an interest in land, GWR rules do not apply if the donor: does not occupy the land, or occupies the land to the exclusion of the donee for full consideration 20

21 II. Tax Issues: 5.1 Giving to beat RNRB taper threshold: Key points Tapered withdrawal if estate over 2 million Lose 1 for every 2 over limit Doesn t apply to lifetime gifts Scope for death-bed gifts as a last resort To reduce estate below 2m threshold Estate includes aggregated trust interests which are subject to IHT on death, Consider deemed gifts by termination of life interest in aggregable trust, which would be taxed on death for IHT May be way round any capacity issue if life tenant not a trustee

22 5.2 Giving to beat RNRB taper threshold It works, but watch out for: CGT: on disposal and loss of uplift. Timing: can gift be completed? Capacity issues attorneys will need court s consent if gift is outside terms of MCA, s12 a post-death variation is a gift for this purpose

23 II. Tax Issues: 6.1 SDLT: Gifts can cause higher tax bills later There are 2 SDLT dangers for donees of residential property: 3% higher rate on additional dwellings - HRAD, & the loss of first time buyers relief - FTBR

24 II. Tax Issues: 6.2 SDLT: The 3% higher rate SDLT is payable at the additional rate if: at the end of the day of purchase, the buyer has a major interest in another dwelling, which has a market value of 40,000 or more, and the dwelling being purchased is not replacing the purchaser s only or main residence.

25 II. Tax Issues: 6.3 SDLT: The 3% higher rate: Implications (1) Gift may be inadvisable Example Grandma gives a buy-to-let to her 4 grandchildren. The value of the property is 200,000. i.e. 50,000 each ¼ share Each grandchild will be liable to additional rates of SDLT when they purchase their first home if still hold interest & also lose FTBR see 6.5/6.6 - even if sold before buy

26 II. Tax Issues: 6.4 SDLT: The 3% higher rate: Implications (2) (2) Parents helping children buy cannot be co-owners They will need to lend or give cash. (3) A beneficiary with an interest in possession (IIP) in a trust which owns a property has an interest. Unless property being bought as beneficiary s own main residence: Can the interest be terminated before the purchase?

27 II. Tax Issues: 6.5 SDLT: FTBR First time buyer s relief: basics Purchased interest must be a major interest in a single dwelling. Price is no more than 500,000. Each purchaser is a first time buyer. The transaction is not linked to another.

28 II. Tax Issues: 6.6 SDLT: FTBR First time buyer s relief - issues (i) A first time buyer cannot ever have had a property interest Any beneficial interest including a bare trust, but not an IIP. (ii) No 40K de minimis. So however small the interest, it denies relief! (iii) No equivalent of 3 year inheritance rule. So lose FTBR relief if inherit, once: assent or appropriation of property or estate otherwise complete

29 7.1 Extension of IHT DOTAS Regulations Disclosure of Tax Avoidance Schemes Original hallmark was obtaining - an IHT advantage, - in relation to the entry charge for a relevant property trust Very little reporting because hallmark so narrow.

30 7.2 Extension of IHT DOTAS Regns New Regns from 1 April 2018 Arrangements must be disclosed if reasonable to expect an informed observer to conclude: Condition 1 the main purpose (or one of the main purposes) is obtaining an IHT advantage, in relation to certain transactions, Condition 2 Using one or more contrived or abnormal steps without which the tax advantage could not be obtained.

31 7.3 New IHT DOTAS Regns from 1 April 2018 HMRC Guidance issued on 29 March examples given are not the most helpful, but all we have. Only 1 example that might be notifiable & 2 that would be notifiable, incl: Example 17: Creation of a reversionary lease But note the comments on those that are not notifiable, as examples of HMRC thinking; Including Example 6 re Deeds of Variation: Not a breach of Condition 1 to redirect a gift to an exempt beneficiary But what about e.g. creating a NRB Disc Trust on death of 1 st spouse, With surviving spouse as a beneficiary? What form of DOV might be in breach?

32 7.4 New IHT DOTAS Regns from 1 April 2018 HMRC Guidance issued on 29 March 2018 Two examples that use statutory exemptions in IHTA & both breach condition 1 just not condition 2: An informed observer would not conclude a contrived or abnormal step needed to obtain tax advantage Example 9: Gift, continued occupation + pay full consideration Example 10: Gift of share of property used by both donor & donee The analysis might be different where the donor only retained a very small proportion of the property in comparison with the level of occupation So avoid gifts of larger shares of equity, retaining only say 5 or 10%? & watch this example with anything less than straightforward.

33 7.5 DOTAS & IHT: Cf. PCRT rules for STEP members Keep in mind when giving tax advice on gifts PROFESSIONAL CONDUCT IN RELATION TO TAXATION (PCRT) Extract from Updated Guidance effective 1 March 2017 Tax planning arrangements: Members must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation STEP Members need to comply or could face disciplinary proceedings. & SRA says all Solicitors should comply with PCRT. 33

34 7.6 DOTAS & IHT: PCRT rules for STEP members Compare PCRT with DOTAS Cf. PCRT with DOTAS: one or more contrived or abnormal steps Not highly so lower threshold than PCRT & is there a difference between artificial & abnormal?! PCRT issued by STEP, CIOT, ATT, AAT, ICAEW, ICAS & ACCA STEP Members need to comply or could face disciplinary proceedings. SRA says all Solicitors should comply with PCRT. 34

35 III. IS THE GIFT VALID? 8.1 Formalities: outright gift or trust Gifts may be outright or settled. If settled, may be by: transfer to trustees or declaration of trust by settlor.

36 III. IS THE GIFT VALID? 8.2 Formalities: Transfer Formalities vary depending on the asset transferred, e.g. land shares chattels choses in action existing equitable interest Settlements are often created in pilot form with assets transferred later. 36

37 III. IS THE GIFT VALID? 8.3 Formalities: Declaration of trust Easier. No formalities - except for land. Writing desirable. Declarations of trust very useful where: there are restrictions on transfer, the gift is to a minor, there is a need for speed, assets are non-assignable. 37

38 III. IS THE GIFT VALID? 9. Capacity Test is the common law test set out in Re Beaney not the statutory MCA test: Rule in Parker v Felgate applies to lifetime transactions: Singellos v Singellos. No previous authority. Void or voidable? - Unclear 38

39 III. IS THE GIFT VALID? 10. Undue Influence More than mere persuasion. Undue influence is presumed, if there is a fiduciary relationship, and a transaction calling for explanation Presumption can be rebutted, for example by evidence of independent legal advice.

40 III. IS THE GIFT VALID? 11. Gifts on behalf of P Attorneys have limited powers to make gifts. LPAs - MCA 2005, s12. Instrument can restrict but cannot widen powers. Court can authorise gifts. Best Interests test, taking into account s.4 factors, eg: - wishes and feelings of P, - views of those caring for P or named by P.

41 What did we do? When not to make gifts Tax: IHT, SDLT, DOTAS Validity: formalities, capacity, undue influence, gifts made on behalf of P

42 John Bunker LLB. CTA TEP Head of Knowledge Development, Tax Trusts & Estates, of Irwin Mitchell Private Wealth and freelance lecturer John has over 25 years of experience as a solicitor specialising in wills, trusts, estate and tax planning. A Chartered Tax Adviser for over 20 years, he serves as Chair of CIOT s Succession Taxes Sub-committee, and on HMRC s Capital Taxes Liaison Group and TACT s Private Trusts Committee. John moved in 2012 to his role responsible for technical development, know-how and legal education within the 100 strong Private Client team of Thomas Eggar, after 23 years as a partner. This role has developed within Irwin Mitchell, since the 2015 merger, with the national Tax, Trusts and Estates team as part of IM Private Wealth. John also developed external training work in a freelance capacity. With enthusiasm for his subject, John seeks to illuminate technical details with practical insight, in training for local law societies, branches of STEP, CIOT, SFE and other professional groups, as well as MBL, CLT, SJ Live, the Ark Group, and individual firms.

43 Contact details John D Bunker LL.B CTA TEP Solicitor, tax adviser and lecturer JDB Legal and Tax Training Ltd www. Jdbtraining.co.uk John@Jdbtraining.co.uk Tel: Copyright: JDB Legal and Tax Training Ltd Disclaimer: The content of this presentation is intended as guidelines for those attending the course and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.