private affairs issue: spring/summer budget 2011 investing in agricultural land employee benefit trusts entrepreneurs relief

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1 issue: spring/summer 2011 private affairs budget 2011 investing in agricultural land employee benefit trusts entrepreneurs relief pensions update

2 hello welcome to the latest edition of Private Affairs editor Matthew Hansell contents 03 Budget 2011 editorial 04 Investing in agricultural land 06 Employee benefit trusts 08 Entrepreneurs relief 10 Pensions update 12 Snippets Welcome to the spring/summer 2011 edition of Private Affairs. In our previous two editions we illustrated, using case studies, some of the very many complex issues that face individuals and their advisers. In this edition, which follows George Osborne's second Budget, we have decided that it is time for another change in our approach and we have focused on a few particular areas of taxation that are relevant to our clients we hope that you will find the content both interesting and useful. It was, for our clients, quite a quiet Budget but Catherine Bacon has summarised some of the more interesting proposals. A change that is likely to be of particular importance to our clients is the increase in the lifetime limit in entrepreneurs relief to 10 million given the potentially high value of the relief, we have included an overview written by Lauren Parker of how it works and pointed out some of the pitfalls to avoid when seeking to claim it. Christopher Townsend, a member of our corporate tax team, also considers how the Government's latest antiavoidance measures affect employee benefit trusts, which have been established in recent years for a variety of reasons including tax deferral schemes for key employees and an exit route for the shareholders of private companies. Given the intention of the Office of Tax Simplification to review inheritance tax as a whole, it was unsurprising that the Budget didn't touch the inheritance tax reliefs: in this edition Virginia Edgecombe considers the practical ways in which those investing in agricultural land can make the most of them. The pensions legislation seems to be the subject of constant revision. We are therefore pleased to introduce our guest writer, Darren Chaplin of Towry, who has prepared a very useful and practical summary of the latest tax changes that took effect from 6 April Finally our snippets section includes some practical information about the taxation of joint bank accounts and mirror wills for couples. If there is anything particular that you would like us to cover in future editions, please let me know it is important to us that our newsletter is interesting and practical so feedback from you is always welcome!

3 03 Catherine Bacon budget 2011 There were a number of announcements in the Budget that may have an impact on your personal tax planning in the near future. If you would like to discuss any of the measures in detail, please contact us. In the meantime, here is a summary of just a few of the more interesting proposals. Inheritance tax The proposal is to reduce the rate of inheritance tax payable on the taxable portion of an individual s estate, where the individual leaves 10 per cent or more of his net estate to charity, from 40 per cent to 36 per cent. The aim is to bring the reduced rate into effect for estates where the individual died on or after 6 April Taxation of non-doms There are three proposals that the Government will be looking at in detail over the summer. The stated intention is to include the measures in the Finance Bill 2012 so that they take effect from April The remittance basis charge: this is the charge that individuals, who have been resident in the UK for seven years or more, pay for the privilege of paying UK income tax and capital gains tax on only the income and gains remitted to the UK (as opposed to their worldwide income and gains). The charge is currently fixed at 30,000. The proposal is to increase the charge to 50,000 for individuals who have been resident in the UK for 12 years or more. Investment in UK businesses: in a bid to boost investment in the UK, the Government is proposing to remove the charge to UK tax where an individual, who is not resident in the UK, remits income or gains to the UK for the purpose of commercial investment in UK businesses. Statutory residence test: the Government will be consulting on the introduction of a statutory residence test, which is an extremely welcome measure. The current situation is very unclear and it can make life difficult for individuals attempting to establish their residence status with any degree of certainty. Entrepreneurs relief The Chancellor announced that the lifetime limit for the relief would be doubled, from 5 million to 10 million. When the relief was introduced in 2008, the limit was set at 1 million the rise to 10 million in three years is extremely welcome but it would have been helpful if some of the restrictions on the relief could have been relaxed.

4 04 Virginia Edgecombe how investors in agricultural land can maximise the benefit of the reliefs from inheritance tax on death Agricultural land has long been recognised as a good long term investment and, indeed, in the last few years we have seen its value more than double. This, combined with the valuable reliefs from inheritance tax (IHT), makes it very attractive for some investors. We consider here how the reliefs may be used to the best advantage of the investor and his successors. Agricultural property relief (APR) from inheritance tax Property that qualifies as agricultural property attracts relief from IHT provided that the statutory ownership and occupation conditions are satisfied. In a nutshell, agricultural property will qualify for relief after: two years of ownership provided the owner occupies the land throughout that period for the purpose of agriculture (ie, where the land is farmed in hand ); or seven years of ownership provided that throughout that period the property is occupied for the purposes of agriculture by the owner or by anyone else (eg, where the land is let). The rate of relief will be 100 per cent unless the land is subject to a tenancy that was created prior to 1 September 1995, in which case it will be just 50 per cent (unless the letting is a pre 1981 inter family arrangement and the specific conditions for working farmer relief apply). The land owner is deemed to be in occupation if the land is occupied by a company that he controls or by a partnership in which he is a partner. For investors with a life expectancy of less than seven years, acquiring land that is let is unlikely to achieve the aim of reducing the inheritance tax liability on his death and farming in hand is the only option. However, the actual practical aspects of the farming may be contracted out to a third party; provided that the contracting agreement is carefully crafted and the owner is involved in the business, it can be said that he is in occupation. However, following the cases known colloquially as Antrobus II and McKenna, HM Revenue & Customs is unlikely to accept that a farmhouse occupied by the owner will qualify as agricultural property unless he is involved in the day to day running of the farm. So, if the reality is that the owner is barely involved in the farming and leaves everything to the contractors, it will be hard to say that the house qualifies for relief. Business property relief (BPR) It s not unrealistic to consider that our investor might acquire some cottages with his land. If these are occupied by farm workers for the purpose of agriculture (or perhaps retired farm workers, or their widows) they may attract APR, whereas if they are let for non-agricultural purposes (eg, on short term tenancies or as holiday lets) they will not attract APR. However, if the owner is farming in hand, albeit via contractors, the cottages may attract BPR after they ve been owned for two years if it can be said that the letting is ancillary to the main activity of the business, which is farming. The rate of relief will be either 100 per cent or 50 per cent depending on how the business has been structured. If it can be said that the cottages are an asset of the business, 100 per cent relief can be secured whereas if they are held outside the business and simply used by it, the relief would be just 50 per cent.

5 highlights 05 Let land may attract valuable relief from inheritance tax but land farmed "in hand" usually offers greater tax reliefs overall Using a "double dip" will can be extremely effective, offering both asset protection and the ability to claim relief on the same assets twice Reducing the IHT liability further by creating a debt in the estate If we assume that our investor has a share portfolio of, say, 2 million, which he intends to realise in order to raise the cash to purchase the farm, he will need to remember that he might trigger an unpalatable capital gains tax liability when he sells the shares. In order to avoid selling the shares, he could borrow from the bank, offering his share portfolio as security for the loan. This has a double advantage in that it enables him not only to purchase land that attracts relief from IHT on his death but also to ensure that the portfolio is set off against the debt when calculating the IHT liability on his death. Realistically the bank is likely to require a charge over the land but, provided that the portfolio is charged in priority to the land, the debt can be set off against the portfolio on death. A double dip will enables further IHT planning opportunities to be exploited after the death If the investor is married, further IHT planning opportunities can be exploited after his death if he has a double dip will. This would provide that the property, which attracts relief on death, passes to a discretionary trust (Trust 1). The remaining assets, which don t attract relief, will pass to a trust in which the widow has a life interest (Trust 2) thereby securing the spouse exemption from inheritance tax. Trust 2 will form part of the widow s estate for IHT purposes whereas Trust 1 will not. The trustees of the two trusts could then swap the assets so that Trust 2 holds property which, subject to the ownership and occupation conditions being satisfied, qualifies for relief on the death of the widow. This structure ensures that the widow is properly provided for as she is entitled to the income from Trust 2 and, as a potential beneficiary of Trust 1, could receive income from the share portfolio even though it will not comprise part of her estate for IHT purposes. Stamp duty land tax (SDLT) SDLT must always be considered in relation to any land transaction. Normally the acquisition of land by one trust from another will trigger a stamp duty land tax charge, the rate of which will be 4 per cent if the value is in excess of 500,000. However, if the will is carefully drafted, it is possible to create two trusts for IHT purposes but, at the same time, ensure that they are treated as a single trust for SDLT and capital gains tax purposes. There are, of course, many things to consider before investing in agricultural land, not just IHT or, indeed, any tax. Any decision must be made taking a number of factors into account, not least the investor s personal interests and attitude to risk. However, for those who do decide to invest in agricultural property, the tax savings can be enhanced by taking good advice and careful structuring both before and after the death.

6 06 author Christopher Townsend employee benefit trusts: the end of the road? Employee benefit trusts (EBTs) are widely used by companies for a variety of reasons, including employee share plans, pensions and benefits (notably healthcare). However, over the last decade or so, EBTs and similar vehicles such as family benefit trusts and employer financed retirement benefit schemes (EFRBSs) have been widely promoted as vehicles for use in tax avoidance and tax deferral schemes for key employees. This has prompted the introduction of tough new tax legislation to counteract disguised remuneration arrangements involving EBTs and other intermediaries. The new rules which have been included in the Finance Bill will take effect from 6 April 2011 (and in some respects from 9 December 2010) once the Bill has been given Royal Assent. Disguised remuneration The term disguised remuneration refers to arrangements involving EBTs that place funds or assets at the disposal of employees, while avoiding or deferring the income tax and/or national insurance contributions (NICs) normally payable when remuneration is paid directly to employees. Common arrangements have involved: using an offshore EBT as a wrapper for what amounts to an employee s personal investment portfolio with the added attraction of tax-free roll-up of income and gains; lending funds interest-free on an indefinite basis with a very low effective rate of tax (currently 2 per cent per year for someone paying income tax at 50 per cent); after the end of the employment, or if the employee becomes non-resident, or on his death, further tax planning which might mean that no UK tax is payable at all on the funds reaching the employee or his family; and side-stepping the relevant limits for registered pension schemes through EFRBS. HM Revenue & Customs (HMRC) has been seeking for some time to challenge arrangements like these through the courts and, in recent years, has placed them under an anti-avoidance spotlight. Now, HMRC has gone a step further and the new rules will substantially limit the future use of EBTs for disguised remuneration arrangements. Many tax advisers feel that anti-avoidance measures in this area were inevitable, but that the draft legislation that has emerged is complex, ill-considered and far too wide-ranging in its potential impact. The new rules: an overview Under the new rules, a tax charge arises when a relevant step is taken on or after 6 April 2011 by a third party (broadly any person other than the employer but including, in particular, EBTs and EFRBSs). The legislation applies where (1) a person is an employee (which term includes current, former and prospective employees and directors) and (2) there is an arrangement in place that provides rewards, recognition or loans to the employee in connection with his employment and (3) a third party operating the arrangement takes a relevant step. For this purpose, a third party takes a relevant step if, for the benefit of a relevant person (broadly, an employee or a person linked to the employee), it: earmarks, however informally, a sum of money or an asset for an employee (such as creating a sub-trust or a more informal allocation for an employee or his family); pays a sum of money (including a loan advance) or transfers an asset to an employee if a loan is made to an employee by an EBT, the new position is that the full amount of the loan will be taxable instead of a small annual charge applying; or makes an asset available for the benefit of an employee (eg, providing for a second or holiday home to be bought for the employee's family). When the relevant step is taken, income tax (payable through PAYE) and NICs will be payable on the full amount or value earmarked, paid, lent, transferred or made available (and if, after

7 highlights 07 Tough new tax legislation to counteract "disguised remuneration" arrangements is being introduced to take effect from 6 April 2011 Many tax advisers feel that anti-avoidance measures in this area were inevitable but that the draft legislation which has emerged is complex, ill-considered and far too wide-ranging in its potential impact Continued use of EBTs for use in connection with employee share schemes or the provision of conventional employee remuneration arrangements should remain both possible and sensible but there is a great deal of devil in the detail earmarking, the employee does not actually receive the anticipated benefit, for whatever reason, a tax refund, if available, will require the employee to apply to HMRC). An EFRBS will normally involve earmarking funds paid into an employee trust, so an upfront tax charge will arise when new contributions are made to the EFRBS and earmarked for an individual, with relief being given when taxable distributions are subsequently made to employees. Existing EFRBS with unallocated funds will also face a tax charge at the point of allocation to a scheme member. HMRC s stated policy is that conventional employee remuneration arrangements, where there is no tax avoidance purpose, should not be penalised. Exemptions from the new rules apply in certain circumstances and provided certain conditions are fulfilled to HMRC-approved employee share plans, registered pension schemes, all-employee benefit arrangements, car ownership schemes, deferred remuneration arrangements and short-term loans. Unfortunately, the new tax regime is complex and so are the exemptions, and there are several potential pitfalls. Some practical implications Where EBTs have been set up to facilitate specific tax planning for individuals, particular attention is needed to avoid unnecessary tax charges under the new regime: Where arrangements were made before 9 December 2010, keeping them intact and unchanged should not give rise to tax charges under the disguised remuneration rules. There might, nonetheless, be challenges from HMRC under the pre-finance Act 2011 law. However, any change (for example, in investments held or making a replacement loan) could cause a tax problem. There is no grandfathering for amounts already placed in trust if a new relevant step is now taken (although there are some special provisions for EFRBSs already set up). The upshot is that many employees, who had hoped that their offshore EBT arrangements might be a tax-free vehicle, will now be disappointed as there seems little way to extract a benefit from the trust without triggering a full tax charge. If, between 9 December 2010 and 5 April 2011, an EBT advanced a loan or provided an asset to an individual, that loan needs to be repaid or asset returned before 6 April 2012 to avoid an income tax and NIC charge on the full amount of the loan or asset. In principle, where companies have set up EBTs for use in connection with employee share schemes or the provision of conventional employee remuneration arrangements, the continued use of EBTs should remain both possible and sensible. However, there is a great deal of devil in the detail of the new rules, and advice should be taken to ensure that your arrangements are not caught by one of the many new traps. Finally, for those who like to engage in tax planning, these new rules invite many reflections. However, perhaps the most obvious is that, when weighing up the attractions and risks of a tax planning proposal, it is always worth trying to assess as far as possible what the downsides might be if the law changes.

8 08 author Lauren Parker entrepreneurs relief an overview of an extremely valuable relief from capital gains tax The rules relating to capital gains tax (CGT) were greatly simplified with effect from 6 April 2008, when a new flat rate of 18 per cent was introduced. However, the removal of taper relief left businesses worse off, and this was mitigated by the introduction of entrepreneurs relief (ER). With the new 28 per cent higher CGT rate from 22 June 2010, and the increase to 10 million in the lifetime limit from 6 April 2011, ER has become even more important and offers a potential tax saving of 1.8 million per individual. At the end of the article, I have included two examples illustrating the importance of planning ahead to ensure that the relief is maximised. However, first I will summarise the key provisions of the relief. The relief ER applies to gains made on the disposal of a business or an interest in a business, or on the disposal of business assets. It is only available in respect of three types of disposal: 1 A material disposal of business assets by an individual 1.1 A disposal of all or part of a business that an individual has owned for at least one year prior to the date of disposal. The disposal must be of assets comprising the business, and not just of assets used in the business. 1.2 A disposal of assets that were used in the business when the business ceased, provided the individual owned the business for at least one year prior to cessation and the disposal takes place within three years after it. In the context of partnerships, each partner is treated as owning the business. 1.3 A disposal of shares or securities of a company provided the company is the individual s personal company, ie: the individual owned at least 5 per cent of the ordinary share capital and voting rights, and the company was a trading company or the holding company of a trading group; and the individual is an officer or employee of the trading company or holding company; or the company has within the three years before the disposal ceased to be a trading company but the requirements set out in and above were satisfied throughout the period of one year preceding the cessation. 2 An associated disposal (ie, disposal associated with a relevant material disposal) The associated disposal rules deal with the disposal of assets (eg, land and buildings) owned by an individual but made available to a partnership in which that individual is a partner, or to a company which is the individual s personal company. The relief applies where, following a material disposal, an individual disposes of an asset used for the purposes of the business, and that disposal is made as part of the individual s withdrawal from the business. It is not necessary for the individual to reduce the amount of work they do for the business but there must be some reduction in their interest in the assets of the partnership or company. The assets must have been used in the business for at least one year immediately prior to the earlier of the material disposal and the cessation of the business. Note the restrictions on relief in this case. For example, there will be an adjustment if the asset has only been used in the business for part of the period of ownership, or where rent has been paid since 5 April 2008.

9 highlights 09 The increase in the lifetime limit to 10 million of capital gain give a potential tax saving of 1.8 million per individual A "material disposal" is more favourable than an "associated disposal" Where assets are held in trust, the relief will only apply if the beneficiary, rather than the trustees, is carrying on the trade The rules are complex and planning ahead to ensure that the relief is maximised is key 3 Disposal of settlement business assets ER may also apply on the disposal of business assets by trustees where the beneficiary has a life interest (other than for a fixed term) in the part of the settled property which includes the assets disposed of. In addition, similar conditions to those set out in 1.2 and 1.3 must be satisfied. Critically, the beneficiary must have been carrying on the business. The trustees will need to make a joint election for relief with the beneficiary as it is the beneficiary s lifetime limit which will be reduced. Planning ahead It is important to plan ahead of a disposal of business assets to ensure the gain will qualify for ER. Consider the following examples. Example 1 Mark owns a 4 per cent shareholding in A B Limited, a trading company of which he is a director. Mark is also a member of the class of discretionary beneficiaries of a family settlement, which owns a further 25 per cent shareholding in the company. The company has expanded in recent years, and it is now valued at 15 million. C D Plc has expressed an interest in acquiring A B Limited and Mark thinks it is likely A B Limited will be sold in the next year or two. A disposal of shares by Mark and the trustees would not presently qualify for ER because Mark only owns a 4 per cent shareholding in A B Limited and he does not have an interest in possession in the settlement. The trustees might consider exercising their powers to advance a further 1 per cent shareholding to Mark so that he owns 5 per cent of the shares outright. They could then exercise their powers of appointment to confer an interest in possession on Mark in respect of the trust s remaining 24 per cent shareholding. Provided A B Limited is not sold for at least one year, then a disposal of shares by Mark and the trustees should qualify for ER. If the net gains are likely to exceed 10 million, then the trustees might want to consider advancing a 5 per cent shareholding to any other beneficiaries provided they are officers or employees of A B Limited. This way it would be possible to use more than one individual s lifetime limit, thereby reducing the overall capital gains tax liability. The rules are complicated and planning ahead is key as it may be possible to use the lifetime limit of a number of individuals on a disposal. The rules must also be considered when carrying out IHT planning before a disposal. Example 2 Jane and Jack have been carrying on the business of farming in partnership since Jane owns 500 acres of land, which she acquired in 2000 and has made available to the partnership since January 2005, but the land is not treated as an asset of the partnership. Jane and Jack decide to go their separate ways and they dissolve the partnership in January 2011, selling all of the partnership assets and each making a capital gain of 500,000. Jane also sells her 500 acres of land, making a further capital gain of 1,000,000. The disposal of the partnership assets will be a material disposal qualifying for ER so that capital gains tax will be payable at the rate of 10 per cent. The disposal of Jane s land will be an associated disposal but, because the land has only been used in the business since 2005, ER will be time apportioned so that only 545,454 qualifies for relief (1,000,000 x 6/11). If Jane had introduced her land to the partnership prior to the sale, then the entire gain would have qualified for ER, representing a tax saving of 81,818.

10 10 guest author Darren M Chaplin Dip PFS, Certified Financial Planner Senior Wealth Adviser, Towry Limited darren.chaplin@towry.com pensions update: the latest legislative changes In April 2006, which is often referred to as A day, the Government made wide ranging changes to pensions legislation. The focus was to simplify pension rules for all and was communicated under the banner pensions simplification. Since April 2006, we have seen a whole host of amendments to pension legislation, which has very much moved us away from a simplified regime. The latest changes were introduced towards the end of 2010 and are included in the Finance Bill 2011 whose provisions, it is anticipated, will be effective from 6 April In summary, the latest changes focus on the following aspects: Restriction of the annual allowance for contributions. Reduction in the lifetime allowance. Removing the requirement to annuitise by age 75. Pension contributions The annual allowance is the yearly limit an individual can accrue in a pension and is tested for each year. This has been set at 50,000 per annum for all from 6 April 2011 (it was previously 255,000) and will be in place until at least the 2015/16 tax year. Tax relief at an individual s highest marginal rate will be available on contributions (and not capped at 40 per cent as previously suggested). No tax relief will be available on contributions above the annual allowance. The current anti forestalling rules, which restrict pension contributions for those whose income is in excess of 130,000 gross per annum, will cease and this will result in all who earn at least 50,000 gross being able to contribute a maximum of 50,000 and gain the highest marginal income tax relief on this contribution. Any protected pension input for regular contributions made by high earners as above will cease from 6 April From that date, any contribution exceeding the annual allowance of 50,000 per annum will no longer attract tax relief, regardless of whether there is a previously deemed protected pension input and will give rise to a tax charge on the individual at their marginal rate of income tax (up to 50 per cent). It may however be possible to mitigate this tax charge through the use of the carry forward facility as explained below. An individual may carry forward any unused annual allowances from any tax year (starting from the 2008/09 tax year) during which they were a member of a registered pension scheme regardless of whether they made any contributions during that year. The unused allowance in this sense is the difference between the contributions made in the year (or the benefit accrued in a final salary scheme in that year) and the new level of 50,000 gross. Lifetime allowance The lifetime allowance is the limit on the total capital value an individual can accrue during their lifetime. This will be reduced from its current level of 1.8 million to 1.5 million from 6 April Fixed protection will be introduced and this will protect the value of an individual s benefits up to 1.8 million with any excess value above 1.8 million giving rise to a tax charge on the individual of currently 55 per cent. It will be possible to apply for fixed protection at any time up to 5 April It is likely that this will have an impact on the level of pension contributions available going forward. For individuals who already hold primary and/or enhanced protection, which were forms of protection available from April 2006 to April 2009 for individuals with large accrued pension benefits, they will retain it and will not be affected by the changes announced. It is also understood that any future change in the lifetime allowance will not impact them. The maximum tax-free lump sum will remain at 25 per cent of the lifetime allowance unless it has been protected. Removing the requirement to annuitise by age 75 Currently, when you come to take benefits from your pension funds, you have a choice of purchasing an annuity, setting up a scheme pension or moving

11 highlights 11 The latest changes in the pensions legislation are effective from 6 April 2011 New annual pension contribution allowance of 50,000 gross Lifetime allowance reduced from 1.8 million to 1.5 million No need to take pension benefits by age 75 New drawdown rules give increased flexibility including the ability to draw the fund as a single payment into unsecured pension (often referred to as drawdown and allows income to be drawn whilst deferring an annuity purchase). At age 75 unsecured pension is replaced by alternatively secured pension, with a new set of rules. The current rules governing both unsecured pension (before age 75) and alternatively secured pension (after age 75) will be abolished. There will no longer be a requirement to crystallise pension benefits at age 75 and both pension and lump sum benefits can be deferred until any age. However, the lifetime allowance test at age 75 on the value of uncrystallised benefits will remain. In place of unsecured pension and alternatively secured pension there will be two new forms of income withdrawal known as capped drawdown and flexible drawdown. Capped drawdown Similar to unsecured pension, capped drawdown will place an annual limit on the maximum amount of income that can be withdrawn. However, the maximum amount will be reduced from 120 per cent of the equivalent annuity (based on Government Actuary Dept published rates) to 100 per cent. This maximum income level will be reviewed every three years before age 75 (as opposed to the current five yearly reviews) and then annually following the pension year end after an individual reaches age 75. Flexible drawdown This is a significant change to pension legislation and increases flexibility for an individual s pension fund. Flexible drawdown will enable unlimited pension income payments from defined contribution (money purchase) arrangements, including the ability to withdraw the whole pension fund as a single income payment. This will be available to those who can demonstrate that they have already secured other sufficient minimum pension income (the minimum income requirement or MIR ) to prevent them falling back on the State. The MIR has been defined as secured pension income of at least 20,000 p.a. This will include pension annuities, final salary scheme pensions and any State pension in payment. There is no requirement for this minimum level of income to be inflation proofed or to provide any pension for dependants. Income from other non-pension assets, including purchased life annuities, will not count toward the MIR. Consequently, flexible drawdown will allow an individual or, on death, a dependant to take income above annual capped income at any time. In contrast to capped drawdown, the amount which can be taken under flexible income drawdown after securing the MIR is limited only by the value of the available fund. Any sums taken will, however, be subject to income tax at the individual s highest marginal rate. While the changes will affect all new drawdown pensions from 6 April 2011, the Government has proposed that, for individuals with an existing drawdown pension, the new rules governing withdrawal limits should apply only from the date of their next scheduled compulsory review. There will be no change to the taxation of uncrystallised (where no benefits have been taken) fund lump sum death benefits before age 75, ie, all the fund can be paid as a tax-free lump sum. However, the current 35 per cent tax rate on lump sum death benefits from crystallised funds (where benefits have previously been taken) before age 75 will increase to 55 per cent. The same 55 per cent tax rate will apply to all lump sum benefits on death after 75, for both uncrystallised and crystallised funds. Inheritance tax will no longer ordinarily apply on death after age 75, however, HMRC will monitor carefully for any sign of abuse and may issue further legislation if required. For those with no dependants, an individual will also be able to nominate a registered charity to leave benefits to tax free, both before and after age 75. The way forward These changes have significant consequences for all those saving for or approaching retirement. For some individuals this represents a valuable opportunity to get more from their pension savings, for others the potential loss of valuable death benefits will be a major concern. Although the legislation includes a window of transition for applying for protection, and to review existing drawdown arrangements, the proposed changes will have an effect on everyone s retirement strategy. The overall message is that planning for retirement will become more diverse and complicated as tax relief on pension contributions becomes more restricted and will in future increasingly incorporate non pension based solutions. The information in this article is based on our understanding of proposed tax and pension legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future. Seeking the advice of a professional fee only financial adviser is highly recommended.

12 Tel: Offices: Birmingham, Cambridge, Leeds, London, Manchester, Norwich Mills & Reeve LLP is a limited liability partnership regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC Its registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP s offices. The term partner is used to refer to a member of Mills & Reeve LLP. Mills & Reeve LLP will process your personal data for its business and marketing activities fairly and lawfully in accordance with professional standards and the Data Protection Act If you do not wish to receive any marketing communications from Mills & Reeve LLP please contact Suzannah Armstrong on or suzannah.armstrong@mills-reeve.com The articles featured in this publication have been selected and prepared with a view to disseminating key information. Space dictates that any article may not deal with individual concerns but the author would be pleased to respond to specific queries. No liability can be accepted in relation to particular cases. Before taking action, you should seek specific legal advice. Copyright in this publication belongs to Mills & Reeve LLP. Extracts may be copied with our prior permission and provided that their source is acknowledged. Spring/Summer 2011 snippets Mutual wills or mirror wills? Mutual wills and mirror wills can easily be confused but they are two entirely different concepts and the difference in effect is significant. If two individuals execute mirror wills, the wills will be mirror images of each other, eg, all to each other in the first instance, and otherwise to the children or grandchildren. It is extremely common for spouses or civil partners to execute mirror wills as their wishes with regard to the distribution of their respective estates are, frequently, similar. There is nothing to prevent either individual changing their will at any point prior to their death. If two individuals execute mutual wills, they may well look like mirror wills but there is one crucial difference: by agreeing to execute mutual wills, each individual agrees not to revoke their will without the consent of the other. If the first individual dies without having revoked their will, the survivor cannot thereafter revoke their will. There were two cases last year in which the courts decided that the wills executed were mutual wills, in spite of the absence of any documentary evidence of the parties intention that the wills should be mutual wills. However, as a matter of good practice (and in the interests of avoiding the inconvenience of a lengthy and expensive dispute) if you intend to execute mutual wills, that fact should be recorded in the wills themselves or in a separate document, which is kept with the wills. Joint bank accounts Legislation provides that where property, which includes, inter alia, bank accounts, is held in the names of a husband and wife or civil partners, the general rule is that the parties are treated as entitled to the income in equal shares, irrespective of their actual interests. The general rule is subject to several exceptions, notably, where the parties have signed a declaration of unequal beneficial interests and where neither party is beneficially entitled to the income (eg, where they hold the property as trustees). In a case that was recently before the First-tier Tribunal, a married couple held a joint bank account and the husband failed to declare any part of the interest on his tax return. The Revenue argued that the husband was liable to tax on 50 per cent of the income but the husband contended that the interest should be treated as belonging solely to his wife. The Tribunal rejected the husband s contention, noting that the couple could have made a declaration of unequal beneficial interest. The couple had failed to complete such a declaration, with the result that the general rule applied and they would be treated as entitled to the income in equal shares.