Wealth, Health & Inheritance Briefing May 2014

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1 Wealth, Health & Inheritance Briefing May 2014 Wealth, Health & Inheritance Brief ing How to maximise the post-death value of your business Many business owners understandably concentrate on the day to day running of their business and its medium term strategy, without making plans to maximise the value of the business after their death. It is, however, worth taking time to consider what can be done to make a significant difference to the business owner s family and the tax that might otherwise be payable to HMRC. Business Relief: too valuable to ignore Most business people will be aware that valuable reliefs from inheritance tax (IHT) are currently available for business assets. An interest in a business, unquoted shares or quoted shares which give the owner control of the business will qualify for 100% relief from IHT while land, buildings, plant and machinery used wholly or mainly for the purpose of the owner s business will qualify for 50% relief. In both cases the business must be a trading one (rather than an investment company) and the business assets need to be owned for a minimum of two years prior to the transfer giving rise to the IHT charge. These are valuable reliefs and it is essential to ensure that the business is structured in such a way as to maximise them. Care should be taken when setting up the company so that its documents of incorporation are drafted to maximise reliefs and to facilitate future IHT planning. Ongoing vigilance is required Once the company has been set up in the best form to ensure maximum use of the reliefs, care is needed on an ongoing basis to ensure that the company remains qualified for those reliefs. Common pitfalls include: Diversifying the business activities from trading activities to those regarded by HMRC as investment activities, to the extent that the business becomes mainly an investment company. Business relief is then denied on a transfer of value. Maintaining cash balances in the business which are not required for its normal operation and which will not qualify for relief. Owning business premises outside of the business: the rate of relief may be reduced to 50% or lost. Re-negotiating finance without considering the new rules over deductibility of debts for IHT purposes. Maximising the post-death value Thought should be given to what happens in the longer term and how to ensure that the maximum value is passed on to the business owner s family. This can be achieved by a well drafted, tax efficient Will and is essential for anyone with business assets. The first point to bear in mind when structuring a Will is that business assets should qualify for 100% relief from IHT, so a gift of these to a surviving spouse or registered civil partner is a waste of that relief. Continued on page 2 Welcome to the May edition of our Wealth, Health & Inheritance Briefing Welcome to the May edition of our Wealth, Health & Inheritance briefing for advisers and tax specialists who advise on wealth management and personal tax planning. In this edition we focus on the expertise of our solicitors who assist business owners with succession planning and structuring their affairs in a tax efficient manner, whether they intend to exit the business or pass it on to the next generation. Our experts also consider: a recent Supreme Court decision setting a new test for deprivation of liberty; the Law Commission recommendations for legally binding nuptial agreements; and the rectification of an invalid Will by the Supreme Court. Anthony Fairweather anthony.fairweather@clarkewillmott.com clarkewillmott.com

2 02 Wealth, Health & Inheritance Briefing May 2014 How to maximise the post-death value of your business: continued The preferable course of action is to leave the business assets to a discretionary trust. No IHT will be payable if the business owner dies before his or her spouse. The discretionary trust puts the shares or assets outside of the surviving spouse s estate, which could be advantageous should the law change to make the relief less generous by the time of the second death or if relief is no longer available because the business has been sold by that point. A double dose of relief If it is intended that a business should remain trading indefinitely, perhaps because the second generation intend to carry it on, then it is possible, with planning, to achieve a double helping of Business Relief, minimising IHT significantly. This can be achieved by the surviving partner buying the shares left to the discretionary trust, with the result that on the surviving spouse s death he or she owns the shares which are free of IHT and the cash paid for them is outside the spouse s estate in the discretionary trust - a double saving of IHT. For further information please contact: Robert Smeath robert.smeath@clarkewillmott.com Case study John is married to Linda. John owns the majority shareholding in the family company, Smith Trading Limited, which has a market value of 325,000. As Smith Trading Limited is a trading business the shares qualify for BPR at a rate of 100%, meaning that the shareholding is valued at 0 for IHT purposes. Minority shareholdings are owned by John and Linda s children, Sam and Denise, who also work in the business. There is no shareholders agreement in place. Common situation John has a straightforward Will leaving his entire estate (which includes his majority shareholding in Smith Trading Limited) to Linda outright with Sam and Denise benefitting following Linda s death. John s nonbusiness assets, including his half share in the family home, are valued at 400,000. Linda has 250,000 of assets in her own right. Following John s death there is no liability to IHT because the gift of his entire estate to Linda is spouse exempt. The fact that John s shares in Smith Trading Limited qualify for BPR would not be relevant because of the spouse exemption. Five years after John s death Linda sells the shares in Smith Trading Limited to a competitor for 325,000. The cash proceeds of sale are added to Linda s non-business assets, which, following John s death, total 650,000. This gives Linda a total estate of 975,000. When Linda dies three years later leaving her estate to Sam and Denise she has an IHT tax free nil rate band of 650,000 but the remaining 325,000 worth of assets are subject to IHT at 40%, leading to a tax bill of 130,000. Tax efficient solution John s Will left his shares in Smith Trading Limited into a Discretionary Trust, from which his family can benefit following his death, with the rest of his estate passing outright to Linda. John put in place a shareholders agreement containing cross-options which allowed Linda, as John s spouse, to purchase John s shares from the Discretionary Trust, should she so choose. When John died, his shares in Smith Trading Limited qualified for BPR so passed into the Discretionary Trust free of IHT at a value of 0. Linda then exercised the cross-options granted in the shareholders agreement to purchase the shares from the trust for their market value of 325,000. Linda felt she did not have sufficient liquid assets to purchase the shares outright so signed an IOU to the trust. This creates a debt in her estate, although if the debt was created after 6 April 2013 it is only deductible against the value of the business property in Linda s estate if the business property is still owned by her at the date of her death. As with the example given above, Linda sells the shares during her lifetime for 325,000. That cash is added to her non-business estate giving her a total estate of 975,000. However, on her death she owes 325,000 to the trust, representing the purchase price of the shares which she no longer owns, leaving her with assets worth 650,000. Using the same tax free nil rate band described above, this means no tax is payable following Linda s death. Alternatively, if Linda had died owning the shares (and if she survives the purchase of the shares by two years) she would own BPR qualifying shares of 325,000 (valued at 0 for IHT purposes). Accordingly, she would have non-business assets of 650,000 and shares valued at 0, meaning a taxable estate of 650,000 on which no tax is due. It is also possible to capture the BPR even after a sale of the shares by reinvesting cash into other assets qualifying for BPR. Birmingham Bristol London Manchester Southampton Taunton

3 03 Wealth, Health & Inheritance Briefing May 2014 Court of Protection: the Supreme Court s test for Deprivation of Liberty On 19 March 2014, the Supreme Court handed down its long awaited judgment in the cases of P v Cheshire West and Chester Council and another and P and Q v Surrey County Council. The decision is important as it sets a new test for determining whether arrangements made for the care and/or treatment of an individual who lacks capacity to consent to those arrangements, amount to a deprivation of liberty. Facts In Cheshire West, P required 24 hour supervision and assistance with all of his personal care needs. He lived in supervised accommodation arranged by the local authority, which he shared with two other residents. There were normally two members of staff on duty during the day and P had one to one assistance to help him leave the house whenever he chose. He attended a day centre four days a week, he regularly saw his mother at the family home and visited a pub, a club and nearby shops. In P and Q v Surrey County Council P and Q were sisters. P had a learning disability and problems with sight and hearing. She lived with her foster parents and was devoted to her foster mother who provided intensive support in most aspects of daily living. P had never attempted to leave the home on her own and showed no wish to do so, but if she did, the foster mother would restrain her. Q lived in a residential home, which was an NHS facility for adolescents with learning disabilities and complex needs, but it was not a care home. Her care needs were met by continuous supervision and control. She showed no wish to go out on her own and so did not need to be prevented from doing so. She attended the same further education unit as P and was accompanied by staff whenever she left the care home. The Decision The Supreme Court concluded unanimously in Cheshire West that P was deprived of his liberty. The decision in P and Q v Surrey County Council was more contentious but the majority decision was that both sisters were being deprived of their liberty. The Supreme Court rejected the approach of the Court of Appeal, which had found that P was not being deprived of his liberty as he led a life of relative normality, comparing the life P led with the life which other people with his disabilities and difficulties might normally be expected to lead. Lady Justice Hale gave the lead judgment and asked what is the essential character of a deprivation of liberty? She concluded that the twin features of continuous supervision and control and lack of freedom to leave are the essential ingredients of deprivation of liberty. Lady Justice Hale noted that a person may be deprived of his liberty without knowing it and, having regard to the quality of accommodation and care, she said We should not let the comparative benevolence of the living arrangements with which we are concerned blind us to their essential character if indeed that constitutes a deprivation of liberty. A gilded cage is still a cage. Application To protect the frail and most vulnerable in society, family members and professionals may need to make arrangements that constitute a deprivation of liberty. Arrangements that result in continuous supervision and control with a lack of freedom to leave will often be necessary and in a person s best interests. Once a deprivation of liberty has been established, hospitals and care homes must comply with the Deprivation of Liberty Safeguards (DOLS) even where P is compliant and does not complain. The safeguards ensure that P lacks the capacity to decide where he or she should live and that the arrangements are made in P s best interests. Care homes, as the Managing Authority under the DOLS regime, also need to be proactive in recognising when a resident is being deprived of his or her liberty and to apply for the necessary DOLS Authorisation. Of course, whether there is a DOLS authorisation in place or not, if there is any dispute about the care arrangements (whether with P or his or her family) then the matter must be brought before the court as quickly as possible. For further information about mental capacity or health and social care law please contact: Joanna Burton Solicitor joanna.burton@clarkewillmott.com Read our blog at

4 04 Wealth, Health & Inheritance Briefing May 2014 Law Commission recommends legally binding nuptial agreements The publication of the Law Commission report, Matrimonial Property, Needs and Agreements at the end of February 2014 brings the concept of a legally enforceable pre-nuptial agreement one step closer. In the report, the Law Commission recommends the introduction of Qualifying Nuptial Agreements (QNAs) which, subject to meeting specified requirements, will be legally binding. The present position Pre-nuptial agreements can be, and are, drawn up seeking to regulate the division of a couple s assets on divorce, or on the breakdown of a registered civil partnership. These agreements are not legally binding, although their persuasive force on the courts was recognised in the 2010 Supreme Court case Radmacher v Granatino when the court stated that such agreements should be given decisive weight by the court in determining financial provision, unless unfair. Qualifying Nuptial Agreements By comparison the proposed QNAs will be legally binding provided they meet certain specified safeguards. Those are: the couple cannot contract out of responsibility to maintain children of the relationship; and the QNA must provide for each partner s financial needs such that neither partner becomes dependent on the State. If these safeguards are complied with in the QNA then the court will not be able to make any order in the ancillary relief proceedings inconsistent with its provisions. Requirements Certain procedural requirements must be complied with for a QNA to be valid. These are: the QNA must be in writing and signed by the parties in front of witnesses; and it must be made at least 28 days before the wedding or civil partnership. In addition: each party must disclose all material information about his or her financial situation; and both parties must receive separate legal advice at the time the agreement is formed. Advantageous uses of QNAs The requirement to ensure that each partner s needs are catered for on the breakdown of the relationship will mean that the potential new agreements will be irrelevant where there are only sufficient assets to cater for the needs of the couple and their children, and indeed the Law Commission makes it clear that it does not expect the agreements to be used as a matter of routine. There are a number of situations, however, where the agreement could be a very useful tool. For example, a wealthy couple may have sufficient assets going into the marriage to cater for their and their future children s needs and wish to ensure that there is certainty over what happens to surplus assets. Another couple may wish to put in place an agreement to protect a specific asset, such as an expected inheritance or a family company shareholding. The agreements might be of particular use to older couples with independent incomes and children from previous relationships, who wish to ensure certainty over property acquired before the marriage so that it is preserved for their own children in the event of a relationship breakdown. Potential drawbacks The draft legislation anticipates that QNAs will be varied and any variation will have to comply with the same procedural requirements. It is difficult to see how every QNA drafted before a couple marries or enters into a registered civil partnership can deal with all the possible changes in circumstances that could arise in a long relationship, some of which may not have been anticipated by anyone. It is possible that a QNA may need to be varied at some point to reflect such unanticipated, major changes but, having entered into the QNA at the outset, keeping it up-to-date may not be in the forefront of a couple s minds. An outdated agreement may no longer cater adequately for both parties needs and thus the court will have to step in. For example, the assessment of needs tends to differ dependent on the lifestyle enjoyed by the couple during the relationship. It may be alleged that an agreement drawn up at the outset of a relationship no longer caters adequately for the needs of a partner, when the couple at the time of the relationship breakdown have a higher normal standard of living. Similarly, it is possible that a QNA could be attacked by one of the couple alleging that it never catered for needs, in the hope of overturning the agreement and achieving a more favourable division of assets by way of a court order. One of the requirements of a QNA, as stated above, is that all material financial information must be disclosed. The Law Commission states that disclosure is limited to material information to avoid, for example, an agreement being invalid because a small inconsequential asset is forgotten. It is, however, possible to envisage circumstances where certain information is not disclosed and a party seeking to overturn the agreement alleges that the QNA was not valid because in their view that financial information was material. So scope for litigation will still exist but it is to be hoped that in other cases the existence of a valid QNA, if these are introduced, will lead to quicker and less acrimonious resolution of financial matters and a more certain outcome for those entering into them. For more information on pre-nuptial agreements please contact: Gareth Schofield gareth.schofield@clarkewillmott.com clarkewillmott.com

5 05 Wealth, Health & Inheritance Briefing May 2014 Case study: a Wills mix up and a just result We have previously reported the case of Marley v Rawlings & Another in which mirror Wills signed by the wrong people by mistake were held to be invalid. In a decision which many regard as achieving a fair result, the Supreme Court has decided that the Wills can be rectified so that the estate passes to the beneficiary in the Wills. Background to the case In 1999 Mr and Mrs Rawlings made Wills leaving their estates to each other. In the event that they both died, the Rawlings did not wish to benefit their two sons, but instead wished to leave their estates to Mr Marley, whom they had always treated as their son. At the time of signature the Wills became mixed up and Mr Rawlings had inadvertently signed his wife s Will and Mrs Rawlings her husband s. The error was not noticed when Mrs Rawlings died in 2003, but only came to light when Mr Rawlings died in When he died, Mr Rawlings owned a house jointly with Mr Marley, which passed to Mr Marley by survivorship. Mr Rawlings Will left the residue of the Rawlings 70,000 estate to Mr Marley. Mr Rawlings sons challenged Mr Rawlings Will, claiming that the mistake made the Will invalid and as such, Mr Rawlings died intestate and his estate would pass to them. Mr Marley argued that the invalid Will should be rectified by the courts, but this was rejected by both the High Court and the Court of Appeal. Mr Marley s subsequent appeal to the Supreme Court has recently been heard, with the court allowing the appeal and deciding that Mr Rawlings Will should be rectified so that the couple s assets pass to Mr Marling, as they had wished. The Supreme Court s reasoning The Supreme Court found that the interpretation of Wills should be approached in the same way as the interpretation of commercial contracts, where courts are concerned to find the intentions of the parties to the contract by identifying the meaning of relevant words in their documentary, factual and commercial context. The Supreme Court held that Mr Rawlings Will satisfied the formal requirements for validity laid down in s9 of the Wills Act 1837, which provides that for a Will to be valid it should be signed by the testator in the presence of two witnesses, and it must appear that by his signature the testator intended to give effect to his Will. In addition, there is a non-statutory requirement that the testator must know and approve of the Will s contents. The court s view was that it was sufficient that the Will had been signed in the correct way and it was intended by Mr Rawlings to be a Will. The fact that some of the Will did not make sense was irrelevant. Mr Rawlings could be said to not know or approve of its contents because it was his wife s Will and not his Will but, if rectification was allowed, then he could be said to know and approve of the rectified contents. In this way the powers of rectification of Wills given to the courts by s20 of the Administration of Justice Act 1982 could be used to give formal validity to a document that is a Will, albeit invalid. Having held that the document was indeed a Will, the court then considered whether it could be rectified under s 20. Under this provision if a court is satisfied that a Will fails to carry out the testator s intentions in consequence of a clerical error then it may order rectification. Both lower courts had held that the mix up of the Wills could not be viewed as a clerical error but the Supreme Court expressed the view that wholesale corrections of Wills were possible under s 20 and held that the phrase clerical error could cover not just typing mistakes but any mistake arising out of office work of a relatively routine nature. The court decided that the execution of the Rawlings Wills fell within this definition of clerical error. Rectification of the Will was therefore allowed and Mr Rawlings estate passed to Mr Marley. This case extends the previously understood meaning of clerical error considerably. The court indicated that wholesale corrections of Wills would fall within s 20 and that initial formal validity is not necessary if rectification will provide this; it would seem that s 20 will now be available in many more cases. For advice about making a Will or to discuss the Probate or Administration of an estate, please contact: Catherine Elliott catherine.elliott@clarkewillmott.com Follow us @CWPrivateClient

6 06 Wealth, Health & Inheritance Briefing May 2014 Focus on: Robert Smeath Business succession planning and international Wills Robert is a partner in our London office and specialises in lifetime tax and succession planning for clients with offshore assets and those owning businesses. Robert is a full member of the Society of Trust and Estate Practitioners and Solicitors for the Elderly as well as holding a Diploma of the Personal Finance Society which gives him an insight into wider financial planning in conjunction with practising financial planners. He is a regular speaker at conferences and training events. Business succession planning Robert helps business owners manage the succession of their businesses so that the handover is structured in as tax efficient a manner as possible, whether the succession takes place during their lifetime or on death. Robert ensures that the relevant processes and timescales have been considered and that the correct people deal with the transfer. Our Business Succession Plan consists of Wills and associated documents designed to maximise the benefit of business relief from inheritance tax, ensuring that the IHT payable on an estate which includes business property is minimised to the greatest possible extent. With regard to a family business this will include advice about how the business can be passed on to the next generation without incurring unnecessary tax charges. International Wills Robert also advises clients who hold property and other assets abroad. A Will should be drawn up in the relevant overseas location to determine how that property will pass after death, but it is essential that the overseas Will does not inadvertently revoke a Will that deals with any UK based property. Robert advises on the most effective way to minimise estate taxes and administration in these circumstances. He has experience in drawing up Wills for clients who hold foreign property and deals with a network of specialists across the world to ensure that the overseas aspects of an estate is properly dealt with. Examples of Robert s experience: Business succession: Advising the directors of a business about their Wills and the succession arrangements for their business in the event of the death of one of them, including obtaining appropriate protection assurance in conjunction with their financial adviser. Family Estate: Advising the first and second generations of a 500 acre family estate on the most tax efficient way to transfer the land to the next generation and working on a family plan to allow it to be run for future generations. International Wills: Advising a family with assets in the UK, France and the USA on the most effective way of organising their Wills to minimise estate taxes and administration on death. Offshore Trusts: Reviewing a large family trust with substantial capital gains and advising on possible ways of minimising future tax whilst carrying out the objectives of the family to benefit their chosen relatives. For further information about business succession planning and international Wills, please contact Robert on: Robert Smeath robert.smeath@clarkewillmott.com CW Private client extranet Our private client extranet is a website designed to keep you up to date with legal developments. The site offers summaries of recent and relevant cases and details of legislative changes. You can also access our library of client briefing notes on various topics, including elderly care, family, lifetime and post-death planning. Access requires a user name and password which you can obtain by registering at: or by contacting your CW adviser. Offices Birmingham Office 138 Edmund Street, Birmingham B3 2ES T: F: Bristol Office 1 Georges Square, Bath Street, Bristol BS1 6BA T: F: London Office 1 Chancery Lane, London WC2A 1LF T: F: Manchester Office 2nd Floor, 19 Spring Gardens, Manchester M2 1FB T: F: Southampton Office Burlington House, Botleigh Grange Business Park, Hedge End, Southampton SO30 2AF T: F: Taunton Office Blackbrook Gate, Blackbrook Park Avenue, Taunton TA1 2PG T: F: If you would like to receive future editions of our Wealth, Health & Inheritance Briefing please contact news@clarkewillmott.com clarkewillmott.com Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC Authorised and regulated by the Solicitors Regulation Authority (SRA number: ), whose rules can be found at Its registered office and principal place of business 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 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.