SB Consulting blog

STEP Wiki

2012-05-12T11:26:52Z

The Society of Trust and Estate Practitioners has launched a trust and estate wiki. The content will not be confined to English law issues.

The wiki is accessible by all, but only STEP members will be to create, edit and comment on the site material.

Go here for the wiki.

Trust settlors taxed on their own expenses

2012-05-03T11:00:39Z

Income Tax (Trading and Other Income) Act 2005, s624 (previously ICTA 1988, s660A) provides that where the income of a trust is payable to, or applicable for the benefit of, the settlor of a trust (or spouse, or civil partner), the income of the trust shall be treated for income tax purposes as income of the settlor.

The settlor is entitled to recover the income tax he pays from the trust, under IT(TAOI)A 2005, s646, and is obliged to return to the trust any income tax repayment received by the settlor as a consequence of the operation of s624.

In the broadest terms, therefore, s624 is a computational measure only. In any trust where the terms of the trust enable the trustees to indemnify the settlor, s646 means that the settlor is not out of pocket.

But what if the income of the trust is paid by the settlor himself? The writer, for one, had always rather assumed that this made no difference and that s624 operated regardless.

The point was heard by the FTT in the joined cases of Rogge & Kent v HMRC TC/2009/15217 in what can be said to be something of a try-on in which the appellants advanced a number of bloke in the pub arguments, but not one legal authority in support of their submissions that a person could not be taxed on their own expense; being, in one instance, interest paid to the trustees on a loan and, in the other instance, rents paid for the occupation of a trust property.

The tribunal ruled in favour of HMRC, and took the opportunity [20] to cite the passage attributed to Professor Walker and quoted in Mayes v HMRC [2011] - the infamous tax abuse case known as SHIPS 2- as follows:

"... neither justice nor reason has any place in tax law, [which] ... more than any other branch of municipal law ... is open to the reproach of being utterly incomprehensible by the individuals affected, and even more frequently by their legal advisers."

So that's all good then.

Gifts to charities – reduction in inheritance tax rate

2012-05-01T09:24:50Z

2012 Finance Bill, s207 and Sch32 introduces a new Inheritance Tax Act 1984, Sch 1A which provides for a reduction in the rate of inheritance tax payable on an individual’s estate where charitable bequests are made. The reduced rate applies to deaths from 6 April 2012 onwards.

The gist is that the usual IHT rate of 40% is reduced to 36% where 10%, or more, of the individual’s net estate is bequeathed to charity. The net estate is the individual’s estate, after taking account of liabilities, reliefs, exemptions and the available nil rate band.

The detail of the rules is tortuous (HMRC explanation here) but, if satisfied, there is no cap on the value of the net estate which attracts the benefit of the reduced 36% IHT rate. This contrasts, somewhat curiously, with the proposal to restrict the income tax relief to which donors are entitled on their lifetime charitable giving.

STEP has provided a pro-forma clause for inclusion in wills, the use of which will mean that a specific legacy will always meet the 10% test in order that the reduced 36% IHT rate is secured.

The clause, which has been "approved" by HMRC, is as follows:

I give to [name of charity] such a sum as shall constitute a donated amount equal to 10 (or larger figure) per cent (%) of the baseline amount in relation to the [general component] [aggregate of the general, [survivorship], [settled property] components and [reservation of benefit property]] of my estate.

The legacy given by this clause shall in no event:

(i) be less than £nn whether or not the lower rate of tax shall be applicable; and

(ii) exceed £nn (the upper limit) even if in consequence of this restriction in the value of the legacy the lower rate shall not apply. [If this proviso shall apply and in consequence the lower rate of tax shall not be payable, the amount of this legacy shall [be equal to the amount of the upper limit] [be reduced to £nn] [lapse]].

The first proviso (i) ensures that the charitable legacy is paid even where there is no IHT charged on the estate. The second proviso (ii) ensures thre amount of the charitable legacy does not exceed a specified amount, even if that means the reduced IHT rate is not ultimately secured.

In the event of a valid will not taking advantage of these new rules, or where the intestacy rules apply, the rules remain available to the beneficiaries of the estate where the beneficiaries enter into a deed of variation.

It remains to be seen how popular this reduced IHT rate facility will prove. With the original government announcement now being lost to time, it will, presumably, be left to will-writers and to charities to make the existence of the facility known to testators. Will-writers are generally known for their reticence when enquiring of a client's intentions for charitable giving, and some are known to be wary of the manner in which certain charities conduct themselves when pursuing legacies. It might, therefore, prove that the biggest promoters of the facility will have to be the charities themselves.

How to execute a will. And how to not.

2012-04-30T09:44:17Z

A will, to be validly executed, must comply with Wills Act 1837, s9, which provides:

"No will shall be valid unless—

(a) it is in writing, and signed by the testator, or by some other person in his presence and by his direction; and

(b) it appears that the testator intended by his signature to give effect to the will; and

(c) the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time; and

(d) each witness either—

(i) attests and signs the will; or

(ii) acknowledges his signature,

in the presence of the testator (but not necessarily in the presence of any other witness),

but no form of attestation shall be necessary."

In writing means any manuscript, typing, printing or other form of words that is visible, including shorthand and braille. The writing need not be on paper, nor in ink. Although not good practice, due to the scope for translation problems, a language other than English can be used.

What is a signature? Aside from the obvious, it can be the signature of an alias, a mark, a thumbprint, initals, a stamp or a seal. Where the testator is incapable of making his or her signature, the testator can ask another person, an agent., to sign the will on behalf of the testator. The agent can sign in the testator's name, or the agent's own name, but must be in the presence of the testator when they sign. The signature does not necessarily have to be at the end of the will. If the signature is made in the absence of witnesses, the signature is valid provided the testator, when subsequently in the presence of witnesses, indicates to them that the signature is, indeed, that of the testator.

It is only the signature of the testator, or its acknowledgement by the testator, that the witnesses must be able to see; the witnesses are not required to know the document is a will or be aware of the document's content. It is sufficient that the witnesses are present and have the opportunity to see the testator make his or her signature; it is of no consequence if a witnesss looks away or is otherwise not paying attention, provided they are present and could see if they so chose. The witnesses must be present at the same time as the testator signs but the witnesses do not, themselves, have to be present together when they sign also.

No form of attestation is required at law, but an attestation clause is good practice and negates the need for the witnesses, if they are even then still alive, to give evidence when the will is presented to the court subsequent to the testator's passing.

Who can be a witness? A blind person cannot be a witness. A mentally incapable individual, or a child, can be witnesses but are not advisable as choices given that they could subsequently be called to evidence the execution of the will. A beneficiary of the will (or their spouse, civil partner) can be a witness but, unless there are at least two further witnesses also, the beneficiary's entitlement will be voided.

And how not to do it? The case of Marley v Rawlings [2012] is a sorry tale in which the court tried its damnest to help within the confines of the law but, ultimately, confirmed that the law cannot save a will which is not executed in accordance of the above Wills Act, s9.

A husband and wife made simple mirror wills, probably each of not more than a single sheet of paper. Each will contained the prospective testator's desired instructions; that being for their estates to be left to the survivor of them and, thereafter, to a family friend who had cared for them.

So, it was about as straightforward as can be envisaged. The couple attended their solicitor's office and signed the wills in the presence of two wtinesses; being the solicitor and his assistant. What could possibly have gone wrong? Each of the husband and wife signed the other person's will, thereby rendering each will a nullity, with the consequence being that the couple died intestate, their intended beneficiary was not provided for, and the couple's estranged family inherited their estate instead.

It is, in these particular circumstances, most likely that the solicitor failed to exercise his duty of care to the testators, and that their intended beneficiary will have a cause of action against the solicitor or his firm.

Stamp duty land tax changes

2012-04-29T02:41:30Z

The 2012 Finance Bill, s212 and Sch 34, introduces two changes to stamp duty land tax (SDLT):

Firstly, the rate of SDLT on residential property sold for more than £2 million is increased to 7%;

Secondly, where the purchaser of residential property of a property sold for more than £2 million is a non-natural person, the rate of SDLT is 15%. Where there are joint purchasers, the increased rate of 15% applies where one, or more, of the joint purchasers is a non-natural person, e.g., a company.

Companies acting as trustee are excluded from the scope of the 15% rate, as are property development companies but only where the purchase is for the sole purpose of developing and reselling the residential land. For no apparent reason, such a property development company must have been in business for two years, or more, prior to the purchase; thereby penalising start-ups (although not special purpose vehicle subsidiaries set up by existing developers).

Further changes have been announced, and will be the subject of consultation with a view to introduction in 2013 Finance Bill, as follows:

Companies owning UK residential property, whether resident in the UK or elsewhere, are to be subject to an annual charge levied on the value of property if that value exceeds £2 million. The annual charge will range from £15,000 to £140,000; and

Non-UK resident companies and other non-natural persons will be subject to UK tax on chargeable gains enjoyed on the disposal of UK residential property.

It can be expected that both of these proposals will need considerable work on the detail before they can be implemented, and especially as the latter proposal is, in its current form, discriminatory under EC law and over which, in other contexts, the UK has already been asked, by the European Commission in February 2011, to change its law.

Ireland - special assignee relief programme

2012-04-29T00:50:21Z

The Irish 2012 Finance Bill proposes the introduction of the Special Assignee Relief Programme (SARP), designed to provide an incentive to employees of non-Irish based employers who are transferred by that employer to work in Ireland.

The relief is available where an employee, who has been employed for at least one year outside of Ireland and who has not been resident in Ireland for the past five years, commences employment in Ireland (working thereafter predominantly in Ireland, and less than 30 days a year outside).

The employee must arrive in Ireland in the calendar years 2012, 2013 or 2014, and work in Ireland for a minimum of one year.

The SARP, which is available for up to five years of employment exempts a proportion of the individual employee's remuneration from income tax (but not social security contributions). That proportion is 30% of remuneration falling between €75,000 and €500,000 in a given tax year.

In a seemingly bizarre add-on, individuals qualifying for the SARP can also claim an income tax free €5,000 towards the payment of private school fees.

Self-assessment tax returns 2011 - penalties

2012-04-26T13:19:57Z

The continued non-filing of a self assessment tax return for the year ended 5 April 2011 attracts a daily penalty of £10 from 1 May. The penalty is chargeable regardless of whether tax is owed.

A summary of the new penalty regime, introduced in 2009, is here.

Finance Bill 2013 leaked

2012-04-21T08:00:00Z

20% VAT will be introduced on:

Raindrops on roses
Whiskers on kittens

VAT increases on:

Bright copper kettles
Warm woollen mittens
Brown paper packages (extra if tied up with string)

Tax reductions for:

Nazis

Source: Private Eye: 20 April to 3 May 2012

Income tax relief on charitable giving

2012-04-12T16:24:19Z

The media is chock full of various types of outrage over tax relief for charitable donations. But what are the rules that the super-rich are supposedly abusing, and which the government wants to change? And how do the rules work?

Firstly, let us address the principles; the numbers can, and should only then, follow.

What is a tax relief?

A relief from tax is a reduction in the amount of tax that an individual would otherwise pay if they had not done whatever it is that entitles them to the said reduction.

Black beer gate - tory posh-boys pick on sweet little old ladies

2012-04-08T02:22:15Z

In 2011, the Office of Tax Simplifcation, a body set up by the current government and run under the auspices of the Treasury, undertook a review of tax reliefs that could be abolished. The approach of the OTS was to start with the easy wins; otherwise known as those rules which made no material difference, and least of all to the luvvies of the tax fraternity and their biggest paying clients, like bankers.

Most interested parties paid at least some attention to the recommendations for reliefs to be abolished, the vast majority of which seemed unobjectionable, e.g., who knew or cared that luncheon vouchers still existed, let alone the limited income tax exemption for the same.

Enterprise Management Incentives

2012-04-08T00:54:33Z

Enterprise Management Incentives (EMI) is a share option scheme available to small and medium sized companies, allowing them to issue tax-advantaged share options to employees.

The small and medium bracket broadly means gross assets of not more than £30million and not more than 250 employees, which does, in fact, includer the vast majority of companies; many of which would not consider themselves to be neither small nor medium in size.

It was announced in Budget 2012 that the present limit of £120,000 on the value of shares over which options can be granted to an individual employee will be increased to £250,000. The change will be subject to approval under EU State Aid rules, and will be introduced by statutory instrument when approval is received.

This increase, whilst quite possibly not providing much of an inherent attraction to many, might nevertheless help to bring the availability of EMI to the notice of more employers. That would be no bad thing when EMI has long since been held to be the most user-friendly of the various approved share option schemes but, yet, strangely, the least appreciated by those employers to whom it is available.

A MORI report on the use and impact of EMI, from 2008 but still relevant today, can be found here.

Cap on unlimited tax reliefs

2012-04-07T23:19:19Z

It has been announced that, effective from 6 April 2013, certain tax reliefs for individuals will be capped at £50,000 or, if higher, 25% of the individual’s income.

A consultation document can be expected in the summer. In the meanwhile, we have the release of 3 April 2012, which can be downloaded here.

At this early stage, and in the absence of some meat to the proposals, it is difficult to discern exactly what underlies this policy.

The gist seems to be that it is unacceptable for people to, errm, take advantage of tax reliefs specifically legislated for by parliament. An early guess that this is really about certain reliefs being used lawfully but in a way which an unelected 23 year old chinless policy-wonk has determined to be unacceptable. If so, a proposal for a Targeted Anti Avoidance Rule would, surely be a simpler and far less objectionable way of addressing the perceived mischief, whatever it might be.

Security for PAYE

2012-04-07T17:11:39Z

With effect from 6 April 2012, HMRC can require a deposit from persons involved with an employer where it is felt by HMRC that the employer may not pay over to HMRC the PAYE deducted from wages.

The facility is aimed at protecting HMRC where the employer, or persons involved with the employer, has a history of being involved with the non-payment of PAYE deductions. It is estimated, by HMRC, that £600m to £800m per annum of PAYE goes unpaid through the insolvency of employers, and much of that being through “phoenixism” (source: 2010 condoc).

The persons who may be required to pay the deposit are: the employer; a director; a shadow director; a company secretary; a partner in an ordinary partnership; or a member in a limited liability partnership.

The decision by HMRC to require a deposit is appealable by the person to whom it is directed, with the appeal being made, firstly, to HMRC and, thereafter, the First Tier Tax Tribunal.

Unless subject to current appeal (or a Time to Pay arrangement), failure to pay the deposit when the employer continues in operation is a criminal offence; for which a non-paying individual can be tried summarily and subjected to a maximum penalty of £5,000.

The rules are found at Income Tax (PAYE As You Earn) Regulations 2003, Part 4A, as introduced by the Income Tax (Pay As You Earn)(Amendment) Regulations 2012.

Remittance for investment purposes

2012-04-06T19:32:15Z

Finance Bill, section 47 and Schedule 12, introduces the proposed new relieving measure for non-UK domicilliaries who remit foreign income or chargeable gains where the reason for the remittance is to make qualifying investments in the UK.

The relief, from the remittance basis charge, does not apply automatically but, rather, must be claimed by the individual.

Whilst, doubtless, the introduction of the relief is to be welcomed it is, in all the circumstances, a shame that it has taken five years to be introduced. An earlier introduction, and preferably from the outset of the wholescale remittance basis changes taking effect in 2008, would have gone a long way to avoiding the reputational damage from which the UK is now suffering on the international stage.

The relief can be claimed where, from 6 April 2012 onwards, a qualifying investment is one made in shares, securities or a loan in a non-listed company. The company need not be incorporated within the UK.

Foreign currency bank accounts

2012-04-06T15:07:06Z

Up to 5 April 2012, the profits and losses of individuals, and others, on bank and other accounts denominated in a currency other than Sterling are within the scope of capital gains; the exception being where the foreign currency bank account is held by an individual for the personal expenditure of him and his family outside of the UK, including expenditure on a non-UK residence.

From 6 April 2012, Finance Bill, section 35, proposes that individuals, trustees and personal representatives will be exempt from capital gains on the profits and losses on such bank accounts.