Of a charitable disposition

Following its Big Society initiative, the Government announced its intention in the 2011 Budget to introduce greater incentives for charitable giving in wills.  Draft legislation published in December 2011 provides for the rate of inheritance tax (IHT) to be reduced from 40% to 36% for the estates of testators who die on or after 2012 leaving 10% of their net estate to charity.

As many are aware, a gift to a charity under a will is already exempt from IHT. The mechanics of the new relief are relatively simple. For example, let us take Mrs Smith, a widow with an estate of approximately £800,000 who would like to leave her assets to her children. She has made no significant lifetime gifts, although her late husband did and so there is no transferable nil rate band (NRB) to add to her own. What would be the effect on her children's inheritance if Mrs Smith makes use of the new tax relief?

If the entire estate passes to her children, IHT at a rate of 40% will be charged on the value that is above the NRB, currently £325,000 (her net estate). IHT is due in the sum of £190,000 and the children receive a net estate of £610,000.

If Mrs Smith leaves £47,500 of her net estate to charity (10% of £475,000), the rest of her estate, £427,500, is taxed at a rate of 36%. The IHT due will be £153,900, leaving an inheritance to the children of £598,600. The cost to her children of a gift of £47,500 to charity is £11,400.

The example shows that although the new relief enables non-charitable beneficiaries to benefit from the lower rate of IHT, they will always receive less than if there are no charitable legacies at all.

The calculation is slightly more complex where a testator has joint or settled property in their estate; however the principle is the same. The relief will also be available for non-domiciled individuals making a will in respect of their assets in the UK. In their case, the 'net' estate brought into the calculation will only constitute their property within the UK.

In these pressed economic times, does the new relief provide a sufficient incentive for testators to divert funds away from the main beneficiaries of their estate? The answer is probably that the relief will most commonly be used by those already disposed to charitable giving, who can increase existing legacies to take advantage of the lower rate for the rest of their estate. That said, it will mean that the question of leaving assets to charity is now likely to be given greater consideration when a testator prepares their will.  

For those who do wish to take advantage of the new relief, there are several options for including the requisite charitable provision in one's will. For example, a testator could simply include a legacy of an amount equal to, or indeed above, 10% of his expected net estate. The difficulty with that approach is that it may well be difficult to know what his estate will comprise at the time of his death, with the risk that the gift falls below the 10% mark.

For a testator who is keen to benefit from the relief but who does not want to give more to charity than is necessary to achieve this, an alternative option is for his will to contain a discretionary trust which includes charities as potential beneficiaries. The testator would prepare a letter of wishes to his trustees requesting that within two years after his death they appoint to the charity assets of a value that is just sufficient to meet the 10% test, so that the lower rate of IHT would apply as a result of the writing back provisions already contained in IHT legislation.

Whilst the legislation is in draft form and may change prior to coming into force, testators may wish to review their wills now to see how they could take advantage of the new relief.

To find out more, please contact Lucy Whitehouse

New penalties

It's that time of year again when tax returns are due, and tax liabilities need to be paid.

HM Revenue & Customs (HMRC) has a new penalty system in force, and this may catch some taxpayers unawares.  If a tax return needs to be filed, this must be filed on-line by midnight on 31 January, if it has not been filed on paper before 31 October.  Any tax return that is not filed by this time incurs an immediate £100 penalty on 1 February.

Before 6 April 2011, the penalty would be reduced to nothing, if no tax was payable.  This has now changed – the penalty is payable regardless of the tax liability. 

Furthermore, if the return is still not filed by 1 May, HMRC charges £10 for every day after that date, in addition to the 1 February penalty, until 29 July.  This produces a total penalty of £1,000, again payable regardless of the tax liability.

If the return is six months late, HMRC charges, in addition to the above, £300 or 5% of the tax due, whichever is the higher.

The onus is on the taxpayer, whether they are an individual, personal representative or trustee, to find out whether they need to file a return, even if the Revenue has not asked for one.  Details are on the HMRC website - www.hmrc.gov.uk.

There is also a penalty regime that applies to unpaid taxes, which may equal as much as 100% of the tax payable, plus interest.

It is therefore increasingly important that everyone's tax affairs are in order, in good time.

To find out more, please contact Adrian Moss

Intestacy and family provision claims on death

The Law Commission has concluded its work on Intestacy and Family Provision Claims on Death and published its final report on 14 December 2011 setting out recommendations for reform. 

One of the main proposals relates to cohabiting couples.  Currently where a couple live together without getting married or forming a civil partnership and one of them dies, the survivor has no automatic right under the intestacy rules to inherit any part of his or her partner's estate.  The concept of a 'common law spouse' is a myth.

The Law Commission has therefore recommended that certain cohabitants should have the same entitlement under the intestacy rules as a surviving spouse.   To be entitled, the couple will have to have been cohabiting for five years.  If they have had a child together then that period will be reduced to two years.  It would also be a condition that the deceased was not married or in a civil partnership at the date of death.

Another of the main proposals relates to the entitlement of a surviving spouse under the intestacy rules.  The Law Commission's consultation found that public attitude was that a surviving spouse should remain the primary beneficiary and should only be required to share the estate with children or direct descendants of the deceased.  The Law Commission recommended therefore that a surviving spouse should take the deceased's whole estate where there are no children or other descendants.  It also recommended that a surviving spouse with children should take the deceased's personal chattels and statutory legacy (currently £250,000) and half of the balance outright (as opposed to the current life interest in half the balance).

Other recommended reforms aim to simplify the current law of intestacy and include the following:

- children who are adopted after the death of a parent should not lose their entitlement to share in
  their parent's estate because of the adoption;

- the rules which currently disadvantage unmarried fathers when a child dies intestate should be
  amended;

- trustees' statutory powers to use capital and income for the benefit of the beneficiaries should be
  reformed;

- the statutory legacy should be regularly updated.

The Law Commission also recommended reform of the Inheritance (Provision for Family and Dependants) Act 1975, namely:

- a child who was treated by the deceased as a child of his or her family should be permitted to make
  a claim regardless of whether that treatment was in the context of marriage or a civil partnership;

- the precondition of a claim that the deceased must have been domiciled in England and Wales is
  to remain but there should be an alternative precondition so that a claim can be made where a
  deceased left assets governed by English succession law;

- a surviving cohabitant who had a child with the deceased should be permitted to make a claim
  whether or not that relationship lasted two years or more.

To find out more, please contact Sian Hodgson

Statutory residence test

In our last issue, we discussed the HM Treasury consultation document in relation to the proposed statutory residence test.  It was announced towards the end of last year that the statutory residence test will now not come into force on 6 April 2012 but will be deferred until 6 April 2013.  It is understood that the delay is to allow for further time for drafting of the new legislation to be completed rather than for the wholesale revision of the proposed test.  Although the delay in bringing the test into force is unwelcome as it means that the current uncertainty in this area of the law will remain for a further 12 months, the decision to allow extra time to clarify definitions within the proposed legislation should be welcomed where the extra time will be used to fine-tune those definitions which otherwise would give rise to more uncertainty for the taxpayer.

However, it was not all bad news as it has also been announced that there will be changes to UK anti-avoidance provisions relating to the transfer of assets abroad and the attribution of gains made by non-resident companies to certain shareholders resident in the UK.  This is potentially interesting for many resident non-domiciled individuals.  The current rules in force in the UK fall foul of non-discrimination between EU states by potentially infringing the freedom of establishment and the freedom of movement of capital.  Accordingly, where offshore structures are utilised within the EU, there may be significant advantages for resident non-domiciled individuals and indeed high net worth UK domiciled individuals who wish to take advantage of lower corporation tax rates available outside the UK.  It will be important to consider these amendments when they appear in the next Finance Act to understand the true effect and opportunities that the amended legislation will afford for future tax planning.

To find out more, please contact Robert Macro

Cohabitation

In our last briefing note, we looked at some of the legal differences between marriage and cohabitation and highlighted the President of the Family Division's call for legal reform to the position of cohabitants.  The most recent development for people living together is that the Supreme Court has now given judgment in the case of Jones v Kernott [2011] UKSC53, the cautionary tale we looked at following the Court of Appeal decision.  Although a different decision was reached by the Supreme Court in this case, the practical advice to clients must be the same. Couples need clear advice about the ownership of their homes when they move in together and when they separate. Agreements about the shares in which the home is owned, and in what circumstances those shares may change, need to be documented to protect both parties from potentially expensive and difficult later property disputes in the courts.

The facts of Jones v Kernott were that Mr K and Ms J bought their house in 1985 for £30,000 in joint names, with Ms J paying the majority share from the sale of a previous property.  They did not have any real discussions about their contributions and whether the property would be owned as 'joint tenants' (in which case the shares would automatically be equal) or as 'tenants in common' (in which case the shares could be equal or unequal, depending on their agreement).  They did not set out their intentions (apart from to own the house in joint names) when they started living together and they did not do so when they separated. Seventeen years after the relationship ended, the court had to decide how to deal with a case where there was little or no evidence as to what the parties intended when they split, and no evidence about what actual share they owned.

During the long separation, Mr K had purchased a second house, in part using his share of a joint insurance policy; he did not contribute to the first mortgage after separation.  The Court of Appeal held that Mr K was entitled to retain a 50% share of the property as there was no evidence that the parties had jointly intended to change ownership.  The Supreme Court reversed the decision on the basis of the following principles:

i.      the starting point where a family home is bought in joint names is that they own the property as
        joint tenants in law and equity;

ii.     that presumption can be displaced by evidence that their common intention was, in fact, different
        - either when the property was purchased or changed later;

iii.    common intention is to be objectively deduced (inferred) from the conduct and dealings between
        the parties;

iv.    where it is clear that they had a different intention at the outset or had changed their original
        intention, but where it is not possible to infer what that actual intention was as to their respective
        shares, then the court is entitled to impute an intention that each is entitled to the share which
        the court considers fair, having regard to the whole course of dealing between them in relation to
        the property; and

v.     each case will turn on its own facts; financial contributions are relevant but there are many other
        factors which may enable the court to decide what shares were either intended or fair.

Lord Justice Wall's warning in the Court of Appeal judgment remains important advice; that cohabitating parties and their advisors 'must contemplate and address the unthinkable, namely that if their relationship will break down and that they will fall out over what they do and do not own'.  It is crucial, in order to avoid a later dispute, for separating couples to resolve any property ownership issues as soon as they can following separation and be aware that any intentions to change ownership should be evidenced in writing; preferably by deed.

To find out more, please contact Melanie Barnes

News

Lesley Lintott, head of Penningtons' private client team, features in the list of the '50 Most Influential' compiled by Private Client Practitioner, a journal for leading private client professionals.  The '50 Most Influential' recognises and celebrates the most prominent and important movers and shakers within private client advisory professions.

To find out more, please click here