UK: Individual Matters - Summer 2011

It is a great pleasure to me that the first issue of Individual Matters since I became Head of Private Wealth at Bircham Dyson Bell should be one where I am able to announce so many new arrivals, or promotions, in the department. The 'Team News' on the back of this issue gives some more details.

One of those arrivals is Nicholas Holland, the new Head of our Contentious Trusts and Estates Team. It is a commonplace in these troubled economic and political times that there is an increasing tendency for disputes to arise, and then to turn to litigation. Nick's article in this issue looks at the ways in which trustees can bring – or defend – claims that arise out of investments that have done less well than had been hoped. Liz Neale and Helen McHale continue the litigious theme by exploring the implications of a recent case that show how very important it is to give time and skill to the preparation of any Will that disappoints the expectations of a family member.

Recent weeks have seen a clutch of new consultation papers issued by the Government: Hugo Smith looks at the 10% inheritance tax rate reduction that will be available to estates where at least 10% of the estate is left to charity, and we also cover new proposals which will be important to non-doms. Closer to home, we consider tax deadlines and penalties, and Henry Cecil looks at the very valuable 100% agricultural property relief available to farms and landed estates – provided they meet the increasingly stringent conditions.

I hope you enjoy this issue of Individual Matters. If you do not currently receive it regularly, and would like to, then please get in touch with Teresa Campion on 020 7783 3687 or teresacampion@bdb-law.co.uk.

TRUSTEES AND INVESTMENT LOSSES

By Nicholas Holland

Crises and difficulties in the world economy have led, in some quarters, to disappointing investment performance. When a beneficiary or a trustee feels that a trust's investments have performed less well than they should, they will sometimes ask themselves whether anyone is to blame, and can that person be made to pay for the failure? Nicholas Holland sets out some of the parameters.

Trustees should be cautious about embarking on litigation and may require the approval of the Court to do so. Nonetheless they should generally pursue a good claim for losses to the trust so long as there are sufficient funds to pay for doing so. There are several targets of a potential claim: asset managers or financial advisers – and, indeed, if we are looking at claims by beneficiaries, the trustees (or former trustees) themselves.

Asset managers

Where a discretionary asset manager has been employed, there are at least two lines of enquiry:

• has the asset manager taken reasonable care? and
• has the asset manager complied with the trustees' investment policy statement embodying the investment objectives?

Investment advisers

Trustees are obliged to obtain investment advice (except in a few exceptional circumstances). Again, there are at least two potential lines of enquiry to determine if a potential claim may lie:

• the adviser is under a duty to take reasonable care in respect of their advice and if competent advice is not given then it is actionable;
• the trustees will generally have taken the initiative to provide the adviser with investment objectives. If they have not, both managers and advisers (if regulated by the FSA) are required to determine the client's investment objectives. Even apart from regulatory issues, the adviser may have been negligent in failing to obtain such information.

Trustees and former Trustees

Trustees can get themselves into three kinds of difficulty with respect to the exercise of their investment power:

• they can make investments which are not authorised by either the trust deed or by statute;
• they can behave in a way which demonstrates infidelity or disloyalty; or
• they can make investments which are authorised but negligent.

As far as unauthorised investments are concerned, the beneficiary has a right of election, on an investment by investment basis: they may keep the good and complain about the bad. Neither honesty nor skill in making the investment is a defence. Causation, forseeability and remoteness are irrelevant to determining the liability or amount of compensation for a breach of this kind.

A disloyal or dishonest investment is treated similarly. The only improvement for the trustee is that causation now matters – but the burden of establishing want of causation is on the trustee.

Authorised but negligent investments are treated differently again. Causation, remoteness and forseeability are defences to such claims. However, the standard of care expected of a trustee in connection with investments is high.

Nicholas Holland has extensive experience of litigation concerning trust investments, in a wide range of jurisdictions, both bringing and defending such actions. Please contact him, or the partner at Bircham Dyson Bell with whom you usually deal, if litigation is threatened, or you feel that it may be appropriate, in relation to a trust with which you are involved.

CLAIMS BY ADULT CHILDREN: A THREAT TO TESTAMENTARY FREEDOM?

By Liz Neale, Partner and Helen McHale

English law has long firmly enshrined the principle of 'testamentary freedom': the right to leave your property to anyone you choose, without being obliged to leave a share to your family (unlike the 'forced heirship' that applies in much of continental Europe). That said, for some time it has been possible for certain individuals to make a claim against an estate if they have been excluded by the Will, or if they feel that what they have received does not make adequate provision for them. The most recent legislation under which such claims are made is the Inheritance (Provision for Family and Dependants) Act 1975.

A recent decision by the Court of Appeal, Ilott v Mitson, was a striking instance of an adult child making a claim under the Act. In that case, a mother had left all her money to various animal charities. Heather Ilott, her only child, from whom she had been estranged for many years, received nothing.

The mother had gone to great lengths to try to avoid a claim being made by her daughter. She told her daughter that she would not receive anything, and she also set out very clearly (though slightly inaccurately) why she did not wish Heather to inherit. The benefit to the animal charities was, however, unexplained: she had no particular love for animals and had not given to the charities during her lifetime.

Heather's financial position was not healthy. She was married with five children and living on state benefits. She made a claim under the Act and a judge awarded her £50,000, from a total estate of rather less than £500,000. Heather's claim was upheld by the Court of Appeal.

Whilst this case was decided on the specific facts, it reinforces the possibility of a successful claim under the Act by an adult child, even though that child has not relied financially on their parent for many years A parent who is considering making a minimal or no gift to one or more of their children in their Will needs to proceed carefully and take advice about how the risks of a claim can be reduced.

One of the saddest lessons from Ilott v Mitson emerges when one looks at the size of the figure that is being argued about: should Heather get more or less than £50,000 out of a £500,000 estate? By the time the parties have finished arguing there will be precious little left for anyone. Families do not have to be as dysfunctional as the one in Ilott v Mitson for disputes to break out after a death and often, when provision in a Will is unequal or unexpected, the basis of the problem is less 'how much?' than 'did I matter less than the others?'. In the long run it is worth having spent time and care, when making the Will, to anticipate and deflect potential problems.

THE 10% IHT RATE REDUCTION AS A NEW INCENTIVE TO CHARITABLE GIVING?

By Hugo Smith

The Government has issued a Consultation Paper giving more detail about the Budget proposal to encourage legacies to charity by reducing the rate of inheritance tax (IHT) from 40% to 36% for estates in which at least 10% of the taxable estate is left to charity.

The announcement was generally welcomed as a means to encourage charitable giving. While it would not alter the fact that a legacy to charity will reduce the inheritance received by other beneficiaries, the lower rate of IHT would reduce the loss to them.

The initial announcement contained little detail and while the Consultation Paper fills in many of the missing pieces, it also highlights a number of areas of detail that will need to be resolved before the reduced rate of IHT can be brought into law. Examples are whether it should apply only to assets passing under a Will or also to jointly owned property which passes by survivorship, or to property in trust. The consultation lasts over the summer and we can expect to see details of the final rules later this year.

Should you alter your Will?

It is important to remember that leaving a legacy to charity to take advantage of the incentive will not make your beneficiaries better off than if there was no charitable legacy. The Consultation Paper is clear that the final rules will be carefully drafted to ensure that this cannot happen.

However, the incentive may well affect you if your Will already leaves a legacy to charity, or if you are intending to leave a legacy to charity. In those cases, the amount received by your non-charitable beneficiaries may increase provided the gift is framed so that your estate qualifies for the reduced rate of IHT. Thus, if your Will currently leaves a small legacy to charity, there may be an advantage in increasing the size of the legacy in order to reduce the IHT payable on the assets passing to other beneficiaries. This will depend on the specific facts of each case.

Once the final rules are clear, you may like to ask us to review your Will with you to consider whether any changes need to be made.

If you would like to know more about the opportunities provided by the 10% IHT rate reduction, or if you think your Will may need review, please contact Hugo Smith, or the partner with whom you normally deal.

SECURING TAX RELIEF ON CURRENTLY HIGH AGRICULTURAL LAND VALUES

by Henry Cecil

Agricultural land values continue to go from strength to strength. Bare land prices have risen from below £3,000 per acre in late 2005 to stand now at between £8,000 and £10,000, or more in some parts of the country. Ensuring that tax reliefs are not lost inadvertently is more important than ever. Henry Cecil explains.

Agricultural values are being driven by a number of factors including the need to produce food, farmland being viewed as a safe asset in volatile times, and by the potential tax incentives, in particular the inheritance tax (IHT) relief offered and the scope for capital gains tax roll-over relief. Whilst many of the deals we have concluded recently have had all of these factors present, it is the influence of the IHT relief which is most notable.

Briefly, agricultural property relief (APR) is available for transfers of value of agricultural property (whether during a lifetime or on death). 'Agricultural property' includes agricultural land and pasture, woodland occupied with agricultural land, and agricultural buildings, farm cottages and farmhouses which form part of the overall farming enterprise.

APR is available at a rate of 100% if the ownership test for APR is satisfied:

• the land has been owned and occupied by you for agriculture for a period of two years either in person or through a contract farming arrangement or partnership; or
• the land has been owned by you for a period of seven years and during that period has been occupied either by you or another person for the purposes of agriculture. This includes land let to a third party, usually on a Farm Business Tenancy.

Where the ownership test is not satisfied, APR may be available on agricultural land at a rate of 50%. The lower rate usually applies where land is still let on a tenancy which was granted before 1 September 1995.

APR is only available on the 'agricultural value' of the land. Any hope value or development value will not qualify for APR. However, if the agricultural land is being used in the owner's business (and this depends on the facts) business property relief (BPR) may be available to relieve any non-agricultural value. BPR may be available at either 50% or 100%, depending on the circumstances of the owner and the business.

Farmhouses and farm cottages have their own special tests for APR. Securing the benefit of APR on the farmhouse is generally especially worthwhile, given its likely value, but also especially tricky, because it must be of a 'character appropriate' to the farmland. Only the 'agricultural value' of the farmhouse benefits from the relief.

The obstacles and hurdles in obtaining APR appear to be growing and HMRC grows ever more demanding in its requirements for proof of use of each part of a farm. Detailed advice should always be taken to ensure that the right steps are being taken, and that actions are recorded properly, to give the best possible chance of benefiting from the tax reliefs.

If you would like advice about landed or farming property, please contact Henry Cecil or the partner with whom you usually deal.

THE BRIBERY ACT – RELEVANT TO YOU?

By Alastair Collett

The much-anticipated and widely misunderstood Bribery Act 2010 came into effect on 1 July 2011.

Some three years in the making and the subject of considerable change following consultation, the Act is designed to outlaw corrupt practice and to promote the UK as one of the world's least corrupt countries.

It introduces four offences:

• bribing another person;
• being bribed oneself;
• bribing a foreign public official; and
• (for commercial organisations) failing to prevent bribery.

The main effects of the provisions will be to limit the extent to which any business or person may use inducements or hospitality in soliciting work or advantage, and to make anyone offered lavish entertainment think twice about any purpose or intent behind it. Equally, however, Kenneth Clarke, Secretary of State for Justice, has indicated that 'no one wants to stop firms getting to know their clients at Wimbledon or the Grand Prix'.

All directors and business proprietors should take care to ensure that systems are put in place to prevent bribery, and to police and restrict inappropriate activity.

In particular, unless there are adequate procedures in place, the directors or managers of the business can be found liable – even without proof of fault on their part – for the acts of employees, partners, agents and even contractors, whether in the UK or elsewhere in the world.

The penalties for complacency could be extreme. The maximum penalties under the Act are ten years' imprisonment for an individual and an unlimited fine. Businesses can also be barred from bidding for public contracts.

Government Guidance may assist in interpreting the way in which the Act may be policed by the Serious Fraud Office (which has responsibility for prosecutions).

Six guiding principles apply to organisations wishing to prevent bribery:

• having proportionate procedures in place;
• top-level commitment to bribery prevention;
• bribery risk assessment;
• anti-bribery due diligence procedures;
• communication of bribery prevention policies and procedures; and
• bribery prevention procedures being monitored and reviewed.

Perhaps less obviously, the Act can also apply to charities and those who direct them; and beneficiaries of offshore trusts in particular will find that trustees are becoming increasingly concerned about the ultimate destination of any funds they release.

If you would like to know more about the effects of the Bribery Act on yourself, your business, or for a charity or a trust with which you are involved, please contact Alastair Collett or the partner with whom you usually deal.

TAX DEADLINES – AS HMRC FOCUSES ON PENALTIES, ARE YOUR TAX AFFAIRS IN APPLE PIE ORDER?

By Paul Gallagher

Paul Gallagher leads our Trusts and Tax Compliance Team which is currently very busy preparing and filing the 2010 tax returns for individuals and trustees. He explains how HMRC has upped the stakes for taxpayers who provide an incomplete or late tax return.

Over recent years HMRC has run a number of campaigns designed to encourage those whose tax affairs have fallen behind, or who have forgotten to tell their professional advisers of a particular source of income or gains, to come forward and 'make a clean breast of it', the incentive generally being that a more favourable position on penalties will be available.

The most high profile of these campaigns has probably been the 'amnesty' for the disclosure of funds held offshore, but HMRC has simultaneously been moving to a professions-based approach, with disclosure opportunities aimed specifically at doctors and dentists, for example, and then more recently at plumbers.

In tandem with the disclosure opportunities, however, HMRC is making it a priority to crack down on those who do not disclose. In June HMRC announced that it will launch a campaign in 2011/12 which will focus on those who 'trade' on eBay, or who provide tuition and coaching of any sort (including, for example, fitness, dancing and lifestyle coaching and tutoring national curriculum subjects), whether as a primary or secondary source of income. Coupled with the campaign, HMRC has announced that it will increase its use of cutting-edge technology to identify and pursue cases where insufficient tax is paid.

HMRC is adopting an increasingly penal stance for those who are late submitting their annual tax returns, or paying tax due. In the past, for example, the £100 late-filing penalty would not have been charged provided the tax liabilities for the year were actually paid by the following 31 January. So a reminder of the relevant facts may be helpful.

If you, or a member of your family, receives 'freelance' remuneration for teaching or tutoring, or buys or sells so heavily on eBay that they are trading, then now is the time to make sure that any mistakes or omissions are identified and corrected. If you would like assistance, then please contact the partner with whom you usually deal, or Paul Gallagher.

PROPOSED NEW DEFINITION OF TAX RESIDENCE: WILL IT AFFECT YOU?

By James Johnston

The long-awaited proposals for a new statutory test for tax residence have now been published. James Johnston pinpoints some of the individuals who may need to be careful that the greater certainty which the new test is intended to provide does not land them on the wrong side of the residence line.

The current test of whether a person has become UK resident, or has shed UK residence, has been the subject of widespread criticism in recent years, both on the grounds of uncertainty and because it was alleged that HMRC had 'moved the goal posts'. A Consultation Paper has now been published, giving details and seeking comments on a new, statutory, test.

The proposed test is not based on simple day counting, as some may have hoped, but aims to give a straightforward answer in each case based on a combination of :

• the number of days an individual spends in the UK; and
• the number of factors they have connecting them with the UK (basically, family, home, certain kinds of work in the UK, and residence status in previous years).

It also sets out explicitly what had often been the case in practice anyway: that it will be harder for someone who has been UK resident to shed that residence than it will be for someone who has not been resident to become resident – in other words, the scales are weighted in favour of HMRC.

While the new test aims to catch the essence of the old, there is no suggestion that it will necessarily produce identical results in each individual case. At the extremes of 'obviously resident' and 'obviously not resident' it might be surprising if applying the new test instead of the old would produce a change in residence status. But for the majority of individuals who fall in between these two extremes, advice will be needed to be sure that leaving their lifestyle unaltered will not produce a different, and potentially damaging, answer to the question: 'are you tax resident?'. Particularly at risk may be those (whether arriving or leaving) who have a home and/or family in the UK, and also those who leave the UK but have a highly mobile lifestyle.

The proposal is that the new rules will be effective from the tax year 2012/13 – after 5 April 2012. But a number of individuals will need to get their affairs in order in the current tax year, so that they do not offend at any time in the tax year 2012/13. In some cases this may involve lifestyle changes which will take time to accept and implement, so the sooner planning starts, the better.

We will be producing a briefing note, later in the summer, when the implications, and perhaps the extent to which HMRC will be prepared to heed the representations that we and others will make, will be clearer. If you would like to know more, or if you would like to receive this briefing, please contact the partner with whom you usually deal, or James Johnston.

THE NEW TAX EXEMPTION FOR NON-DOMS INVESTING IN UK BUSINESSES

By Helen Ratcliffe

The Coalition Government promised to simplify the maze of complexity that had been created in the taxation of non-doms who pay UK tax on the remittance basis. The proposals in the recently-published Treasury Consultation Paper will soften some of the worst excesses of the technicalities, but do not provide the root and branch simplification of the compliance burden that was really needed.

A bolder hand has been taken, however, with the proposal put forward in the Consultation Paper to implement the Budget commitment to encourage inward investment into the UK by non-doms. Briefly, foreign income and gains brought to the UK to invest in a qualifying business will be exempt from the remittance rules, with no upper or lower limit, and this exemption will extend to offshore trusts and companies that are suitably connected with a non-dom individual. The relief will be effective from 6 April 2012 onwards.

A 'qualifying business' will need to be more than just a purchase of business assets. As the proposals stand it must be a company that is

• UK resident, or has a permanent establishment in the UK, and
• engaged in either trading on a commercial basis or developing and letting commercial property.

The intention is that the rules will be carefully circumscribed to prevent the investment being used to provide non-commercial benefits to the taxpayer and those connected with him or her, but this is nonetheless an interesting development.

We will be preparing a briefing note once the details, benefits and potential issues have developed. If you would like to be sent this briefing, please contact Helen Ratcliffe. She will also be pleased to help in the meantime if you think this may represent an opportunity for you, your trustees or your beneficiaries.

TEAM NEWS

As high levels of activity continue, it has been a pleasure to see a clutch of promotions and new arrivals in the team. The strength and depth of expertise in our Contentious Trusts and Estates Team has been enhanced with the arrival of partner Nicholas Holland, who brings extensive experience of litigation both onshore and offshore. Hugo Smith and Henry Cecil, both Bircham Dyson Bell 'home-grown' products, have been made partners. Hugo has a wide-ranging, heavyweight, UK and international trusts and tax practice, while Henry joins partner Chris Findley in our leading Landed Estates and Agricultural group.

We are also delighted to welcome Helen McHale, who has just finished her training with us and is at the outset of her career. Hamish Frost has been promoted to Senior Trust Manager, while Michelle Sprack's promotion to Assistant Trust Manager, and Shaharan Deen's arrival as a new Trust and Tax Manager, add fresh blood to our flourishing Trusts and Tax Compliance Team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.