UK: Financial Health Warning

Last Updated: 25 August 2015
Article by Victoria Mahon de Palacios

Wealth management practitioners must take note of new case law and legislation, some of which may give rise to difficulties in practice, says Victoria Mahon de Palacios

George Osborne delivered his final Budget of the parliament on 18 March 2015. As in previous years, the Autumn Statement gave us a pre-warning of much of its content, and the revisions to the stamp duty land tax charging structure, increases in the remittance basis charge (RBC), and increases to the annual tax on enveloped dwelling (ATED) charges were all confirmed. However, there were a few surprise announcements.

The use of deeds of variation for tax purposes is to be reviewed. Deeds of variation allow a redirected inheritance to be subject to inheritance tax (IHT) and capital gains tax (CGT) as if it had been a gift made by the will. The announcement follows publicity around families of high-profile politicians using deeds of variation to secure IHT relief. The results of the review are expected in the autumn.

Another unexpected announcement was the restriction of the CGT 'wasting assets' exemption, so as to be available only if the asset disposed of has been used in the business of the person disposing of it. The restriction is designed to stop the exemption being available for assets, such as 'plant and machinery', that are used in a business not run by the disposer. This was on point in HMRC v The executors of Lord Howard of Henderskelfe (deceased) [2014] EWCA Civ 278, and meant an old master painting held at Castle Howard was accepted by the Court of Appeal as a 'wasting asset'. The restriction is now included in the Finance Act 2015 and applies to gains accruing on or after 6 April 2015.

Draft legislation was published on 10 December 2014 in connection with the simplification of the IHT relevant property regime for trusts. However, it was announced in the Budget 2015 that these rules would not be included in the Finance Act 2015 but carried over to a future Finance Bill, depending on the election result. We could hear more in the second Budget of the year, which is scheduled for 8 July 2015.

Finance Act 2015

The Finance Act 2015 received royal assent on 26 March 2015, shortly before parliament's dissolution in advance of the general election. Key provisions for wealth management practitioners include the following:

  • The ATED rate bands are lowered so as to apply, for the first time, to relevant properties worth in excess of £1m. Previously, the threshold was £2m. The Act also included above inflation rate increases for the ATED annual chargeable amounts;
  • Following on from the consultation launched in March 2014 and the draft Finance Bill published on 10 December 2014, the Finance Act 2015 extends the CGT regime to non-UK residents disposing of UK residential property after 6 April 2015 (with the value of affected properties being rebased as of that date). Previously, non-UK residents were not liable to CGT on any of their UK gains;
  • In a connected move, the Act also alters the principal private residence relief (PPR) rules in section 222 of the Taxation of Chargeable Gains Act 1992, so as to make it more difficult for non-UK residents to circumvent the new CGT charge by electing their UK property as their 'main residence' for PPR purposes. Under the new PPR rules, individuals must spend 90 nights during the tax year in the property in question or be tax resident in the country in which the property is located; and
  • As expected, the Act increases the RBC from 6 April 2015 to £60,000 for individuals who have been a UK resident in 12 or more of the 14 tax years before the year of claim, and £90,000 for those who have been UK resident in 17 or more of the 20 tax years before the year of claim.

Restrictions of attorney's powers

The Court of Protection held in Re XZ [2015] EWCOP 35 that a donor can include as many restrictions as they wish over when and how their chosen attorneys can act under a lasting power of attorney (LPA) dealing with property and financial affairs, even if these give rise to practical difficulties.

The Office of the Public Guardian (OPG) had refused to register the donor's LPA in this case on the basis that the conditions set out therein, extending to seven pages, rendered the LPA unworkable in practice. Under the LPA, subject to specified emergency situations, the attorneys were prevented from acting unless two psychiatrists had confirmed that the donor had lost capacity, the opinions were approved by the donor's friend (the protector), and 60 days had elapsed since the opinions were obtained.

The OPG viewed the time delay and the overriding powers of the medically unqualified protector as failing to be in the best interests of the donor. However, the court held that it is not for the OPG to make paternalistic judgements on behalf of donors. The OPG can only prevent registration of LPAs where its provisions render the LPA ineffective; seemingly unwise provisions, rendering the LPA less effective, would be insufficient.

Practitioners have traditionally advised on limiting restrictions in the LPA, where possible, to ensure that the LPA will be registered by the OPG. This decision may lead to a change in approach. However, the risk of workability problems arising still remains.

New LPA forms are being introduced on 1 July 2015 to include a tick box preventing an attorney from acting unless the donor has lost mental capacity. This comes with a health warning that such a restriction could give rise to difficulties in practice.

Challenge to a will

In the case of Sharp v Hutchins [2015] All ER (D), the beneficiary of a bachelor's previous revoked will unsuccessfully challenged the late bachelor's last will on the grounds of want of knowledge and approval on the bachelor's part. Under his last will, the bachelor left his estate to a builder who had carried out some odd jobs at his home. The previous beneficiary, the testator's only surviving relative, had not heard of the builder prior to the bachelor's death. There was no evidence showing that the bachelor had sought legal advice or how the will had been prepared.

The court applied a single stage test by reviewing the factual and expert evidence to determine whether the will was valid. The traditional two-stage test (whether there were sufficient facts to excite the suspicion of the court and whether those suspicions were allayed by the propounder of the will) was thereafter also used by the court as a cross-check of the conclusion reached; the same conclusion was reached under both tests.

The court found that the bachelor, on the balance of probabilities, had understood what was in the will when signing it. The fact that the will was short and easy to understand, and that there was evidence from the two attesting witnesses that the bachelor knew and approved the contents of the will, was crucial in the court reaching this decision. The case highlights the difficulty in challenging simple wills, even those with surprising contents, on the basis of want of knowledge and approval alone where there is supporting evidence from the attesting witnesses.

Anti-money laundering directive

On 20 May 2015, the European parliament endorsed the proposed Fourth Anti-Money Laundering (AML) Directive, which came into force on 26 June, although member states will have two years to transpose the directive into their domestic law.

The AML Directive topic of most interest to wealth management practitioners is the establishment of registers of beneficial owners of companies and trusts. Under the AML Directive, a central register must be maintained by each member state, recording information on the ultimate beneficial owner of trusts established in its territory or governed by its law. Information will include the beneficial owner's name, month and year of birth, nationality, country of residence, and details of ownership.

No such central register is currently maintained in the UK, and when these provisions were first announced, serious opposition was voiced by related UK professional bodies. The UK government sought amendments to the proposed rules on the basis that, in the UK, trusts are usually established for private, family reasons and rarely for tax avoidance.

Thankfully, the rules have been 'watered down' since the first proposals, and, unlike the registers for companies, the information on the central trust registers will not be accessible to the general public, but only to authorities, their financial intelligence units, and 'obliged entities' (such as banks with 'customer due diligence' requirements). The information is not expected to be any more intrusive than that required by HMRC when registering the trust for tax purposes; however, we will need to await draft UK legislation and guidance on how the registers will operate in practice in the UK.

This article originally appeared in the Solicitors Journal on 30 June 2015.

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.

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