Wilsons - Private Client Newsletter - Spring Term 2014

Private Client Newsletter Spring 2014

2 FOREWORD

Welcome to our Spring 2014 newsletter

Matthew Bennett is a partner in our private client team.

Welcome to Wilsons’ newsletter for private clients. Lawyers from across the team have contributed to five articles on diverse matters which have one common thread, they are all points on which we have been consulted by clients in the last three months.

Grainne Alen-Buckley in our residential property team has prepared some practical tips for people who are looking to buy property in a competitive market, particularly relevant as we are being told the supply of property for sale in December reached the lowest level for five years.

Rosie Sharp provides an update on pre-nuptial contracts and how to make them effective. After the introduction of a statutory test for tax residence, Tim Fullerlove explains what to watch out for if you are coming to the UK temporarily and do not want to be taxed on your worldwide income.

Alison Morris explains why Lasting Powers of Attorney are useful for key individuals in business, and Rupert Wilkinson starts by looking at the 36% inheritance tax rate which a number of clients have shown interest in.

Contact E: matthew.bennett@wilsonslaw.com T: 01722 427 653

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This edition

£

TAX

4

I nheritance tax and charity, benefit and cost.

Read more >

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T ips for property purchasers Read more >

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10

renuptial Contracts P A binding agreement?’

Read more >

isky business – R Lasting Powers of Attorney Read more >

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Moving to the UK the new tax residence test Read more >

4 FEATURE

Inheritance tax and charity, benefit and cost

Rupert Wilkinson is an associate in our private client teams.

T

he Finance Act 2012 introduced a reduced 36% rate of inheritance tax to encourage legacies to charity. We are now starting to deal with the administration of estates to which the 36% rate applies. Many clients who are reviewing their Wills ask us how to obtain the benefit of the 36% rate. However, where there is a benefit, there can be a cost‌

The inheritance tax exemption for charitable gifts It is common knowledge that a gift to charity is exempt from tax. It follows that a lifetime gift to a charity is exempt from inheritance tax. So, unlike a gift to an individual or non-charitable association, inheritance tax is not charged if the person making the gift dies within seven years.

Any legacy to charity on death is also exempt from inheritance tax. It does not affect the individual’s nil rate band for inheritance tax, by which inheritance tax on the first £325,000 of an estate is charged at 0%.

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£

TAX

6 FEATURE

The reduced charitable rate The Finance Act 2012 introduced a reduced rate of inheritance tax to encourage further charitable giving. The rules governing the calculation are complicated, but in essence, where an individual leaves 10% of their net estate (pre-tax) to charity on death, inheritance tax will be charged at a rate of 36%. This applies to deaths on or after 6 April 2012. % given to charity

Received by beneficiaries (ÂŁ)

0

600,000

1

594,000

2

588,000

3

582,000

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How then to explain the complicated calculation? You will have to forgive a graph showing an estate of ÂŁ1,000,000 (using round numbers helps) where the donor is considering leaving legacies to charity.

The graph is based on the table that appears below, where the columns are misaligned on purpose, to show that in giving 4% or 10% of the estate to charity, beneficiaries receive the same amount:

% given to charity

Received by beneficiaries (ÂŁ)

576,000

10

576,000

5

570,000

11

569,600

6

564,000

12

563,200

7

558,000

13

556,800

8

552,000

14

550,400

9

546,000

15

544,000

9.9

540,600

16

537,600

17

531,200

18

524,800

To keep the calculation simple, this estate has no nil rate band available.

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estate given to charity. So as you would expect, if 0% is given to charity, the beneficiaries receive ÂŁ600,000.

On the graph, the red line shows the amount the beneficiaries receive from the estate after inheritance tax at 40%. The figures on the bottom axis show the percentage of the

610,000 600,000 590,000 580,000 570,000 560,000 550,000 540,000 530,000 520,000 0.00%

2.00%

4.00%

6.00%

Beneficiaries receive

From 0% to 9.99%, the red line shows that the beneficiaries receive less, as the percentage of the estate given to charity increases. Suddenly at 10% the red line jumps upwards as the estate passes the threshold for the 36% inheritance tax rate.

8.00%

10.00%

9.99% amount

12.00%

14.00%

16.00%

18.00%

10.00% amount

More money becomes available to the beneficiaries from the tax bonus. As the amount given to charity passes 10%, the amount the beneficiaries receive resumes its downward march.

8 FEATURE

Some points to consider: • If you are giving under 4% of your estate to charity, obtaining the 36% rate of inheritance tax comes at a cost. It will result in a reduction of the amount the non-charitable beneficiaries receive (following the red line where it is above the blue line); • If you are already giving between 4% and 9.99% of your net estate to charity, giving 10% of your net estate to charity might increase the amount the non-charitable beneficiaries of your estate receive; • If you are already giving between 4% and 9.99% of your net estate to charity and are not concerned about increasing the amount the noncharitable beneficiaries receive, you could increase the charitable gift to just under 16% without further reducing the amount the noncharitable beneficiaries receive;

• If you are already giving over 10% of your net estate to charity, the non-charitable beneficiaries of your estate (if any) will receive a little more of your estate than might otherwise be expected, particularly if your Will was drafted before the 36% rate of inheritance tax was introduced.

The numbers used above show an estate which can be manipulated to achieve close to the optimum benefit from the 36% rate. For larger estates, the point at which a charitable gift results in additional benefit for the non-charitable beneficiaries will be over 4%, and for very large estates, it could be quite close to 10%.

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Summary If you are already considering leaving a part of your estate to charity, the 36% rate may be of interest to you. If a charitable legacy is not something you have in mind, the 36% rate will only apply at a cost to the intended beneficiaries of your estate.

Contacts

Rupert Wilkinson Rupert is a private client lawyer, and much of his practice revolves around issues arising from and planning with Wills and trusts, with UK tax usually a vital consideration. His clients are primarily individuals, executors and trustees, but he also acts for companies and partnerships on trust and tax matters with a ‘private client’ element.

E: rupert.wilkinson@wilsonslaw.com T: 01722 427 602

Frances Mayne Frances is a partner and head of our probate and trust administration team.

She specialises in private client work, in particular probate and mental capacity issues.

E: frances.mayne@wilsonslaw.com T: 01722 427 524

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Prenuptial Contracts A binding agreement?

M

any people remember the Radmacher case where a triumphant Mrs Radmacher and her lawyer stood on the steps of the Royal Courts of Justice and declared that the court had given effect to a pre-nuptial agreement. However, pre-nuptial agreements are still not commonplace or straightforward. Rosemary Sharp explains.

Rosemary Sharp is a solicitor in our family law teams.

Three years on from the 2010 Supreme Court decision in Radmacher v Granatino, there is still confusion about the legal position of prenuptial agreements.

To dispel a tabloid myth from the outset, the Supreme Court’s judgment in Radmacher did not make prenuptial agreements automatically binding in England and Wales.

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Instead, the Supreme Court judgment found that prenuptial agreements were to be given effect as long as the parties had entered in to these agreements freely and with full appreciation of the agreement’s consequences. In addition there are various other factors that can increase or decrease the weight that the Court gives to prenuptial agreements in the future such as the degree of financial disclosure and whether independent legal advice was available to the parties at the time the contract was signed.

The Radmacher case left some points uncharted and later cases have tended to focus on whether an agreement was freely entered in to by each party with a full knowledge of its implications and whether the prenuptial agreement should be considered “fair”.

To meet the “fairness” criteria, a prenuptial agreement must provide for the reasonable requirements of any minor children of the family.

In addition, although the purpose of a prenuptial agreement is often to protect inherited wealth, it is important to ensure that any agreement would not leave the financially poorer spouse in a position of “real need”. The term “real need” has not been defined either by statute or case law and is open to interpretation by the courts. One party’s view of a fair financial settlement on the grounds of need can be very different from another’s.

When entering into a pre-nuptial agreement, there is no absolute requirement to provide full financial disclosure or for each party to take

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independent legal advice. However, if both take place, on a later divorce this will help to show a court that, the parties had sufficient information available to them to appreciate the consequences of their prenuptial agreement.

On a first marriage, a pre-nuptial agreement often comes about because of a desire to protect pre-existing family wealth or where one party is much wealthier than the other. On a second marriage the impetus is usually personal, particularly where there are children from the previous marriage to consider and the consequences of an earlier divorce are still fresh in the memory.

The Law Commission’s eagerly anticipated Matrimonial Property, Needs and Agreements Report due at the end of February 2014 is expected to propose that prenuptial agreements should be legally binding. However, it is also highly likely to insist on the safeguards set out above being adhered to in order to prevent one party being financially vulnerable post divorce. Anybody contemplating a prenuptial agreement would be well advised to remember the old adage ‘if a job is worth doing, it’s worth doing properly’ and can ensure they bear in mind the factors that are likely to be important if the prenuptial agreement is disputed later down the line.

Contacts

Rosemary Sharp, Solicitor E: rosemary.sharp@wilsonslaw.com T: 01722 427 618

Katharine Shaw, Partner E: katharine.shaw@wilsonslaw.com T: 01722 427 542

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Tips for property purchasers

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B

uying residential property is rarely straightforward, and in a competitive environment like London it can become quite a challenge.

A purchase is often made smoother with a plan of action, which starts with being prepared for action before you start looking for properties. We have seen a number of factors help recent purchasers to get ahead of the competition as Grainne Alen-Buckley explains.

Prime Central London property is in short supply and if you are planning on buying in this area, you have to be quick off the mark to avoid missing out and disappointment. There is fierce competition out there. One of the best tips is to be prepared to act quickly if you find a property which meets your requirements.

You have to be one step ahead of other purchasers to secure the property and avoid being pipped at the post.

Get your finances in order

Grainne Alen-Buckley is an associate in our property team.

If you will be using mortgage finance, make enquiries before you start looking for a property to establish the best deals available and the amount you will be able to borrow. If possible, have a mortgage offer in place in principle. This will also help to focus your efforts on properties with a realistic value from the start.

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Ensure you can access your funds for the deposit, which is usually 10% of the purchase price on exchange of contracts.

The balance of the purchase price should be available so you can send it to your solicitor, particularly if completion can take place at short notice. Note that the completion funds will include the payment of Stamp Duty Land Tax, payable on all property purchases worth over £125,000 and at a rate which rises to 7% for properties worth over £2,000,000.

There will also be fees for registration of your ownership at the Land Registry.

Surveys and surveyors Instruct a surveyor to carry out a survey as soon as your offer is accepted and your solicitor has received draft documentation.

If you are obtaining a mortgage, it is useful if the surveyor is also on the panel of the mortgage provider. This will negate the requirement for a second valuation to be carried out which can result in further expense and delays.

Property due diligence and searches Property searches can be carried out at the outset of the transaction – there is no reason to delay. If you do not require a mortgage (and therefore do not need to satisfy mortgage lenders’ stringent requirements) you may consider not implementing some searches. For instance, local authorities can sometimes

take several weeks to return search results, causing considerable delays. An alternative is to access such information as you can online (e.g. planning consents and building regulations). Not all councils offer this service and the information can be somewhat limited. Search insurance is another alternative. There is an element of risk in following this course of action, but knowing the risks, you may feel happy ignoring them if you wish to proceed within tight deadlines.

Leasehold complications If you are buying a leasehold property, annual service charges will be payable.

These can be substantial in central London. Some landlords make a bank reference (usually based on the annual service charge payable) and a personal reference a condition of giving permission for the lease to be assigned (transferred).

You can put your bank on notice that this may be a requirement.

Exclusive to you?

Where there is likely to be severe competition between potential purchasers of a property, many major estate agencies have a standard requirement that any prospective buyer’s bid must be accompanied by a non-refundable deposit (usually 1%). The buyer is then given an exclusivity period of 14 days (or more depending on what the parties have

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negotiated) in which to exchange contracts.

However, you should ensure there is a contract in place to regulate how and when the deposit can be forfeited or returned, these agreements are known as ‘exclusivity agreements’ or ‘lockout agreements’. A disadvantage is that negotiating this type of agreement can take as long as reaching the point of exchanging contracts in the usual way.

It would be wise not to enter into an exclusivity agreement until your solicitor has had the opportunity to look over the lease as there may be restrictions in the lease which would affect your decision to proceed (e.g. restriction on pets, prohibitions against alteration). This can also apply to freehold properties which are sometimes subject to onerous restrictive covenants.

Primus inter pares The best position is to be ‘chain free’ so that your purchase is not reliant on a sale and the conduct of third parties, which is likely to cause delays which are not of your making.

If you have all your ducks in a row and know how you want to proceed before or at the outset of your property search, you stand a greater chance of getting to exchange of contracts and completing your purchase with the minimum of fuss.

Contacts

Grainne Alen-Buckley, Associate E: grainne.alen-buckley@wilsonslaw.com T: 01722 427 562

Tim Clayden, Partner E: tim.clayden@wilsonslaw.com T: 01722 427 713

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Risky business – Lasting Powers of Attorney

T

here is a scenario that every key director and key shareholder dreads.

It is waking up to find that you have been unconscious for a long time, and in that time, your company has lost business it would have expected to win, and lost value. Whether it is illness or an accident, if the temporary loss of mental capacity was not bad enough, the blow of finding a thriving business is not what it once was is one to try to avoid. A Lasting Power of Attorney offers an option.

Alison Morris is an associate in our probate and trusts department.

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Lasting Powers of Attorney Lasting Powers of Attorney (LPAs) were introduced in October 2007 and replace Enduring Powers of Attorney (EPAs). They enable somebody appointed by you to manage your affairs if you lose mental capacity e.g. through illness or an accident.

If you do not have an LPA or an EPA, you place your property, business affairs and finances at risk if you lose capacity.

Separate LPAs can be put in place to cover business and personal matters. Business LPAs should be considered by all major shareholders in a company, and as part of a risk assessment exercise by directors at a board meeting.

They offer the director or shareholder (or anybody else who is key to a business) a chance to appoint somebody who understands their business affairs until they recover, or in the case of permanent incapacity, to take vital decisions for the future. While many companies have systems in place to cover routine decisions, there is the possibility of corporate stalemate or a wrong decision if a director or shareholder’s vote cannot be exercised.

At the very least, an LPA dealing with business affairs will be a useful back-up to a pre-determined risk management strategy, in some circumstances it could prove very valuable. To show the value of putting an LPA in place for business and/or

personal matters, it is worth setting out what happens if no power of attorney has been given.

Losing capacity with no Enduring or Lasting Power of Attorney If you do not have an EPA or an LPA in place you face a number of risks: • An application to the Court of Protection by somebody wanting to act as your ‘Deputy’ and to manage your affairs for you is time consuming and costly.

• It may be many months before anyone is given authority to act for you.

• In the meantime any business reliant on you and management of your personal affairs will be on hold.

• This could be disastrous for your dependents and your employees.

• Competing or contested applications to the Court to manage your affairs on your behalf may lead to further cost and delay.

• There is no guarantee that the Court will choose the people who you think most suitable to act on your behalf.

• If there is nobody suitable, the Court will appoint a ‘panel Deputy’ to look after your financial affairs, usually a professional who will charge fees for acting on your behalf.

• The Court will try to tailor the Deputy’s

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powers according to your circumstances, not necessarily in accordance with your wishes if you had not lost capacity.

• If the Deputy needs to use your funds to maintain anyone who you have maintained prior to losing capacity, or to make gifts or enter into tax planning on your behalf, then further applications will need to be made to the Court which will be expensive and time consuming with no guarantee of success.

Contacts

Alison Morris, Associate E: alison.morris@wilsonslaw.com T: 01722 427 636

• The Public Guardian takes the view that it is your responsibility to put your affairs in order or face the consequences.

• There is no fast track procedure for registering an LPA. Registering a Lasting Power of Attorney.

Wilsons can complete the LPA forms for you and send or submit them on your behalf. The forms (which can be found on the website of the Office of the Public Guardian) are lengthy and ask a number of questions on which you may wish to take advice. If you want advice, or want to register a lasting power of attorney, please contact Alison Morris or Ann Cory.

Ann Cory, Senior Associate E: ann.cory@wilsonslaw.com T: 01722 427 517

22 FEATURE

Moving to the UK the new tax residence test Residence – a vital concept The question of your tax residence is of vital importance to your UK tax position, especially if you live abroad and are thinking of spending any time in the UK. If you are UK tax-resident, you pay UK income and capital gains tax on all your worldwide income and gains, whereas a non-resident is outside the scope of UK income tax and capital gains tax.

Troubling uncertainty It has for some years been a concern that English law lacked any clear definition of “residence”. Historically, HMRC published guidance which showed how they, at least, interpreted the law. Any clarity this might have given was lost when HMRC ignored

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Tim Fullerlove is an Associate in our private client team.

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the interpretation found in their guidance in the well-publicised claim they brought against Mr Gaines-Cooper.

In the face of this uncertainty, Finance Act 2013 introduced a new statutory residence test that has applied from 6 April 2013.

It is intended to provide a conclusive decision on each person’s residence.

Of course, in reality the position is still not always clear. A scenario where the rules need to be checked closely is when a non-resident individual is moving to the UK. It is important to know precisely when they become UK-resident and, if they work or own assets in another country with lower tax rates than the UK, whether they can avoid or delay becoming UK-resident.

The new tests The details of the tests are complex (and beyond the scope of this article) but the following points may be of use: • If you have not previously been UK-resident, you can now spent up to 45 days in the UK in each tax year and automatically remain non-resident; • If you have work outside the UK full-time (with no significant breaks from that work) the law is more lenient. Provided you do not work in the UK for more than 30 days, you can spend a total of 90 days in the UK and remain non-resident; • If you do not have a home in the UK, you can still spend up to 182 days in the UK without automatically becoming resident; • If you do have a UK home and spend at least 30 days there, and do not

spend at least 30 days in a home in another country, then spending more than 90 consecutive days in the UK will automatically make you UK-resident; and • If you fall between these lines (for example if you own no home in the UK and work outside the UK full-time, and in one tax year spend more than 90 but fewer than 182 days in the UK) then the position will be more complex and will depend on many details of your lifestyle including various connections you may have to the UK and exactly how many days you spend here.

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Contacts

Conclusion In some cases, the result of the new tests is clear, but in others the position is still uncertain. In any event, there is no doubt that three particular issues are of primary importance under the new rules: • The number of days you are actually present in the UK each tax year; • Whether you have a house in the UK and/or abroad; and

Tim Fullerlove, Associate Tim is an Associate in our private client team. A large part of his practice is dealing with enquiries from our offshore clients. Tim was listed as one of Citywealth’s “top 35 under 35” private client practitioners in 2013.

E: tim.fullerlove@wilsonslaw.com T: 01722 427 651

• Whether you work full-time abroad.

If you are coming to the UK in the near future, or on a regular basis, and you are concerned to avoid accidental UK tax residence, you will need to consider the position carefully and most likely, take advice on your tax residence.

Adam Herbert, Partner E: adam.herbert@wilsonslaw.com T: 01722 427 543

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The Sunday Times Wealth Management Supplement For those of you that read The Sunday Times you may have spotted a Wilsons advert in a recent supplement on Wealth Management (The Sunday Times, 2 March 2014).

The publication looks at topics such as entrepreneurial wealth, the changing role of wealth managers and regulations impacting the sector, and explores the challenges facing the wealth management industry.

To view a copy of the report in full please click here.

CONTACT US Alexandra House St Johns Street Salisbury SP1 2SB Tel: +44 (0)1722 412 412

4 Lincoln’s Inn Fields London WC2A 3AA Tel: +44 (0)20 7998 0420 enquiries@wilsonslaw.com

www.wilsonslaw.com © Wilsons Solicitors LLP, is a limited liability partnership registered in England, registered number OC328787 and is regulated by the Solicitors Regulation Authority. A list of members of the LLP can be obtained from Wilsons’ head office together with a list of those non-members who are designated as partners. The contents of this newsletter are intended as a guide for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law.