MALCOLM GUNN FTII, TEP reports highlights of the 2002 Sussex STEP conference.
Deeds of variation
MALCOLM GUNN FTII, TEP reports highlights of the 2002 Sussex STEP conference.
Deeds of variation
The December 2001 newsletter of the Capital Taxes Office contained an article setting out the Revenue's view that, in order to be effective, a deed of variation must be implemented (or have some practical impact) in the real world.
Peter Twiddy
said that the Capital Taxes Office is looking to have a test case at an early opportunity in order to establish whether or not this view is correct. There is a possibility that a Scottish case will go before the Special Commissioners in August; this concerns a deed of variation of a will made after the death of a beneficiary who had a continuing right of residence in a property in the estate. The deed of variation was designed to vary the will so that the property passed directly to another beneficiary, thus taking the person with the continuing right of residence out of the picture retrospectively.
Trust capital gains sheets
Representatives from the Revenue's Nottingham Trusts District said that it was important that the prescribed form for trust capital gains is used with the self assessment tax return form. A photocopy of the pages may be used, but the sheets produced by stockbrokers will not be acceptable unless they are an exact replica of the Revenue's form. The Revenue is prepared to allow computer-generated documents to replace the Revenue produced capital gains tax pages provided that they follow the layout of the Revenue forms. Such replicas do not have to be a precise facsimile, but the layout does have to be followed in terms of the columns across the page. There is no similar requirement as regards the number of rows down the page and so a computer generated document could have sufficient space for a larger quantity of disposals than can be entered on the Revenue supplementary pages.
Nil-rate band discretionary trusts
Peter Twiddy
said that he agrees that it is possible, in principle, to vary a will so as to set up a nil-rate band discretionary trust in which the only asset is an IOU given by other beneficiaries or trustees of a continuing trust.
Revenue's 'real world' variations
Phillip Laidlow
discussed the Revenue's announcement in the December 2001 Capital Taxes Office newsletter to the effect that deeds of variation must operate in the real world to be valid. Phillip said that the vital point to bear in mind is that section 142, Inheritance Tax Act 1984 is not an enabling section. It does not give authority for an act which would not otherwise be legally possible. Will variations are simply legal documents which assign rights under the will. The impact of section 142 is to allow such a document to have retrospective effect for inheritance tax purposes. Accordingly, when making a deed of variation, the first point to consider is whether or not it is legally possible to carry out the gift or assignment
which is to be incorporated in the deed.
Thus, if a will gives a life interest to a beneficiary who dies within two years and then an absolute interest to another beneficiary, Phillip Laidlow considered that the latter beneficiary could not vary the will. However, the personal representatives of the beneficiary with the life interest could vary the will after the death of the life tenant so long as there was still some accrued benefit due to the life tenant which could be given away. It was agreed that a deed of variation to remove a life interest was probably not possible after the estate had been fully administered and all the assets distributed to the beneficiary ultimately entitled.
Work it out yourself!
Representatives from the Revenue's Nottingham Trusts Office said that the Revenue's computer does not bring forward the unused tax pool (sections 686 and 687, Taxes Act 1988) in discretionary trust cases. There is a box on the self-assessment trust return form on which the tax pool has to be entered and, if no figure is inserted in that box, the Revenue's system will assume that there is no tax pool brought forward.
Accumulation and maintenance trusts
Chris Whitehouse
, barrister, said that it is important to pay close attention to the detailed requirements of section 71, Inheritance Tax Act 1984 when setting up accumulation and maintenance trusts. The Revenue is reported as saying that approximately one half of the accumulation and maintenance trust deeds which it sees are not within section 71 as they fail to satisfy the detailed conditions.
Avoidance of gifts with reservation
Peter Twiddy
said that the Special Commissioner's decision in Essex v Commissioners of Inland Revenue
(SpC 296) is due to be heard on appeal by the Revenue in the last week in June. The case concerned a settlement in which the settlor's husband had an initial life interest and this was followed by discretionary trusts which included the settlor as beneficiary. The point at issue is whether the settled property is within section 102, Finance Act 1986 as regards the settlor, in that she had reserved a benefit from the gift. The taxpayers argued successfully at the Special Commissioners that there was no gift with reservation as the initial interest was in favour of a spouse and therefore section 102(5), Finance Act 1986 disapplied the provisions of section 102.
Peter Twiddy said that the Revenue will continue to press its argument that the gift in settlement must be split into two elements, the first being the life interest, and the second being the subsequent discretionary trusts. The Revenue will argue that it is important to distinguish between gifts and transfers of value. A gift in settlement can be two gifts, one of a life interest and one of a reversionary interest, where there is only one transfer of value for inheritance tax purposes, namely the life interest which exhausts the whole transfer for the purposes of the tax. The Capital Taxes Office will argue that the alternative view enables the gift with reservation provisions to be defeated even where there is only a very short term interest initially given to a spouse.
Rights of beneficiaries to information
Do beneficiaries have to be informed of the existence of a trust from which they may benefit?
Chris Whitehouse
advised that this is not a clear-cut matter; in an Irish case (Chaine Nickson v Bank of Ireland
[1976] IR 393), it was held that if the discretionary class is very wide, not all members of it need to be informed but primary beneficiaries or those in a small class of discretionary beneficiaries should be informed. It is considered that this should apply in the United Kingdom as otherwise who can hold the trustees accountable for their administration of the fund, particularly if the settlor is dead?
Beneficiaries have a right to inspect trust accounts and trust documents and to receive information concerning the trust and this probably includes the principal beneficiaries of a discretionary trust (see Re Londonderry
[1965] CH 918). However, the decisions of trustees and the process by which those decisions have been reached, particularly in relation to their discretionary powers, are generally confidential and need not be disclosed to beneficiaries.
Overview of trusts and capital gains
The rate of capital gains tax payable by trusts is a maximum of 34 per cent, and a minimum (with the benefit of maximum business asset taper relief) of 8.5 per cent.
Chris Whitehouse
pointed out that once assets are within a trust the general principle is that capital gains tax only arises if they leave the trust or are disposed of by the trustees. Thus, no capital gains tax liability arises on a change of beneficial interest or on the conversion of the trust from one type into another. Deemed disposals may arise in certain circumstances (emigration; Schedule 4B to the Taxation of Chargeable Gains Act 1992; death of life tenant and recovery of holdover relief), but as a general rule there is nothing to prevent a trust commencing in discretionary format for a short period of time in order to secure section
260, Taxation of Chargeable Gains Act 1992 holdover relief, and the trust thereafter being converted to an interest in possession trust or an accumulation and maintenance trust without affecting the section 260 relief.
Domicile review
The Government has commenced its review of the future for domicile in its impact on tax liability.
Peter Twiddy
said that invitations will be going out shortly for views to be offered on the matter. A possible timetable is for representations to be made between June and October this year with draft legislation or more definite proposals being made available in this year's Green Budget. New rules could then be effective next year. No quicker timetable could operate. Views of all concerned will be very welcome.
Peter Twiddy said that the big question is whether domicile should have any impact at all on tax liability. Would it not be better to have a residence based test which might include exemption for foreign income and assets for an initial period of five years or so on arrival in this country, and full worldwide liability thereafter?
He remarked that the remittance basis is widely considered to be 'a joke'. However, it is recognised that it encourages foreigners to work here and to contribute to the United Kingdom as a financial centre.
The 2002 trust tax return form
Question 12 of the 2002 trust return form asks 'Have any assets or funds been put into the trust?'. Trustees should note that this is a new formulation of the question, as compared to that on previous trust forms. The question is no longer directed just at additions to an existing trust but in the case of a new trust it is now necessary to answer yes to this question and to detail the assets settled.
State funding for care costs
Margaret Richards
said that there is no legal duty for care providers to pass on the benefit of National Health Service funding for nursing care to individual nursing home residents. The guidance states that National Health Service contracts with homes might cover a stipulation that the full benefit of any state funding 'should be discounted in any fee payable by the resident to the nursing home'. However, many homes have increased their fees so that residents pay the same as before and the state funding therefore benefits the providers rather than the residents of the home.
To counter this practice, a ministerial statement on 11 March 2002 requires homes to provide a breakdown of their costs so that people can see exactly what they are paying for, and they must record the financial contribution from the state separately from that provided by other parties. In addition, the Department of Health has issued a 'care contract' which provides that:
'The care home will keep a record for each eligible person in the home and will either account to either each eligible person for the amount of his/her registered nursing care contributions within x days of receipt or will reduce each eligible person's invoice by the amount of their amounts of registered nursing contribution to care.'
Margaret Richards
said that these recent steps have been designed to put matters back on a proper footing, although it is recognised that enforcing the contract can still be difficult because it is not a public document available for third parties to see.
Discretionary trust of a share in a house
Discretionary trusts which contain a share in a person's main residence, with that person owning the other share, are continuing to cause problems, according to
Peter Twiddy
.
The view of the Capital Taxes Office is that this arrangement gives the person in occupation of the home an interest in possession in the discretionary fund.
However, there are statements to the contrary by the Special Commissioners, for example as in Essex v Commissioners of Inland Revenue
SpC 296 where 5 per cent of the home was in the name of the owner occupier and 95 per cent in the discretionary trust, but the Commissioner thought that occupation of the house was by virtue of the 5 per cent share alone.
In such cases, it can be said that the trustees' power of investment is tacitly being used to allow occupation of the share of the property held in the trust rent free. Peter Twiddy considered that this was an exercise of the discretion of the trustees by means of the investment power to provide a benefit to the beneficiary.
Lifetime gifts, notional capital and care costs
In relation to state assistance for care costs, Regulation 25 of the National Assistance (Assessment of Resources) Regulations 1992 states that 'a resident may be treated as possessing actual capital of which he has deprived himself for the purpose of decreasing the amount that he may be liable to pay for his accommodation', this being broadly the notional capital rule designed to prevent people depleting their assets in order to secure greater state assistance.
Margaret Richards
said that evidence as to whether or not the claimant was aware of the notional capital rule when making gifts will be crucial. In Beeson v Dorset County Council
[2001] EWHC Admin 986, Mr Justice Richards said:
'I do not see how an applicant could be found to have the relevant purpose unless he was aware of the possibility that he might be provided with accommodation and that he might be liable to pay for it.'
It is therefore critical to establish the state of knowledge of the claimant and if gifts were made in ignorance of the consequences as regards state assistance for care fees, then a good case can be made for the view that the notional capital rule should not then be applied.
Alternatively, those passing on property to others may do so as an acknowledgement of considerable care assistance already given by the donee. Margaret Richards
considered that there is a strong argument in these cases for resisting treatment of the gifts as notional capital. If they are no more than proper value given in return for past care assistance, then the application of Regulation 25 should be resisted.
French rules of succession enhance the entitlement of the spouse
The French system of succession is based on 'forced heirship' and it has long been recognised that the surviving spouse comes low down the list of entitlements, with children and parents having prior rights. The reason for this is that France, like other forced heirship systems, has a matrimonial property régime which is the way that spouses often receive their entitlements in the estate.
Prior to 4 December 2001, a surviving spouse was entitled only to a usufruit (a sort of life interest) over one quarter of the deceased spouse's estate.
Gill Steel
said that the French Parliament has now elevated the surviving spouse to a similar position to that of the children, as regards entitlement, and the spouse is now given a minimum right to one quarter of the estate.
The Hastings-Bass
principle
Chris Whitehouse
reported highlights of a Kings College lecture given by Sir Robert Walker on 26 February 2002. Sir Robert gave some indication that, in his view, the High Court is taking the Hastings-Bass
principle (whereby trustees who overlook a vital matter when exercising their discretions can apply to the Court to have an appointment reversed) further than it warrants. One question which arises is whether the application of Hastings-Bass
renders an appointment void or just voidable. It seems possible therefore that the Court of Appeal may lay down some boundaries to the Hastings-Bass
principle if a case ever progresses that far.
The shadow director problem
Following the House of Lords' decision in Regina v Allen
[2001] STC 1537 problems can arise where an overseas property is purchased by a United Kingdom resident through the medium of a company. In such cases, it will be difficult to refute an allegation that an individual is a shadow director of the company and thus an income tax benefit charge will arise in respect of the use of the property under sections 145 and 146, Taxes Act 1988.
Chris Whitehouse
advised that this difficulty can be overcome by the company holding the legal title to the property, not as absolute owner but as nominee for the individual.
Tax due for past years
Box 17.2 of the trust tax return form is marked 'tax due for earlier years'. Representatives from Nottingham Trusts District said that, where returns for several years are being submitted at the same time, it is important not to fill in box 17.2 with the amounts of tax due for some of the earlier years. The box is intended for use where any of the averaging rules apply (such as for farmers) for the carry back of post cessation receipts or for the spreading of copyright income. It should not be used to denote liabilities outstanding as shown on previous returns.
Trust terminations
The filing date for trust returns of the current fiscal year is 31 January 2004 and the Revenue then has an 'enquiry window' for them which closes on 31 January 2005. Representatives from Nottingham Trusts District advised that, for trusts which are to be finally distributed within the tax year, an 'in-year' return should be requested from the Revenue which should be completed and sent back with a letter requesting clearance. The Revenue will then deal with this as quickly as possible in order to allow immediate distribution of the trust.
Tax-geared penalties and the impact of Human Rights
The decision of the European Court of Human Rights in AP, MP & TP v Switzerland
[1997] 26 EHRR 541 held that it is not lawful to impose criminal sanctions upon the living in respect of acts apparently committed by the deceased.
Gill Steel
said that tax-geared penalties can be regarded as criminal for this purpose, whereas fixed penalties for the late submission of a tax return would be civil and not criminal in nature.
Personal representatives should be advised not to pay tax-geared penalties when coming to a settlement with the Inland Revenue. Under human rights law, they are not enforceable against the estate and a payment of them would therefore be in breach of the general duty of personal representatives to protect and preserve the estate for the benefit of the beneficiaries; they would therefore be open to a claim from the beneficiaries for reimbursement of the penalties paid.
Discretionary trusts of agricultural or business property
If a discretionary trust holds agricultural or business property which qualifies for 100 per cent inheritance tax relief at a ten-year anniversary date, there will clearly be no liability to inheritance tax on that anniversary. This has the result that, by virtue of section 69, Inheritance Tax Act 1984, a nil rate of charge will apply to the trust in relation to distributions before the next ten-year anniversary.
This position is not dependent on there being agricultural or business property in the trust at the time of distribution. The nil rate will apply if the property of this nature is sold and the sale proceeds are later distributed by the trustees.
Self-assessment trust returns: opening questions
Question 8 on page 3 of the trust self-assessment return asks certain general information concerning the nature of the trust.
The opening question is 'Are you completing this tax return for a period of administration?', for which the answer boxes are 8.1 for no and 8.2 for yes.
If box 8.2 is marked, then it is not necessary to answer the other boxes. However, representatives from Nottingham Trusts Tax District said that if box 8.1 is marked, indicating an answer no, then all other boxes at question 8 must be completed or the system will reject the return.
