Tax Advisors Beware! : Supreme Court Decision abolishes ‘Get out of Jail Free’ card

Many Accountants and Tax Advisors will have a number of Trusts as their clients.  They may or may not have known that the ‘Rule in Hastings-Bass’ referred to a legal defence Trustees could use to prevent HMRC collecting tax on steps which resulted in extra tax liabilities [NB:  Those who thought the Hastings-Bass rule was to do with the offerings of a South Coast pub should read on to protect their PI insurance].  Effectively, the Hastings-Bass rule was used as a way to unwind actions which had unexpected, adverse tax effects.  Essentially, it was a ‘Get out of Jail Free’ card.

Trusts are often misunderstood.  They have suffered recent adverse publicity, but they can still serve valuable roles in protecting minors, the vulnerable and inter-generational family wealth.  This is the reason many Trustees may only be involved in one Trust, and many Advisors will only have a few on their client list.  Such diversity is helpful, in my opinion, because it keeps those most affected by the outcome closely involved in the decision making process.  The underlying personal and commercial issues are generally more important, and those who are close can give a more balanced view, than just technical input.  It does not stop the latter being important though.

This month the Supreme Court issued its judgement in Futter and Another v The Commissioners for HM Revenue and Customs and Pitt and Another v The Commissioners for HM Revenue and Customs.  They were disparaging about the Hastings-Bass rule and Trustees claiming that they had acted in an ‘un-Trustee like fashion’ such that they should be able to void as a ‘mistake’ actions which gave rise to an unexpected tax bill.  The Supreme Court compared such a defence with the lack of relief which would be due to an individual beneficial owner of property who may have made a similar mistake.

The Court Opinion is elegantly written but raises a number of potentially complex issues for advisors.  Those who may be affected should read the judgement carefully.  Perhaps the first thing which springs to mind though is that Trustees and Advisors need to protect their own interests (as well as the Trusts) by ensuring they have evidence of obtaining appropriate professional advice.

Holiday Letting Business Does Not Qualify for Business Property Relief

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.

Inheritance Tax Series – IHT Planning

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Inheritance Tax & Estate Tax Planning

Overview

Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.

The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.

Examples of inheritance tax and estate planning opportunities include:

  • Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
  • Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
  • Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
  • Gifts to charity
  • Making full use of allowances such as the annual allowance and gifts on marriage
  • Regular gifts out of income
  • Outright gifts to individuals/trusts
  • Trusts for vulnerable persons

Non-UK Domicile Tax Planning

Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.

However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.

In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.

Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.

Anti-Avoidance & Other Considerations

Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.

It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.

A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.

 

 

 

Inheritance Tax Series – Overseas Issues

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

Inheritance Tax – Overseas Issues

General Rules

Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.

Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.

Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.

 Foreign Property – Deduction for Expenses

Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.

It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.

Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).

Double Tax Relief

Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.

The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.

These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.

It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.

Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.

For these purposes the location of the asset is determined in reference to UK law.

The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.

In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

Inheritance Tax Series – Reduced Rate of IHT & Gifts to Charity

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Reduced Rate of Inheritance Tax – Charitable Donations

 

Gifts to registered charities, whether in lifetime or on death, are as a general rule exempt from inheritance tax.

 

In addition, with effect from 6 April 2012 where a person gives 10% of their ‘net estate’ to charity, the estate may benefit from a reduced rate of inheritance tax of 36%.

 

There are specific rules to determine the amount of the net estate for these purposes. Furthermore, assets can be owned in different ways (for example; joint ownership, tenants in common and trusts), and the 10% test must be applied to the different ownership types when considering whether the relief is due.

 

In cases where the 10% test is not currently met it should be possible to either (1) amend the Will during lifetime to increase the amount of charitable gifts, or (2) where the taxpayer is already deceased the personal representatives could enter into a deed of variation within two years of death.

 

In certain circumstances, it may be possible to achieve an overall tax saving by increasing the amount of the charitable gift.

 

However, in the majority of cases this is unlikely to be the case because the benefit of the lower tax rate will be offset by the increased cost of increasing the amount of the donation.

Inheritance Tax Series – Transfer to Spouse

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Transfer to Spouse

 

The general rule is that transfers between spouses whether on death or during lifetime are normally exempt from inheritance tax.

 

However, where the gift is made by a UK domiciled person to a non UK domiciled person, the spousal exemption is currently limited to £55,000.

 

The Draft Finance Bill 2013 includes legislation that will increase the exempt amount to the amount of the nil rate band at the date of the transfer.

 

Thus increasing the amount that may be transferred free of inheritance tax to a non UK domiciled spouse from £380,000 (£325,000 + £55,000) to £650,000 (£325,000 + £325,000).

 

Furthermore, the non UK domiciled spouse will be able to elect to be treated as though they are UK domiciled for inheritance tax purposes. However, such an election will bring the entirety of the spouse’s estate into the UK inheritance tax net, therefore advice should be taken before an election is made.

 

These changes are expected to come into effect from 6 April 2013, although the precise wording of the legislation may change before the provisions are enacted into law.

Inheritance Tax Series – Nil Rate Band

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Nil Rate Band

 

The amount that may be passed on to a person’s beneficiaries free of inheritance tax is determined by the nil rate band at the date of death.

 

The nil rate band for inheritance tax has been frozen at £325,000 per person since 2010.

 

The Chancellor announced in the Autumn Statement that the amount of the nil rate band will rise to £329,000 with effect from 6 April 2015.

 

Since October 2007 it has been possible to transfer the unused proportion of the nil rate band between spouses, although the benefit of this can only be realised on the death of the second person and not in respect of a lifetime transfer, such as a transfer to trust.

 

Where a person survives more than one spouse, the maximum amount of the nil rate that may be transferred is equivalent to one full nil rate band.

 

However, with careful tax planning, it may be possible for their combined estate to benefit from 3 full nil rate bands. Thus reducing the overall amount of inheritance tax payable.

 

Ideally inheritance tax planning such as this should be undertaken during lifetime through careful drafting of Wills, although it may also be possible to implement the planning post death through a deed of variation.

Recent Inheritance Tax Case – Silber v HMRC

The First Tier Tribunal Inheritance Tax Case of Silber v HMRC looked at how a settlement of cash made between the beneficiaries of the deceased’s estate and the deceased’s sister should be treated for Inheritance Tax.

The sister challenged the will of the deceased and she was paid an out of court settlement of £400,000 by the beneficiaries.

The Beneficiaries claimed the £400,000 as a liability of the estate and thus a reduction in Inheritance Tax payable of £160,000 (£400,000 x 40%).

The Court held that the money paid was not a liability incurred by the deceased and thus wasn’t allowable for IHT relief.

The taxpayers’ case was not helped because of the fact that they did not turn up for the Tribunal hearing (even though they were expected) although there is little doubt that the tribunal reached the right conclusion anyway.

Eaves & Co are experienced in inheritance tax planning and compliance, please call if you have IHT concerns.

 

Inheritance Tax, Lifetime Planning

Inheritance Tax is a thorny subject for families and can affect couples with more than £650,000 of net wealth between them (2012/13 rates).

 For such couples planning to avoid inheritance tax is never easy because there is a balance to be achieved between maintaining a standard of living through the later years and giving assets to younger generations.

 It is never too early to start planning for IHT mitigation; but typically it would be sensible for the process to begin in the late 50s or 60s.

 It is important to understand that capital gains tax can often hamper planning for IHT and so succession planning in relation to property, shares and businesses is important if this is to be accounted for.

 The first stage of planning is to estimate a family’s current exposure to IHT and if this is material some initial ideas can be suggested. It will become clear to the family which ideas are practical and which are not, and then we can focus on the ones which have a chance of practical success.

For an initial consultation please call Eaves & Co on 0113 2443502 to arrange an appointment. We have much experience in this area of tax planning and testimonials are available on our website.