Summer 2019 update
10 September 2019
23 September 2019
Some recent developments affecting trusts and estates.
There have been some recent interesting developments in the area of trusts and estates that affect financial planning, including a Court of Appeal decision overturning a judgment previously discussed.
Tax avoidance via an offshore employee benefit trust
During the 1990s and 2000s one of the popular methods of paying bonuses to directors or high-flying employees was by transferring the award money to an offshore employee benefit trust (EBT). The funds could then be allocated to employees in the form of an interest-free loan which would be left outstanding indefinitely. In many cases, employees then accessed the bonus immediately, without paying any tax on it. Unsurprisingly HMRC was not happy about these arrangements.
The Finance Act 2011 introduced new rules on the disguised remuneration (DR) to ensure that the employees were subject to tax on EBT loans as employment income. However, this did not apply to loans made before FA 2011. To remedy this, another set of rules, announced in 2016 and introduced in 2017, mean that if any loans from an EBT made since April 1999 had not been repaid in full by 5 April 2019, or had not already been taxed under other provisions, any such loan amounts would be taxed on the recipient as employment income.
The retrospective nature of the provisions was much debated but remains unchanged. Ahead of the 2019 deadline HMRC was writing to companies inviting them to contact HMRC to settle any tax liabilities that may result from the use of an EBT. The employer had an option to negotiate settlement with HMRC, wait for the outcome of any ongoing litigation or pursue appeals on a case-by-case basis.
A recent decision of the First-tier Tribunal in S Hoey (TC7292) is interesting because in addition to dealing with the issue of loans from an EBT it includes an interesting comment on the tax avoidance motive which, whilst not binding, illustrates the judicial approach to this topic which may be useful in other areas. For example, there is famously not much guidance on the tax avoidance motive in relation to relevant property trusts.
In this case Mr Hoey, a UK resident, was a contractor employed by an offshore company. Until 2004 he supplied his services through his own personal service company but found the running of the company onerous. He therefore used a firm of intermediaries which suggested he enter employment with an offshore company. Ultimately the result was that the latter contributed to an employee benefit trust, the trustees of which then made interest-free loans to the contractor.
In the first instance, following a discovery assessment, HMRC ruled that the loans were taxable. Mr Hoey appealed to the First-tier Tribunal (FTT).
After deciding in favour of HMRC on the discovery issue, the FTT also commented on HMRC’s alternative argument – that the taxpayer would be taxable under the transfer of assets abroad legislation (section 714 et seq of the ITA 2007), in particular on the motive defence (section 737 ITTOIA 2005 ). This is the interesting part.
It was Mr Hoey's defence that "his motive was purely the avoidance of the complexities of running his own company or his own consultancy. He had no idea that the arrangements involved tax avoidance or anything untoward". On this point the judge said that he could not conclude that Mr Hoey's motivation was related to tax avoidance. However, the judge also said that it was also necessary to examine the motives of the entity designing or providing advice on the transactions.
While the basic structure of using an umbrella company was a ‘perfectly reasonable commercial transaction’, the insertion of additional steps – setting up an offshore umbrella company that made payments to a trust which made interest-free loans to the contractors with the expectation of never having to repay them – constituted tax avoidance. He concluded these were "more than incidentally designed for the purpose of avoiding liability to taxation".
Therefore, on this point Mr Hoey would not have won either and we have a little more guidance on what constitutes tax avoidance, in particular the role of the intermediary, or adviser, seems to be more to the point than any personal motive of the taxpayer.
Court of Protection in England allows a family to undertake inheritance tax planning
It is well known that the scope to make gifts by an attorney or deputy acting on behalf of an incapable person is very limited and any proposed gifts in excess of the usual birthday or Christmas habitual gifts need approval from the Court of Protection (CoP). It also needs to be shown that any gift would be in the interest of the patient. This is likely to be a time-consuming requirement as well as costly if not actually difficult to show, especially if IHT mitigation is the main reason for any proposed gift (more likely to benefit those who will inherit the estate of the patient, rather than the patient himself).
So a recent CoP decision in this area is most welcome. A judge allowed the family to make tax exempt gifts on behalf of their millionaire brother, who has been in a coma (a "persistent vegetative state" to be precise) since 2007.
District Judge S. Ellington ruled that gifts made to family, charities and political organisations were in the 66-year-old's best interest. The ruling was hailed by some as "groundbreaking" and that it sets a precedent for carers to "make use of legal loopholes" to reduce tax bills years after someone is unable to look after their own money – even where they have expressed no such wish to do so.
In this case the responsibility for managing the £17 million fortune was given to the millionaire’s brother, who won a plea to ratify a number of gifts that had already been made, as well as prospective ones from his £120,000 annual income.
Millions of pounds will now be given to family and charity while thousands will go to political organisations.
The judge said that the man's love for his family and his commitment to charity would have led him to “put his financial affairs on a better footing”.
Of course, the requirement to seek CoP permission for larger gifts remains, but there seems to be a green light for applications involving IHT planning on behalf of an incapable person.
EWCA reverses Cowan decision on standstill agreements
A couple of months ago we reported on a case involving a widow making a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for an increased award from her deceased husband's estate. There are strict deadlines for such claims in the legislation and her claim was 17 months beyond the deadline although she did agree with the executors to delay the deadline by means of a so-called "standstill agreement". The High Court judge denied her claim and was indeed very critical of this type of agreement, which apparently has the effect of overriding statutory limitation periods (and indeed is used quite often in litigation).
Well, guess what. The England and Wales Court of Appeal (EWCA) has now overturned the High Court judge's decision. (Cowan v Foreman, 2019 EWCA Civ 1336).
Describing the High Court judge's reasoning as ‘plainly wrong’, the EWCA said the Act’s six-month time limit was there only to protect personal representatives when distributing the estate. In this case, the estate had not been distributed. Moreover, apparently the High Court judge had failed to take into account the full circumstances of the case.
Regarding standstill agreements generally, the EWCA partially accepted the High Court judge's argument that the deadline belongs to the court and not to the litigants so that any agreement cannot be binding. However, it said it would be unlikely that the court would refuse to endorse the standstill approach, because without-prejudice negotiations should be encouraged to avoid the issue of proceedings.
The decision should come as a relief to those involved or potentially involved in this type of claim, given that the deadlines are very short and it is not at all unusual for matters to take longer to resolve between the parties.
The very unfortunate, if not heartbreaking, case of the deaths of Mr and Mrs Scarle and the subsequent litigation involving their respective daughters has been well publicised in the press, particularly in the tabloids, often invoking strong emotions, especially given that the immediate cause of the death of both of this elderly couple from Essex was given as hypothermia. The full judgment in the case has only just been released. (The estate of John William Scarle deceased (by his personal representative Ann Winter) v the estate of Marjorie Ann Scarle deceased (by her personal representative Deborah Ann Cutler)  EWHC 2224 (Ch).
While we will never know what exactly happened and when, there has been no suggestion of neglect, but it is still rather sad, if not tragic, that the step sisters could not settle the dispute out of court, preferring an all or nothing approach.
Briefly, this was the case where the couple were discovered dead by neighbours and it was impossible to say who died first.
They jointly owned their home and had some jointly held deposits, in total of about £300,000.
When assets are owned jointly as beneficial joint tenants, they pass to the survivor upon the first death and cannot be dealt with in a will. On the death of the second owner, their beneficiaries will inherit, in effect by-passing the estate of the first to die.
As both Mr and Mrs Scarle had children of their own from previous relationships, those that would ultimately benefit differed according to who predeceased who.
The key legal question was, therefore: who died first? The presumption under section 184 of the Law of Property Act 1925 (LPA) is that if two or more people die in circumstances where it is not possible to determine who died first, the younger is deemed to survive the elder. This is known as the commorientes (simultaneous deaths) rule.
However, it is possible to rebut this presumption with compelling evidence to the contrary.
Mr Scarle was 79 years old whereas Mrs Scarle was 69 years old so the presumption is that Mr Scarle died first. However, Mr Scarle was in much better physical health than his wife, he had been her carer since 1998 when she suffered a stroke.
Medical evidence suggested that Mrs Scarle had ‘probably’ died first based on the state of her body. However, in order to rebut the presumption, Mrs Scarle's lawyers submitted that the court would have to be faced with 'clear, reliable and compelling evidence’ to show, ‘beyond reasonable doubt’, that Mrs Scarle had died first.
Based on the evidence presented to him the judge concluded that there was insufficient evidence from which he could reliably reach a conclusion as to who died first. This remains uncertain which means that the presumption in section 184 LPA applies and Mrs Scarle is presumed to have survived Mr Scarle.
This of course means that the daughter of Mr Scarle, who brought the claim, lost and not only does she not get a penny out of her father's share of the joint assets, she is now faced with a legal bill estimated to be in excess of £150,000.
As it happens, only a couple of months ago we considered dealing with jointly-owned assets and how frequently it is difficult to resolve problems arising from joint ownership after one of the owners dies. Obviously, it is even more difficult once both are dead. While cases of true simultaneous deaths are few and far between, they can clearly happen and the consequences, as the above case illustrates, can be disastrous for some.
Given the ever rising number of second marriages, if parents were aware of the possible consequences of dying in the "wrong order" to their offspring from those previous marriages, would they be happy to take a chance? Of course once the joint ownership problem is overcome, an appropriately drafted will can address the potential danger of simultaneous deaths (for example by including a survival clause) ensuring that the wishes of the testator are satisfied rather than having legislation intervene.
Whilst on the subject of wills, we have just seen two separate but equally depressing reports.
First, according to Collyer Bristow's findings announced in their Age of Apathy report, many parents operate under the belief that a will is not necessary. For example, 23% of their respondents presumed their assets would be inherited automatically by their surviving spouse. This reason was second only to the belief amongst respondents that they do not have the time to make a will.
Second, according to research by UK will writing specialists Farewill, 70% of parents with children under 18 do not have a will and so have not legally appointed guardians for their children if they were to die.
Clearly, the public at large needs more education in this area. Need I point a finger at the potential educators?
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.