Taxation and trusts; Mortgage prisoners: new FCA review 

Contents:

• Modernising LPAs - new consultation
• Mortgage prisoners: new FCA review
• IHT - impact of frozen nil rate bands 

 

Modernising LPAs - new consultation  

(AF1, RO3) 

On 20 July, the Ministry of Justice (MoJ) launched new consultation on a number of proposals to modernise Lasting Powers of Attorney (LPAs). These are aimed primarily at digitalisation of the LPA process. 

The LPA was introduced in England and Wales in 2007 to replace its predecessor, the enduring power of attorney (EPA), but in principle it also retained many of the paper-based features and protections of the EPA. 

The protections that exist in the LPA are based on tradition and legal case law. They’re based on known and trusted paper-based social conventions, such as signing and witnessing (an LPA must be executed as a deed and signed in wet ink with the physical presence of witnesses). It is the physical execution and the amount of paperwork involved that is apparently causing the problem, especially as these days most people seem to expect to access Government departments online.

According to the MoJ in 2019/20, the Office of the Public Guardian (OPG) received 19 million sheets of paper in the form of hard copy LPAs and posted out a similar amount. Handling large amounts of paper is costly and inefficient, creating an ever-increasing need for staff, equipment and storage. 

The MoJ acknowledges that people increasingly want to access services digitally. The COVID-19 pandemic has accelerated this demand and transformed the way many people think and act. 

The stated aims of the MoJ in this area are to: 

• increase safeguards, especially for the donor;
• improve the process of making and registering an LPA for donors, attorneys and third parties;
• achieve sustainability for the OPG whilst keeping LPAs as affordable as possible for all people in society.

The consultation asks for responses to seven proposals: 

Proposal 1 concerns the role and value of witnessing on LPAs and examines how to achieve this using technology to support remote witnessing or to replace the witness. The MoJ’s preferred option is to replace the witness with new safeguards that perform the same function. 

Proposal 2 concerns the application to register an LPA and who can apply. The preferred option here is that LPAs are digitally checked as they are being made and are sent for registration as soon as they are executed. 

Proposal 3 considers the OPG’s remit. The proposal is for the OPG to expand the types of checks the OPG is allowed to carry out under the Mental Capacity Act and supporting regulations. 

Proposal 4 considers how to simplify the process for making objections to an LPA. The preferred option is that anyone should be able to object to an LPA and that all objections are sent to the OPG first. 

Proposal 5 considers when people can object and the preferred option is to allow people to object to an LPA from the time the donor starts creating it to the point it is registered. 

Proposal 6 considers the possibility of a dedicated faster service being introduced for people who need an LPA urgently. 

Proposal 7 considers solicitors’ access to the service with the potential for solicitors being forced to use a digital channel for LPAs, in the same way as they have to use the online probate portal. 

The consultation document is a weighty 81 pages and can be found here. The consultation is open until 13 October 2021 and the responses to the consultation will be published in January 2022. 

Given that the requirements for an LPA are in the statute (the Mental Capacity Act 2005), a change to primary legislation will be required to enable any changes to the process. 

The above is all based on English law, as different rules apply in Scotland and in Northern Ireland. 

Up to now there has generally been resistance, at least amongst the legal profession, towards electronic execution of LPAs, largely due to the perceived scope for fraud and exploitation of vulnerable individuals. However, technology now offers new ways for the OPG to protect its users through identity and information verification. Society’s attitudes to fraud and abuse, and the expected protections against them, have, according to the MoJ, also changed. 

Nevertheless, the MoJ acknowledges that protection of the individual who may lose capacity must remain the primary concern which means that the task of digitalisation of the LPA process may not be straightforward. The right balance will have to be found between the ease of use and protection against abuse. Ease of access and protections must also be ensured for those who cannot use the digital service or do not want to. Clearly, the current system could be improved but care will have to be taken to ensure that vulnerable individuals are protected.  

 

Mortgage prisoners: new FCA review 

(ER1, LP2, RO7) 

The Government and the Financial Conduct Authority (FCA) are seeking additional options for borrowers with inactive firms who are unable to get a deal with a new lender. 

The FCA has estimated that there are 250,000 borrowers who have mortgages held by ‘inactive firms’. These are firms that are either not lending to new customers (known as inactive lenders) or are not lenders (known as unregulated entities). Not all of these borrowers are mortgage prisoners. 

Mortgage prisoners are borrowers who are unable to switch to a new mortgage deal despite being up to date with their mortgage payments and, depending on their loan and borrower risk characteristics, could potentially benefit from switching.  

In April 2021, the Treasury announced that the FCA would review their data on borrowers with inactive firms who are unable to switch, despite being up to date with payments, as well as the effect of its recent interventions to remove regulatory barriers to switching. The FCA has now published their terms of reference for this review. 

The FCA’s mortgage prisoners review will provide information on the following areas:  

1. Data review - The FCA will review and update its data to consider the demographic and loan characteristics of mortgage prisoners. The FCA believes that its July 2020 assumptions led to a low estimate of the number of customers who have mortgages with inactive firms and are unable to switch despite being up to date with payments. So, in the review, it will take a fresh look at all its assumptions. The FCA expects that the change in economic conditions, more recent data and updated assumptions are likely to lead to an increase in its estimated number of mortgage prisoners. 
2. Interventions review - The FCA will review the effect of its recent interventions to remove regulatory barriers to switching. These interventions are the modified affordability assessment, introduced in October 2019 and its intra-group switching rule change, introduced in October 2020. 

The FCA will explore how firms have used the flexibility provided by its rules to ensure borrowers who have mortgages with inactive lenders benefit from switching options and whether any barriers remain, and it will consider:  

1. What effect its modified affordability assessment and the lender switching options prompted by this, had on borrowers with inactive firms:  
2. being able to switch; 
3. receiving other support, g. referrals to debt advice. 
4. The effect of its intra-group switching rule change. This is intended to make it easier for borrowers in closed books – where the firm is no longer lending – to switch to a mortgage with an active lender within the same financial group.  

Next steps:  

Data review and analysis will be carried out between July and October, and engagement with interested stakeholders will be carried out between July and August. The FCA’s report on the outcome of this review will then be submitted to the Treasury and it will be laid before Parliament by the end of November 2021. 

The Government says that, following the review, it will work with signatories from industry to look for practical and proportionate solutions to help as many affected borrowers as possible switch to an active lender, should this be the customer’s wish. This could include taking advantage of the Modified Affordability Assessment, offering additional flexibility around other aspects of the underwriting process, or other steps to reduce the barriers preventing these borrowers from switching to a better deal. 

Helpful information for borrowers with inactive firms who are up to date with payments and want to switch their mortgage can be found on the Money Helper website - ‘Help for mortgage prisoners’ guide. 

Industry signatories are: Association of Mortgage Intermediaries; Barclays; Building Societies Association; HSBC; Lloyds Banking Group; Nationwide Building Society; NatWest Group; Santander; and UK Finance.  

 

IHT - impact of frozen nil rate bands  

(AF1, JO2, RO3)  

The Sunday Times and the Sunday Express both carried a story highlighting the dual impact of the frozen nil rate bands (general and residence) and increased values. 

In March, the Office for Budget Responsibility (OBR) projected 15% growth in inheritance tax (IHT) receipts from £5.2bn in 2020/21 to £6bn for 2021/22. The OBR’s March 2020 EFO was projecting £7.1bn in IHT receipts in 2024/25, after allowing for indexation of the bands which had been due to start in April 2021. Despite the freezing of the bands, the March 2021 OBR figure was only £6.1bn for 2024/25 and £6.6bn for the following year, based on lower equity prices and lower house prices. However, on the basis of recent house price increases, it will be interesting to see what the next OBR forecast shows for IHT receipts, due out on 27 October 2021. If the rise in IHT receipts continue at the same rate as that experienced over April, May and June this year – then the 2021 total yield will likely exceed £6bn. 

It’s always surprising that only around 25,000 estates actually bear IHT each year, but this year it could exceed 30,000. With the nil rate bands frozen until the end of 2025/26, then, unless values fall materially, this trajectory will continue. 

And while on the subject of IHT, let’s not forget: 

1. There are two Office of Tax Simplification (OTS) reports on IHT reform that have, substantially, not been acted upon.
2. There have been a number of calls for wider reform of IHT from the likes of the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness. 
3. A 2015 YouGov report found that IHT was the most disliked of all the personal taxes.

This combination of developments and potential developments reminds us that IHT is a subject that is likely to continue to resonate with clients, especially as we move towards whenever the next Budget is - this autumn or next spring. 

Doing all you can to secure intergenerational success is something that is so important for clients and advisers.