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The key trust and estate issues from 2019

Technical article

Publication date:

14 January 2020

Last updated:

14 January 2020

Author(s):

Barbara Gardener

January is usually a good time to catch up on, or to summarise, the important developments from the past year and so this is what we will do this month and the next.

 

First, we will look at the latest on the Trust Registration Service (TRS), and then we will consider a few important topics selected from the author’s inbox.

 

Trust Registration Service

Last month we considered the expansion of the TRS in order to comply with the EU's Fifth Money Laundering Directive (5MLD). The UK government has now enacted regulations bringing into force the 5MLD.  However, no further guidance on the scope of registration has been published.

The new provisions are contained in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, enacted on 20 December 2019. Most of the new provisions came into effect on 10 January 2020. Although the UK is due to leave the EU later this year, it has nevertheless agreed to transpose the Directive.

The provisions relating to trust registration will be delayed until later in 2020, following a more detailed technical consultation on implementation. 5MLD requires not just public access to the trust register, but also that it is extended from trusts with UK tax consequences to include all express trusts. It is estimated that this will extend the number of registrable trusts from around 200,000 to as many as two million.

HMRC, in its latest Update, stresses that the TRS will have to contain a 'robust and proportionate framework', and the forthcoming consultation will include additional information on the proposals for the type of express trusts that will be required to register; data collection and sharing provisions; and penalties for non-registration.

 

The importance of following the rules in share purchase arrangements

Business owners who choose to trade via a limited company should not have to be reminded that the limited liability that this trading vehicle offers comes at the price of having to follow company law rules. Unfortunately, it is not unusual that such company owners treat the corporate rules as something that can be ignored. An example of what happens if things go wrong  can be  found in the recent decision in Dickinson v NAL Realisations (Staffordshire) Limited  [2019] EWCA Civ 2146. As this was a Court of Appeal decision there were quite complex legal arguments involved but the gist of the story is as follows.

The company (operating a foundry) had three shareholders – Mr Henry Dickinson (D), Mr D’s discretionary family settlement, and a SSAS of which D and his wife were the sole members as well as being the trustees along with a professional firm. D and his wife were also directors of the company, along with a third director, although in practice they never held formal board meetings, with D making most of the decisions.

Over several years, D entered into various transactions with the company, including the following:

  • In 2005 he purchased a factory from the company for less than market value (the “factory sale”).
  • In 2010, he, the family trust and the SSAS sold shares back to the company (the “share buy-back”). The purchase price was left outstanding as a loan.

The company went into liquidation in 2013. The liquidators claimed that the factory sale and the share buy-back were invalid and sought a court order to recover the company’s property.

In the first instance the High Court declared both the sale and the share buy-back void and of no effect. D appealed to the Court of Appeal, but the Court dismissed his appeal.

In relation to the factory sale it was decided that D had no authority to conclude the sale on behalf of the company. It was never approved in a formal board meeting, and D had not involved his co-directors in the decision.

D argued that the sale was valid because all of the company’s shareholders had approved it informally. There is in fact a rule that if all of a company’s shareholders give their informal consent to something, that consent is as good as a formal resolution. But, in this case, it was clear that the professional trustee of the SSAS had not been told about the sale, let alone consented to it.

In relation to the share buy-back it was found that the buy-back was invalid because the company had not paid for the shares when it acquired them. Under section 691(2) of the Companies Act 2006 (the Act), when a company buys its own shares, it must pay for them at the time of purchase. Failure to comply with the Act renders a buy-back void.

Here the price was left outstanding as a loan. The judge rejected the idea that the loan arrangements themselves amount to “payment”, as the very purpose of the loan was to formalise the deferral of payment.

Interestingly, on appeal, D argued that section 691(2) merely requires the buy-back contract to provide for payment at the time of the buy-back, and it does not matter if the price is not in fact paid then. But the Court of Appeal said the words “paid for on purchase” in the Act were clear and required actual payment.

(N.B. The High Court also said the buy-back was void under section 423 of the Insolvency Act 1986 because it was made at an undervalue and its purpose was to put assets beyond the reach of creditors. However, having declared the buy-back void for lack of payment, the Court of Appeal did not need to consider this point.)

The share buy-back decision is of particular interest to financial advisers dealing with business protection. The corporate share purchase route (as opposed to the “personal” route involving option agreements for purchase between shareholders) is often chosen as it requires fewer formalities at the outset. In particular, there is no need for any trust arrangements. However, as the above decision shows, it is crucial to structure the actual purchase properly. Failing to comply with statutory requirements will likely render a buy-back totally ineffective. In particular:

  • The buy-back contract must require payment on purchase and such payment must be made. It is possible to buy shares back in tranches, but payment for each tranche must be made when the shares are acquired. A company cannot pay for its own shares in instalments and payment cannot be deferred.
  • Shares must not be acquired in exchange for loan notes or loan stock. This is effectively an agreement to pay at a later time.

 

Gifts to absolute trusts and trusts of unit trusts/OEIC shares

There were a couple of interesting questions that came up last year. The first related to absolute trusts of life assurance policies. When a policy is subject to an absolute/bare trust, what is the inheritance tax treatment of premiums paid? Well, with a regular premium policy, you would expect that in most cases the premiums paid by the settlor/donor would be covered by the normal expenditure out of income exemption. If not, there is the annual (£3,000) exemption. But what if the premiums exceed or are not covered by any of the exemptions?

Typically, a short answer when considering gifts to an absolute trust is that any gift to it will be a potentially exempt transfer (PET). However, in fact this is not necessarily the case and, for an explanation, you need to look to the statutory definition of a PET in section 3A of the IHT Act 1984.  We will cover this point in more detail in a separate article but suffice to say that, in some cases, such premium payments may constitute chargeable lifetime transfers (CLTs) for IHT purposes. So, care needs to be exercised if the premiums are not covered by any exemption(s).

 The second interesting question, to which we will also come back to in the future, is what assets can be used in IHT planning using trusts? Typically, advisers who are used to utilising draft trust documentation provided by life offices will use those trusts, by definition, with life assurance policies or bonds. But  it is essential to remember that , while some IHT mitigation plans such as, for example, discounted gift trusts or loan trusts, work best with investment bonds (because they do not produce any real income and are therefore easy to administer, especially using the 5% annual tax-deferred withdrawal facility), this does not mean that other assets, such as shares in OEICs or units in unit trusts or just any direct shareholdings, cannot be gifted to a trust. Of course, in some cases a bespoke trust will have to be prepared, especially when dealing with an existing holding although many unit trust companies or investment companies offering OEICs also now provide draft trust documentation. The only assets that cannot be gifted to a trust are ISAs and pension funds.

 

Comment

With the General Election behind us, we can move on with business as usual as far as estate planning is concerned, well, at least until the March Budget. Next month we will cover more interesting stories from 2019 that are likely to impact future planning.

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.

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