The key trust and estate issues from 2023

Despite various predictions about major capital gains tax and inheritance tax reform, neither the Spring nor the Autumn Budget in 2023 proposed any significant changes other than some simplification of taxation for trusts and small estates and changes in the CGT annual allowances. Of course, we are still facing speculation about possible abolition of inheritance tax ahead of the planned general election later this year but that’s for the future. However, as far as trusts and estates generally are concerned, there have been some significant developments last year which are worth reminding of, especially as we await further details and implementation of the various proposals which may well take place in 2024.

 

So, as ever at  the beginning of the year  it’s a good time to review some of those key issues and events from the last year.

 

 

Tax simplification for “small” trusts and estates and new CGT annual exemption

 

Following an announcement in  the Spring Budget  the government  legislated a package of  reforms in s 29 and Sch 2 Part 2 of the Finance (No2) Act 2023.

 These are the new rules that will apply from 6 April 2024:

• Trusts and estates with income up to £500 will not pay tax on that income as it arises. Where a settlor has made other trusts, the amount is the higher of £100 or £500 divided by the total number of existing trusts (subject to some exceptions)
• The basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income (i.e. the “standard rate band”) is being removed
• Beneficiaries of UK estates will no longer pay tax on income distributed to them that is within the £500 limit for the Personal Representatives.

 

For beneficiaries of interest in possession trusts and settlors of settlor-interested trusts there will no longer be a tax credit attached to trust income where the trust is not taxed because of the new £500 limit. For non-taxpayers this will remove the need to make tax repayment claims. For other taxpayers there will be an additional amount to pay and tax returns may need to be made when that was not previously the case.

There will be no impact on beneficiaries of discretionary trusts.

Estate beneficiaries will not need to report income tax where the PR’s £500 limit applied to the income, or they have available savings allowance to apply against distributed savings income.

Also, from 6 April 2024 the personal CGT annual exemption of £6,000 is to be cut  to £3,000 so the trustee annual exemption  will be  £1,500,

 

 

The final death knell for double trust schemes

 

The 2023 was also the year when finally, the efficacy (or rather the lack of)  of the so-called double trust (also called home loan)  scheme was settled,  so it’s worth a mention.  The scheme was used around 20 years ago as a way of potentially mitigating IHT inheritance tax through complex arrangement involving two trusts, sale of the home to one trust in return  for an IOU and the gift of the IOU to the second trust. We have written enough about the scheme, so suffice to mention the cases which finally put an end to any doubt. These were Pride v HMRC [2023] UKFTT 316 (TC) and   Elborne & Ors v HMRC [2023] UKFTT 626 (TC).

 

Consultation  on will revocation by marriage and on digital wills

 

The English Law Commission had started  consulting on wills back in  2016 but then paused it during the pandemic. In October last year the Consultation was revived  in relation to two areas:  the first whether electronic wills should be allowed in light of technological and societal developments and  the second,  whether the rule that marriage or a civil partnership automatically revokes a will should be retained in the light of concerns about predatory marriage and vulnerable people.

 

The Law Commission was seeking views on whether a new Wills Act should permit electronic wills, either immediately or by allowing for them to be introduced later. The new legislation could go further than the temporary measures (allowing for video witnessing) brought in during the pandemic. Fully electronic wills could be created digitally, using electronic signatures, and could  be stored electronically with no paper version needed. However, any legal provision for electronic wills would need to ensure that they are as secure as paper wills. The key question therefore is how electronic wills can be made legally valid and how bespoke requirements for these wills should be introduced.

The issue of predatory marriages was highlighted last year in a Channel 5 Documentary about “Inheritance Wars”. In one episode a 92-year-old widow with severe dementia was befriended by a man. She was apparently unable to make even simple decisions but married the man a few months before her death, with her family having no notice of this. Although Registrars have responsibility for judgment of mental capacity on the day of marriage, they often lack training and/or awareness of capacity issues.

 

As mentioned above, under English law a marriage or civil partnership automatically revokes an existing will so, as a result of marriage in this case, the lady’s children lost their inheritance and indeed were not even able to bury their mother. This case resulted in the daughter of the lady starting campaign for change in the law, resulting in a Private Member’s Bill from her local MP. There are apparently numerous similar examples.

The consultation closed in December 2023 and we are now waiting for the Law Commission’s report.

 

New version of STEP Standard Provisions

 

Any adviser involved in estate planning will inevitably see a copy of their client’s will.  On many occasions the will  includes  a statement that “the STEP Standard Provisions (1^st or 2^nd edition) shall apply”. Similar wording can be incorporated in a trust deed. It is important to understand what this means and be familiar with the provisions

 

The STEP Standard Provisions are a set of ready-made clauses that can be inserted into a will or a trust. These clauses provide protections and powers that enable the executors or trustees to effectively deal with the estate/trust funds.

Any properly drafted will or trust deed  must contain a large amount of text dealing with routine administration matters. It had been necessary to set this out in full in each such document until STEP condensed this material into its STEP Standard Provisions.

The STEP provisions are widely used by solicitors and of course others drafting wills.

The Provisions were originally published in 1992 (1^st edition) . An update was published in 2011 (2^nd edition) , following changes in trust and tax law.

In 2023, the practice direction was approved by the Chief Chancery Master of the Family Division. This allowed the STEP Standard Provisions (3rd Edition) to be incorporated into wills by reference.

The main changes from the 2^nd edition include updated powers of maintenance and advancement to reflect statutory changes made in 2014 to section 32 Trustee Act 1925  that broadened trustee powers over the entire interest of a beneficiary, new powers over capital when a minor beneficiary is involved, and updating clauses on trust corporations.

Wills using the earlier editions of the provisions remain valid and in force so it may be necessary to refer to those earlier editions. However, on any next update of the will it would be sensible to ensure that the latest edition of the Provisions is  incorporated.

 

The Powers of Attorney Act 2023

 

Following a consultation by the Office of the Public Guardian (OPG) and the Ministry of Justice in July 2021 and the Government’s response in May 2022 on modernising Lasting Powers of Attorney, the Powers of Attorney Act 2023 received Ryal Assent last September.  OPG has described it as a key milestone in their journey to modernise lasting powers of attorney.

The Act will allow for the OPG to introduce a new digital process and an improved paper application system. Requirements to verify the identity as part of the registration process will also be introduced, clearly a key to the security of the process.

There will be a choice of making an LPA completely online for the first time, on paper, or through a combination of the two methods. The Act will also change the objection process so anyone with a valid concern can raise an objection directly with the OPG.

The next legislative stage will be to develop secondary legislation to amend the regulations which govern LPAs and the process the OPG uses to register them. Until the new digital system  currently being developed is complete  and fully tested the current system will continue to apply.

One change that is already in force though is  that  from 18 November 2023 Chartered Legal Executives can certify copies of LPAs.

 

The Trusts and Succession (Scotland) Act 2023

 

The Trusts and Succession (Scotland) Bill was introduced in the Scottish Parliament in November 2022 and after consultation and a small number of amendments, on 20 December 2023 SMPs voted unanimously to pass it. The new legislation is to be known as The Trusts and Succession (Scotland) Act 2023 and will mostly come into effect once it receives the Royal Assent, expected soon.

 

The Act will repeal in its entirety the Trusts (Scotland) Act 1921 and the Powers of Appointment At 1874 as well as large parts of a myriad of other Acts dealing with trusts and succession in Scotland.

 

The Act makes comprehensive provisions in relation to the appointment, assumption, resignation, removal and discharge of trustees, decision-making by trustees,  powers and duties of trustees,  duration of trust,   private purpose trusts,  protectors, and  powers of the court.  Most of the provisions will apply by default, i.e., “Except in so far as the trust deed, expressly or by implication, provides otherwise (or, in a case where there is no trust deed, the context requires or implies otherwise)” -  the quoted words are used at the beginning of many sections of the Act.

 

For trust practitioners the most important is the abolition of the restrictions on accumulations (currently generally limited to 21 years)  and on  creation of future interests  (section 41 of the Act) and the new statutory powers  of advancement (section 20) which so far have been missing from Scottish trust legislation, as well as the new powers for majority of trustees to remove a trustee in certain circumstances. It will also be easier for practitioners drafting “standard” discretionary trusts that offer a choice of law, as there will no longer be a need to have special Scottish definitions of accumulation periods etc.

In relation to succession there are two important provisions: first, that where a person dies without a valid will and leaves a spouse but no issue, the surviving spouse will be entitled to the whole of the net estate; and second, by extending the  time limit within which a surviving cohabitant can apply for a share of the deceased’s estate from 6 to 12 months. 

Comment

 

Judging by the comments in legal press, the jury is still out both on the issue of electronic wills and whether to change the rule that marriage/civil partnership revokes a will in England.

 

There is also concern about the safety of the proposed digitalisation of the LPAs, so a lot to watch out for in the coming year.

Finally, now that Scotland has updated and modernised its trust law, let us hope that England will follow suit, the English Trustee Act 1925 is long overdue for an update.