some top issues for executry practitioners in 2014€¦ · • hmrc trusts and estates newsletter...

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Some top issues for executry practitioners in 2014

Alan Eccles and Hayley Manson

Brodies LLP

Personal & Family

Some top issues

• Cohabitation claims : how to minimise the scope for unnecessary

contention and risk in executries

• Dealing with business interests

• Conditions attaching to charitable legacies and other charities

issues in executries

• FATCA- yikes!

• How will the new rules on trust taxation affect executries?

• The latest from HMRC on IHT and proper reporting

• SLC and Scottish Government on succession and trust law

• Survivorship: the riddle returns

Cohabitants

• where are we now?

• what have the cases told us?

• Savage v Purches 2009 SLT (Sh Ct) 36… where so much

began

• Hendry v Bruce, unreported- time period to raise action

• Kerr v Mangan 2014 SLT 866- foreign asset- “net intestate

estate”

• the myths of cohabitant “rights”

• the risk that creates

• methods of resolution

• Deed of Variation

• tax planning opportunities?

When did the action commence?

• S29(6):

– Any application under this section shall be made before the expiry of the period of 6 months

beginning with the day on which the deceased died.

• Note: Not disputed that the court has no discretion to amend this.

• The initial writ was warranted and the service copy posted to the Defender

on 14 May 2013.

• It was received by the Defender at his home in England on 16 May 2013.

• So, the writ was warranted and posted within the prescriptive period, but

received by the Defender out with the prescriptive period.

• The parties went to a debate on whether or not the action was time-barred.

Decision and reasoning

• Sheriff Small: “The answer to the question “When is an application

timeously made?” may not be as straightforward as it first appears.”

• Sheriff Small: There’s “an obvious attraction” to the Pursuer’s submission

that the statute be given its ordinary meaning – i.e. that an application is ‘made’

when the writ is handed to the Sheriff Clerk for warranting

• However, “it is clear from an examination of the various authorities that this

simplistic approach is not the one traditionally taken by the courts in

determining the date of the making of an application.”

• Macphail: Function of due service of the initial writ is that it marks

commencement of the action…an action does not commence until the

defender is cited or citation is deemed to have been achieved.

Decision and reasoning cont…

• Case law referred to s3 of the Citation Amendment (Scotland) Act 1882,

which provides that ‘posting’ constitutes legal and valid citation and therefore

the commencement of the action.

• However, this only applies ‘when service may be executed in Scotland’.

Successfully argued that the 1882 Act did not apply in this case because the

Defender resides in England.

• Interpretation Act 1978: service effected when the

letter would be delivered ‘in the ordinary course of post’

• In this case, that was after the prescriptive period

ended – the action was time-barred.

Lesson to be learned

• When serving on someone in Scotland, the 1882 Act will apply and the

action will commence when the service copy of the writ is posted.

• When serving on someone out with Scotland, the 1882 Act will not apply.

Instead, the 1978 Act will apply and the action will commence only at the time

when the writ would be delivered to the Defender ‘in the ordinary course of

post’.

– That day, obviously, would be after the day of posting.

Dealing with business interests

• Beyond the “black letter” law– valuation

– financial advice and corporate finance advice

– management team

– family members

– position of the survivor spouse

– legal rights

– interaction with other pots of wealth

– communication and board composition

– conflict of interest (has the drafting of the Will created any conflict?)

– trustee duties- Bartlett v Barclays Bank Trust Co [1980] 3 All ER 726

– don’t do it all yourself!

Conditions attaching to charitable legacies and other

charities issues in executries

• making conditions work

• drafting charitable legacies and bequests

• flexibility- ensure tax exemptions apply (as early as

possible- i.e. date of death)

• do the conditions achieve what is intended?

• unlocking conditions

• OSCR processes

• ss 39 to 42 of the 2005 Act

• “restricted funds” reorganisation

• The Burrell Collection (Lending and Borrrowing) (S) Act 2014

• what does it tell of us about conditions?

• maximising the tax exemptions

FATCA

• The Foreign Accounts Tax Compliance Act

• The International Tax Compliance (United States of America) Regulations

2014

– Trustees must consider this whether the trust holds US assets/interests

or not

The new rules on trust taxation

• HMRC issued a consultation document ‘Inheritance tax: a fairer way of

calculating trust charges’ on 6 June 2014

– aim to simplify the way in which IHT charges are calculated on relevant

property trusts

– all relevant property trusts are subject to IHT every 10 years (10 year

charges) and on the distribution of capital from the trust (exit charges)

– if brought in force, the proposals would be of relevance to all funds

transferred to a trust post 6 June 2014 (but not where transferred from

one trust to another) and including additions to pre 6 June 2014 trusts

– the current rules for calculating trust IHT are complex and time

consuming – both for the advisor and HMRC alike


• The proposals for change are as follows:-

– 1) to dispense with the requirement to calculate the trust’s nil rate band

by reference to the truster and replace this with a ‘Settlement Nil Rate

Band’ (“SNRB”)

• each individual will have a SNRB to allocate among any trusts

created by them during their lifetime or on death

• the SNRB will mirror an individual’s own personal nil rate band

which will remain separate, and in addition to, the new SNRB

– 2) to dispense with the requirement to calculate an effective rate and

settlement rate of tax and replace this with a flat rate of 6%

• Seems likely to appear in much this form in Finance Bill 2015


• Following a transfer of assets to trust, the truster would decide what % of

their SNRB is to be allocated to the trust

• The truster is responsible (NB not the trustees) for ensuring that the total %

of the SNRB allocated by them does not exceed 100%

• If the SNRB is exceeded, the truster will be subject to penalties

• The % allocated to a trust can be increased/decreased by the truster up

until payment of the first IHT charge

– the % once used in a calculation cannot be reduced, only increased if

further funds are added to the trust

– the use of % ensures that trusts will benefit proportionately in any future

increase of an individual’s own nil rate band

• When a trust is wound up, the ‘released’ SNRB can be reallocated to other

trusts

The new rules on trust taxation - impact on

executries?

• Impact on executries?

– If enacted the rules will be applicable to all deaths on/after 6 June 2014

– executors will have two years from the date of the truster’s death to

make an election to allocate any remaining/unallocated SNRB between

any trusts to which the deceased contributed either in lifetime or on

death

• “want to ensure that the deceased’s SNRB has been fully allocated

between settlements made during their lifetime and on death”

– if an immediate post-death interest (“IPDI”) is created on death it will not

be affected by the SNRB as this is not a relevant property trust.

The new rules on trust taxation – wider

impact?

• Planning?

– it seems clear that pilot trusts will no longer work as contributions will be

caught by the SNRB rules

– it also seems clear that there will be no benefit in multiplying new trusts

going forward

• Does this simplify matters or simply create anti-avoidance?

• Seems likely there are many possible consequences as yet

undiscovered in the consultation and many not yet determined by the

Government

• Next steps?

– Consultation closed on 29 August 2014 and feedback is currently being

collated by HMRC and will be published soon

– Finance Bill 2015

The latest from HMRC on IHT and reporting

• HMRC Trusts and Estates Newsletter – August 2014

– The Finance Act 2014 (received Royal Assent on 17 July 2014)

contains a number of changes to the Inheritance Tax legislation

• 1) Deduction of liabilities

– No deduction is allowed for money that is borrowed and used to

fund a qualifying foreign currency bank account that is left out

under s.157

– The foreign currency amount is treated in the same way as

money that is borrowed and used to acquire, enhance or

maintain excluded property.

– This applies to transfers of value made on or after 17 July 2014

» See IHTM28033



• 2) Relevant property trusts filing and payment date

– The date for filing the IHT return (IHT100) and payment of the

IHT has been changed to 6 months after the end of the month

in which the charge arose – in line with IHT due on death

– This change affects all relevant property trusts and is applicable

to chargeable events arising on or after 6 April 2014

– Previously the deadline was 12 months

• 3) Retained income

– Income from a trust fund that has been retained as income by

trustees for more than 5 years as opposed to being

distributed/added to capital is now to be treated as relevant

property and subject to IHT for the purposes of ten year charge

to IHT. Applicable to ten year charges on/after 6 April 2014

– HMRC are happy for trustees to assume that income has been

distributed on a ‘first come, first serve’ basis (see IHTM42166)



– Reminder that 0845 3020 900/0845 6046 455 telephone number for the

Probate and Inheritance Tax Helpline will be closing in December 2014

and has, since 2013, been changed to 0300 123 1072

– Amendments have been made to the Inheritance Tax Manual (IHTM)

• to reflect changes to excepted estate Regs (re Finance Act 2014

changes which restrict deduction of liabilities)

• new guidance has been added re the voluntary procedure where

amendments require to be made to an IHT400

– the ability to advise of all the amendments ‘in one go’ if

executors believe these are the final amendments or 18 months

has passed since the date of death, whichever is earlier – if the

estate meets the criteria. Interest will however still accrue on

any unpaid IHT until payment is made)



• IHTM34032 has been amended to show the time limits for making a claim

for loss on sale of shares

– IHT35 must be submitted within 4 years of the end of 12 month period

during which the qualifying sales are made and by the appropriate

person.

– If there is more than 1 executor/trustee all are required to sign



– New IHT forms since 19 February 2014 should be used where the

deceased died on/after 6 April 2011

• IHT205 has been simplified and pension questions altered.

Alternatively secured pensions (ASP) ceased to exist from 6 April

2011 and are therefore relatively uncommon therefore this question

has been removed

• IHT217 (claim to transfer unused nil rate band for excepted estates)

replaces the previous version of the form

• IHT206 – notes to assist completion of IHT205 and IHT217 have

also been altered re the above

SLC Report on Succession

• Report on Succession (2009)

• The SLC made some wide ranging proposals for reform of the law of

succession which is based on the outdated Succession (Scotland) Act

1964

• The aim is to simplify the law and ensure it reflects the nature of family

structures in a modern Scotland

• The recommendations provide:-

– new scheme for intestate succession

– reformed protection from disinheritance for spouses and civil

partners with options for protection of children

– review and extension of rights for cohabitants

Scottish Government consultation on

technical issues relating to succession

• The Scottish Government has launched a consultation on “technical” issues

affecting the Scots law of succession in August 2014 as per SLC Report

• Subsequent discussions have revealed many of the issues raised to be

controversial in nature therefore a decision has been taken not to

controversy delay reform on the more technical areas of succession law –

allow work to progress in two separate consultations

• The current consultation focuses on technical recommendations in the

report

– in the main relating to jurisdiction and choice of law; wills and

survivorship (see Povey case); rights of succession in limited

circumstances; bonds of caution; and the timescale for a cohabitant to

make a claim on deceased’s intestate estate.

Scottish Government consultation on

technical issues relating to succession

• The Government agrees that there could be merit in legislating along the

lines suggested by the SLC but is anxious to ensure that any new legislation

is “robust and durable, with no unintended consequences

• The further aim of the consultation is to gather information which will allow

them to assess the impact and costs of the proposals from the perspective

of a range of interests

• Deadline for responses to current consultation is 7 November 2014

• A second consultation will follow covering the more controversial proposals

in the SLC report

– in the main this will focus on the new scheme for intestacy, protection

from disinheritance under a will and extended rights for cohabitants

• First step towards implementing the recommendations of the Scottish Law

Commission (SLC) in their 2009 Report?

And finally …..SLC Report on Trusts

• SLC Report on Trust Law - “hot off the press”

• Provides a comprehensive review of the law of trusts in Scotland and

detailed recommendations for reform and a draft Bill

• Bill is intended as a replacement for all existing trust legislation with the

exception of legislation specific to charitable and public bodies

• The Report highlights that the existing legislation (primarily based on the

Trusts (Scotland) Act 1921) is out of date and out of sync with modern

demands and stresses that trusts play a crucial part in the many areas of

the law, society and the economy.

– Currently the value of assets held in trust in Scotland is in excess of

£500billion

• A review of the (100+!) recommendations is beyond the scope of today but

the most significant change to the current law is the proposal that the trust

legislation should be contained within one coherent, modern statute

Survivorship destinations

• The riddle returns

• Povey v Povey’s Executor and the Keeper [2013] CSOH

68

– disposition

– unregistered disposition

– executed by Power of Attorney

– when does a destination take effect?

• Fleming’s Trs v Fleming 2000 SC 206

– must evacuate pre-death (cf DoV)

Survivorship Destinations

• Evacuation– Inter vivos

– Post mortem

• s 30 Succession (Scotland) Act 1964– A testamentary disposition executed after the

commencement of the Act has no effect so as to evacuate a special destination unless it contains a specific reference to the destination and a declared intention on the part of the testator to evacuate it.


• Pre-requisite to evacuation • Is there power to evacuate?

– Check title

» If silent, presumptions apply

• Is there a contractual bar on evacuation? – operates where both contributed (need not be equally) to

price

– narrative clause of disposition is conclusive

• If there is no power, any purported evacuation is ineffective– Bar can be waived (by agreement) or discharged (by a

registered conveyance)

» Incapacity law issues? (Fam. L.B. 2007, 90(Nov), 1-3)


– Effective ways to evacuate (Inter vivos and Post mortem)

• s 30 clause in Will plus renunciation

– Good

» immediate and completely removed on death

• Renunciation alone

– destination still takes effect (but you can get the property to the correct estate through contract)

• s 30 clause in Will alone

– does not evacuate immediately

• disposition

– Aberdeen College v Youngson 2005 SLT 371

– immediate evacuation

– include words of renunciation


• s.19 Family Law (Scotland) Act 2006

– divorce revokes special destinations

• Reform?

– Scottish Law Commission Discussion

Paper No 136 and Report on

Succession No 215

Survivorship Destinations – The Tricky Case

of Life Policies

• Who owns the policy?

• Survivorship destinations

– Where the policy is held by “A, B and the survivor of A

and B”

– A and B each have a one half pro indiviso share to

(theoretically) independently transact with, which then

passes to survivor on death of A or B

– Whatever the theory, they do own half each

• Banff v Ruthvin Castle Limited 1944 SC 36

The Tricky Case of Life Policies

• Default position for destinations?– England

• Survivorship destination

– Scotland• No survivorship destination

– Connell’s Trs (1886) 13 R. 1175

• Identify if policy is English or Scottish

• Effect of destination (if present) is that ownership will pass to survivor (not part of estate)

• If no destination then ownership will remain in estate of deceased (even if payment due on second death)

– Why does this matter?

The Tricky Case of Life Policies

• Correct valuation obtained?

• Legal rights– A policy owned by A will form part of moveable estate

for legal rights computation even if payment on second death unless no or evacuated destination

• “English” destinations

• Inheritance Tax– Asset of estate

– Legal rights can restrict spouse exemption

Survivorship Destinations and Legal Rights

• Legal rights and survivorship generally

– More on Connell’s Trs

– Is it really the survivorship destination in

a title that matters

• Or is it a contractual/debt/obligation

matter?

Survivorship Destinations and Care Home etc

costs

• CRAG 2010 starting point

• Flexibility

• The “dangers” of absolute entitlements

– including survivorship

• “Solutions”

Being good doesn’t help….

• Hann v Howatson [2014]CSOH 69

– underlines the importance of thinking

about contracts/obligations as well as

title in the transmission of assets on

death

Contact

Alan Eccles

0141 245 6255

[email protected]

Hayley Manson

0141 428 3351

[email protected]

some top issues for executry practitioners in 2014€¦ · • hmrc trusts and estates newsletter...

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