When a person dies “intestate” (i.e. dies without leaving a valid Will that disposes of the deceased’s estate), the distribution of that person’s assets (or “estate”) among surviving family members is governed by the intestacy rules. However, the intestacy rules, which date back to 1925, have not been comprehensively reviewed for more than 20 years and the Inheritance (Provision for Family and Dependants) Act 1975 has not been vigorously reviewed since it was enacted, although it does now cover cohabitants, civil partners and same-sex cohabitants.

The Law Commission’s recommendations are included in two draft Bills: The draft Inheritance and Trustees’ Powers Bill and the draft Inheritance (Cohabitants) Bill.

The draft Inheritance and Trustees’ Powers Bill includes provisions that would do the following:  

1. Ensure that the assets of a married couple or a couple in a civil partnership will pass on intestacy to the surviving spouse in all cases where there are no children or other descendants;

2. Amend the legal rules which currently disadvantage unmarried fathers when a child dies intestate;

3. Simplify the sharing of assets on intestacy where the deceased person was survived by a spouse and children or other descendants;

4. Protect children, who lose a parent, from the risk of losing an inheritance from that parent if they are adopted after the parent’s death;

5. Remove obstacles to family provision claims by dependants of the deceased and anyone treated by the deceased as a child of his or her family outside the context of a marriage or civil partnership;

6. Permit a claim for family provision in certain circumstances where the deceased died “domiciled” outside of England and Wales, but left property and family members or dependants in the UK; and

7. Give all trustees more flexible statutory powers over the trust’s income and capital (subject to any express provisions in the trust instrument.)

The draft Inheritance (Cohabitants) Bill gives certain unmarried partners who have lived together for five years the right to inherit on each other’s death in the event that one of them dies intestate. In instances where the couple have a child together, this entitlement to inherit would accrue after just two years’ cohabitation, provided that the child was living with the couple when the deceased died. An application to the Court under the Inheritance (Provision for Family and Dependants) Act 1975 would therefore not be required.

This change, if implemented, would give unmarried couples similar rights to married couples in instances when one person dies without leaving a Will. With an estimated 2.3m unmarried couples living together (a figure expected to rise to 3.8m by 2033), the recommendations reflect the fact that cohabitation is much more prevalent in the UK than it was 25 years ago.

However, there is of course one easy solution to the problems of intestacy: make a Will and ensure that it is regularly updated.

The Act received Royal Assent in July 2011 (click here for details) and preserves the succession rights of the descendants of a person who:

1. Disclaims (or rejects) an inheritance in an estate; or

2. Forfeits his succession rights by killing the deceased person.

The Act also amends the current law so that the children of a minor are able to inherit their parent’s interest in an intestate’s estate, where the parent died before the age of 18 without having married or formed a civil partnership.

The Act will not apply where a death occurs before the commencement of sections 1, 2 and 3 (i.e. before 1 February 2012.)

Full details of the Act are here.

In its recent second annual report on the competitiveness of the UK tax system, the Institute of Directors (IoD) has suggested that capital gains tax and inheritance tax should be merged in order to help simplify the UK tax system (much in the same way as the integration of income tax and national insurance would do.) The IoD suggests that capital gains tax should be charged on those assets held at death above a fixed and “reasonably generous” (but unspecified) threshold, and that inheritance tax could then be abolished. Its full proposals are here (see page 26.)

This is not the first time that the IoD has put forward suggestions to change the tax system – in 2007, an IoD discussion paper called for the abolition of capital gains tax and inheritance tax – and it is an idea that has been mooted by others for some time.

Following on from Spain’s possible prosecution at the hands of the European Commission for discriminating against non-residents, the Commission has now referred the Netherlands to the European Court of Justice (ECJ) for discriminatory rules on inheritance and gift duties, after it failed to amend its laws following a formal request in September 2010. Under Dutch legislation, country estates located in the Netherlands are fully or partially exempt from succession and gift duties if they are open to the public, while inheritance or gifts of country estates in other European Economic Area (EEA) States are taxed on 100 per cent of their market value. The Commission considers the difference in tax treatment to be contrary to the free movement of capital.

It is interesting, though, that UK inheritance tax laws in this area could themselves be potentially discriminatory. The UK offers a conditional exemption tax incentive (which is not limited to land in the UK) to historic houses that are open to the general public. Inheritance tax and/or capital gains tax is not paid when the qualifying property (or historic item, such as a painting or sculpture) passes to a new owner on death or is gifted. However, according to HM Revenue and Customs’ (HMRC) memorandum on ‘Capital Taxation and the National Heritage’, in order to obtain the exemption, the new owner must agree to look after the item/property, keep it in the UK if it is moveable, and allow “reasonable” public access to it. HMRC’s stipulation that public access to the property should be “reasonable” means that the relief cannot realistically be given to property or land outside the UK.

Not that the Government will be overly concerned about this.

With the EU currently threatening to sue the UK over its recently-signed tax agreement with Switzerland unless the Chancellor renegotiates it, the Government has more pressing things to worry about.

In its coalition agreement, published in July 2010, the Government stated that there was an urgent need to reform the social care system, so that individuals and carers had more control over care. Consequently, the Government set up a Commission on the funding of long-term care, led by the economist Andrew Dilnot, which investigated alternatives for funding long-term care.

After launching a call for evidence on ideas for a future social care funding system in December 2010, the Commission published its report containing the following recommendations:

1. Capping individuals’ lifetime contributions towards their care costs – which are currently potentially unlimited – to between £25,000 and £50,000, but ideally around £35,000. After the cap is reached, individuals would be eligible for full state support;

2. Means-tested support should continue, but the asset threshold, above which people are liable for their full residential care costs, should increase from £23,250 to £100,000;

3. Individuals should contribute a standard amount of between £7,000 and £10,000 to cover their living costs;

4. National eligibility criteria for social care service entitlement should be standardised, and a more objective eligibility and assessment framework should be developed by the Government;

5. Carers should be supported by improved assessments, which aim to ensure that the impact on the carer is manageable and sustainable;

6. The Government should run an awareness campaign to help people understand the system and to encourage people to plan for later life;

7. Those individuals who have entered adulthood with a care and support need should immediately be eligible for free state support, rather than being subjected to a means test; and

8. Local authorities should have sufficient government funding in order to implement these reforms.

The Dilnot Commission estimates that its proposals – based on a cap of £35,000 – would cost the State around £1.7bn per year. It believes that the combination of a cap on contributions and the higher means-tested threshold would ensure that individuals going into residential care would not have to spend more than 30 per cent of their assets on their care costs. Currently, some people can lose over 90 per cent of their assets.

The Government plans to consult on social care reform before publishing a progress report and White Paper in spring 2012.

Whilst the report is welcome and the Health Secretary, Andrew Lansley, described it as an “immensely valuable contribution”, we are in an era of public sector spending cuts and the Government will be aware of the significant costs (and year-on-year increases) of reforming the system and supporting an ageing population. Consequently, major change may still be some years away.

For the foreseeable future, individuals must consider the financial implications of meeting their care home costs and ensure that they protect their assets through careful tax and estate planning. If you would like to discuss your options, please contact me at iain.donaldson@mablaw.com.

Inheritance and gift tax in Spain are regulated at both state level and at the level of autonomous communities (i.e. local level.) Spain has 17 autonomous communities (or “Comunidades Autonomas”) and each has a territorial basis, their own government and Parliament, and broad legislative and executive powers. This legislation grants Spanish residents a number of tax benefits that, in practice, allow them to pay much lower taxes than non-residents. Consequently, Spain has been referred to the European Court of Justice on the grounds that this practice goes against the principle of free movement of people and capital within the EU, and breaches the Treaty on the Functioning of the European Union.

This is not the first time that Spain has been in trouble over this issue. In May 2010 and February 2011, the European Commission requested Spain to amend its legislation so that it complied with EU rules on inheritance and gift tax provisions. However, although Spain “tweaked” its laws, no satisfactory amendments have yet been made.

It remains to be seen how Spain will respond to the threat of legal action, and whether it will now satisfactorily change its inheritance and gift tax laws. According to the European Commission, approximately 95 per cent of infringement cases are resolved before they reach the European Court of Justice, so we shall wait and see…

The aim of the review is to:

* Understand how the Act is operating in practice;

* Assess how effective it is; and

* Determine whether the legal and regulatory framework for charities in England and Wales is fit for purpose, now and in the future, and whether further improvements could be made.

The Charities Act 2006 made a number of changes to the legal framework for charities, but Parliament agreed that the Act should be reviewed after it had been in force for five years, so it could assess whether it was an effective piece of legislation.  

The review’s Terms of Reference include 14 specific issues that need to be considered, which were brought to the attention of the Government by the charity sector, lawyers and other interested parties. These include the following:

1. The definition of “charity” and the changes made by the Act in relation to the public benefit requirement;

2. The licensing regime for public charitable collections – are the Act’s provisions workable and do they represent value for money?;

3. UK cross-border issues;

4. Self-regulation of fundraising (as delivered by the Fundraising Standards Board (FRSB));

5. The success of the First-tier Tribunal (Charity), particularly the range of Charity Commission decisions that are appealable to, or reviewable by, the Tribunal;

6. Measures to reduce bureaucracy on charities;

7. The objectives, functions and structure of the Charity Commission, including relevant recommendations from its strategic review;

8. Measures to facilitate social investment or “mixed purpose” investment by, and into, charities;

9. The operation of the charity merger provisions in the Act;

10. Exempt charities, including the policy approach to the regulation of exempt charities;

11. The transparency and accountability of the charity sector, including current accounting and reporting/audit procedures;

12. Thresholds for registration of charities, including the £5,000 general registration threshold and the £100,000 registration threshold for excepted charities;

13. The effectiveness of organisational forms available to charities, including the Charitable Incorporated Organisation; and

14. Methods of supporting and encouraging individuals to volunteer as trustees, recognising concerns about trustee liability.

Full details are here.

Lord Hodgson is to publish a call for evidence from charities and other stakeholders in due course. He aims to complete his review before summer 2012, and a report will then be laid before Parliament.

These changes could affect all commercial property owner-occupiers and investors.

HMRC intends to do the following:

1. Require all taxpayers to claim capital allowances within one or two years of when the money was spent, or no capital allowances claim will ever be allowed for any current or future owner. This will apply to all new construction expenditure (e.g. new-builds, extensions, refurbishments, etc) as well as purchases of second-hand property. Historic expenditure made before April 2012 is also likely to be subject to the new rules.

2. Require the buyer and seller of a second-hand building including fixtures to submit a formal ‘Record of Agreement’, showing how much of the purchase price is attributable to the fixtures (and notify this to HMRC within one or two years.)

If these changes do go ahead, buyers of plant and machinery fixtures will need to ensure that they notify HMRC of the expenditure within the required time limit in order to claim capital allowances. Also, the buyer and the seller will have to agree on the sale value of the fixtures within the requisite time period if the buyer is to be able to claim capital allowances in relation to the fixtures.

Draft legislation will be included in the Finance Bill 2012, with the changes expected to take effect from April 2012.

As a matter of urgency, if you have not yet claimed for fixtures, or believe that capital allowances might have been under-claimed, please contact either me at david.marsden@mablaw.com, or our property tax specialist Shimon Shaw at shimon.shaw@mablaw.com, as any additional claim should be made before the rules change in April 2012.

We now hear that the Chancellor has ordered an investigation into how much the tax brings into the national coffers. HMRC has been told to report back by January.

This shows us the power of the people (well, a very select group of the people) to get the Government to take action.  Or does it?  The Chancellor has done nothing but buy himself some time here. 

Time to think has to be a good thing, and it is commendable that there hasn’t been another knee jerk reaction of “yes” or “no”.  What is glaringly obvious, to me, is that whilst economists may be in a position to opine as to how measures such as the 50% rate of tax affect the economy, this is only part of the picture.

The other part is politics; and it is the politicians who are responsible for making changes.  The damage which could be done in being seen to favour the rich at a time when unemployment is high and growth is flat lining means that the merits of the 50% rate are of secondary importance to “how it looks”. 

Just listen to the news and take note of how often you hear the phrase “send a message”.  Policy seems to be more about messages sent than the merit of the measure. 

I fully expect that when the Revenue report back on this next year, the results will not show a strong case for the 50% rate.  I’ve helped enough clients to shape their affairs to reduce the impact of the 50% rate to form my own view on the matter. 

Whatever the outcome of this review, my personal opinion of this is that it won’t matter.  It’s the politicians that shape the policy.  Call me cynical if you will, but the bottom line is that any changes made by politicians are going to be based more on politics than economics

The decision to investigate is based on advice given by the Legal Services Consumer Panel’s (LSCP) following its own investigation into the will-writing market, which began in summer 2010. The LSCP’s subsequent report found that many wills, prepared by both solicitors and unregulated will-writers, did not reflect the instructions of testators and contained many basic errors. Further background information is here and here.

Currently, will-writing is not a reserved legal activity in England and Wales, although the preparation of probate papers and the administration of oaths are. This means that the writing of wills is not restricted to solicitors and barristers, who are regulated by the Solicitors Regulation Authority and the Bar Standards Board respectively. With unregulated private will-writing companies now claiming to write approximately 10 per cent of all new wills, consumers who use them are often unaware that this incredibly important legal document may be written by someone who has little or no legal training.

In a related matter, yesterday’s national newspapers published details of the Legal Services Ombudsman’s plea to the Government to take action over unregulated companies that offer consumer financial services, including will-writing. The Ombudsman said that since it became operational late last year, it has received 38,155 complaints and accepted 3,768 cases for investigation – 13 per cent of which involved will-writing. The consumer organisation Which? and the Law Society have also called for more protection for consumers.

Change in the industry has already begun. In February 2011, following discussions with the Office of Fair Trading, some of the UK’s biggest banks voluntarily agreed to review and, where necessary, improve the way they sell will-writing and professional executor services to consumers.

However, any further move towards the regulation of will-writing is currently on hold: a spokeswoman for the Ministry of Justice has said that the Government will await the outcome of the LSB investigation before taking any action.

The Bill was introduced into Parliament as a Private Members’ Bill, so its passage into law was uncertain. However, because the Bill more or less implemented the recommendations of the Law Commission, it was supported by the Government – a luxury most Private Members’ Bills do not receive. 

When I discussed this legislation back in February, the Act was only a Bill and at the time there was no guarantee that it would become law. Full details of it are here. As it turned out, the Bill received few amendments during its parliamentary progress and received Royal Assent relatively quickly.

The Act will amend the law in relation to who may inherit a beneficiary’s interest which is forfeited under the Forfeiture Act 1982. The forfeiture rule prevents a person from acquiring a benefit from unlawfully killing another person.

To summarise, the Act reforms the law of succession in the following two ways:

1. If a person either disclaims an inheritance or is disqualified from receiving an inheritance by the forfeiture rule, the inheritance rights of that person’s descendants will be maintained; and

2. The children of a minor (i.e. an individual under the age of 18) will be able to inherit their parent’s interest in an intestate person’s estate where that parent died before the age of 18 and was unmarried or had not entered a civil partnership.

For full details of the changes and further background information , please click here.

At the time of writing, there is no date for when the Act will come into force.

This pseudo-tax known as the, Art Resale Levy, (or droit de suite in French) means that sellers will have to pay royalties on works by European artists who have died in the past 70 years, including Pablo Picasso, Henri Matisse and Francis Bacon. Cash is payable to the artist’s heirs each time a work is resold.

The tax already exists in mainland Europe and is due in Britain from January, applying to all works priced above (EURO)1,000 (£900) and on a sliding scale of 0.25 per cent to 4 per cent. 

There will be intellectual property implications of this, if the directive is brought into force in UK.

On the other hand, so the argument goes, why shouldn’t the family reap some of the benefits (in particular when success is mostly posthumous)?

For a more detailed review of the tax’s history and the UK’s derogation until 2012, I suggest an article in the FT, which can be found here (although please note that the FT is subscription only), and for the view of the art lobbyists (LAPADA), click here: LAPADA, and follow the links at the bottom of the page.

There will be scope for planning to avoid this levy if the UK is not be able to extend the derogation beyond 2012, and if you are interested in discussing this with a solicitor, please call 01923 20 20 20 and ask for the Wealth Management Department.

Mr Gaines-Cooper wants to treated as a UK non-resident and claims that HMRC failed to interpret the IR20 guidance correctly (now replaced by HMRC6.) However, in February 2010, the Court of Appeal rejected Mr Gaines-Cooper’s application for a judicial review of HMRC’s decision that he was resident and ordinarily resident in the UK rather than in the Seychelles. Full details are here.

The hearing is expected to last two days.

UPDATE (13 July 2011): It has been reported that the judgment will be handed down in approximately 12 weeks’ time.

After this date there will be a significant reduction in the annual investment allowance for qualifying expenditure which potentially could result in lost 100% up-front tax relief.

Claiming on the balance not covered by AIA at rates applicable to the general, special or short-life asset pools spreads the claim for tax relief over much longer periods.

Here is an example I’ve seen from accountants Smith & Williamson:

Using an example of a 30 June 2012 year end, the table below shows the effect of delaying expenditure until after 1 April 2012 or 6 April 2012 on the maximum amount of AIA claimable for that year.

Businesses need to consider more than just the availability of allowances when incurring expenditure, however this change in allowances is significant enough to justify very careful consideration of when to incur qualifying expenditure.

For more information, please email me on shimon.shaw@mablaw.com.

The changes affect Employer Annual Returns and starter and leaver PAYE forms.  From April, employers with fewer than 50 employees must now send starter and leaver forms – P45s, P46s and similar pension information – online to HMRC.  

Further, all employers who send their Employer Annual Return to HMRC after the 19 May filing deadline will now receive a late-filing penalty.  Previously, an extra-statutory concession gave employers extra time before HMRC charged a penalty, but this has been withdrawn.

From this year, employers will be liable to a penalty if they file their annual return on paper. Last year, no penalty was charged for employers with five or fewer employees. But these transitional arrangements have now ended. HMRC will also be issuing PAYE penalties this spring for the first time in two key areas:

• Penalty notices will be sent out in April to employers with 50 or more employees who have not filed starter and leaver forms online to HMRC. The first penalties will apply for the three month period to 5 April 2011, with further penalties being issued on a quarterly basis.
• From May this year, HMRC will start sending out penalties for late payment of PAYE. Employers will be liable for a penalty if they haven’t made PAYE payments on time, and in full, from April 2010. The amount of the penalty will depend on the amounts paid late and the total number of late payments made. Penalties will be charged after the tax year-end.

Employers must file an Employer Annual Return (EAR) – a P14 for each employee and a P35 summary sheet – by 19 May. They must do this online (with some very limited exceptions, for example, people who employ their own carer and those with religious objections). If an employer has not previously sent their return online, they must act now by registering for HMRC’s online service. 

HMRC has published a list of common errors to avoid on its website.

There are a number of ways that employers can send employee starter and leaver details online. They can use commercial software, HMRC’s free Online Return and Forms – PAYE Service, HMRC’s Basic PAYE Tools (formerly Employer CD-ROM) or an agent can do it for them online. To avoid unnecessary administration work for employers and HMRC, employers should not send paper starter and leaver forms to HMRC where they have already filed online or intend to do so.

But here is some good news.

Stamp duty on property (SDLT) has to be one of the most hated taxes out there.  It is a tax on mobility and, like VAT, is imposed on cash which in most cases has already been taxed.  Not only that but it makes moving house a lot more expensive.  Hence the spread of stamp duty planning in recent years, even to transactions which in the past would never have been considered for this.

So a ray of sunshine in the doom and gloom is welcome.

An SDLT case was heard in the Tax Chamber of the First-tier Tribunal towards the end of last year.  Deputy Judge Charles Hellier heard arguments over a scheme used to avoid SDLT on the £65.1m purchase of a property in London’s Regent Street in October 2006.  The SDLT scheme in question involved a subsale of the property to a partnership resulting in no SDLT being payable.

This was the first occasion a court or tribunal has considered an SDLT scheme and its importance lies in the attitude of tribunal to the technical arguments SDLT schemes rely on.

And the winner was…..the taxpayer.

The judgement has not yet been published but watch this space as this article will be followed by an examination of the tribunal’s approach and a consideration of how this will impact on future schemes.

Why? Because taxpayers are not properly planning, managing and reviewing their personal finances in a tax-efficient way, resulting in them paying more tax than they need to. The south-east of England was found to be the most tax-inefficient, with tax payers squandering a whopping £1.8bn in overpayments of capital gains tax and by not taking advantage of tax reliefs and other entitlements.

According to the research, a staggering 88 per cent of people stated that they have done nothing in the past 12 months to reduce their tax liabilities. (Last year it was 86 per cent, proving that this is not a one-off statistic.) Of that 88 per cent, 45 per cent of respondents erroneously believe that they are being as tax-efficient as possible; 28 per cent of respondents admitted that they do not know how to become more tax-efficient.

There are all sorts of ways to reduce your tax liabilities, such as using your partner’s income tax rate, making use of pension tax relief, maximising your (and your children’s) capital gains tax allowance, structuring your investment portfolios, inheritance tax planning, and writing a will. The list is endless.

At Matthew Arnold & Baldwin, we can help you and your business in all matters related to developing tax structures, mitigating tax liabilities, and the preparation of wills. If you would like to discuss your options, please contact me at iain.donaldson@mablaw.com (tax and trusts), or James Odds at james.odds@mablaw.com (tax), or Emma Alford at emma.alford@mablaw.com (wills).

The study (the Truth about Bonuses) by the University’s School of Economics involved subjects either being paid a bonus or fined depending on their performance in certain areas.  The results showed that the joint earnings of employers and workers were almost 19 per cent higher when fines were handed out than when bonuses were paid. However, while employers were better off when fines were introduced, workers earned less than in the scenario without fines.

Alternatives to bonuses

So what does work?  I suspect it depends on who you ask.

Employees (especially those in the, ahem, financial services sector) will probably say cash is king, and when it comes to it, a bonus will do nicely, thank you very much.  Now where is the Ferrari showroom?

Employers will often take a longer term approach to incentives and will often prefer employee share schemes and options.  These have the benefit of being tax efficient and of promoting long term commitment to the business since employees will benefit from future growth.

I’ve yet to come across anyone offering employee fines as an incentive and, if my boss is reading this, I am not sure that it would go down well in practice.

If you would like to discuss employee incentives for your business please contact me (for a discussion of tax), or Emma Cameron in our corporate team.

Skilled workers from overseas who do not take home big salaries will have to satisfy strict criteria.  Fewer than 21,000 a year will be let in because of a new cap on the number of people coming to the UK for employment.

Applicants will need a “certificate of sponsorship” from a UK employer and they will be given points according to the rarity of their skills, for example scientists will be ranked highly. Employers filling a vacancy that attracts a salary of £150,000 or more will not be subject to the limit on the number of certificates that may be allocated.

For more information on this change, the press release can be seen here.

Looking at the bigger picture, the Government is sending out mixed messages.  On one hand, this will be welcomed by business leaders who are concerned about a brain drain from the UK.  This is clearly intended to encourage skilled immigration and to support both the knowledge based economy as well as the City.  On the other hand, HM Treasury have raised tax to 50% on the highest earners with hints from the Chancellor that the beneficial tax regime in the UK for resident non-domiciliaries (who will be the ones most interested in the above announcement) may be restricted. In an increasingly mobile global society, there are simply too many other choices and, put simply, tax is a large part of the equation when choosing where to live.

The Government needs to have a clear policy to increase the skill set (and therefore the wealth) of the UK through targeted and consistent measures.  It is not enough to simply fiddle with immigration quotas.

I don’t act for any sports leagues.  That’s not to say I wouldn’t be interested, if someone from the FA, for example, reads this.

However, I know that stories about sports are always of interest (hence the fact that the slightly esoteric question of proper taxation of image rights is now familiar territory to a large part of the general public), so here we go.  Here we go.  Here we go.  Sorry.

HMRC have issued a notice clarifying their view of the VAT treatment of commercially operated sports leagues in response to enquiries from a number of organisations that run football leagues.

Background

Typically, a sports league provider will do most or all of the following:

• organise a league
• allocate fixtures to teams in the league 
• provide pitches for teams to play on (some league providers own pitches, others rent them from other parties) 
• provide referees
• determine results
• keep and publish scores and league tables
• award trophies to winning teams 

Payments for such supplies are collected in a variety of ways. For example, the sports league provider may charge a one off ‘admin fee’ to teams plus a ‘match fee’ for each game that is played.

Taxation

Some leagues have put it to HMRC that the essential nature of their supplies is one of pitch hire.  This relies on a series of VAT cases which rule that when you have provide one main service and there are added services ancillary to this, the VAT treatment is that of the main supply.  Following this, the leagues would not have to charge VAT.

Unsurprisingly, HMRC disagree with this and I suspect that most fans would too.  The supplies made by sports league providers consist of a bundle of elements, which are integral to each other.  HMRC consider that it cannot be said that there is one principal element to which all others are ancillary.

So what is that main supply?  In HMRC’s view, the overarching supply is of participation in a sports league, not a supply of land, and therefore subject to VAT at 20%.

Conclusion

It seems that by raising this as a question, the leagues have forced HMRC to go public with their views.  Rather an own goal, I’d say.  Sorry, again.

The Legal Services Board, the independent body responsible for overseeing the regulation of lawyers in England and Wales, had asked the LSCP to conduct this investigation, with a view to considering the possible regulation of the industry.

Will-writing in England and Wales is not currently a reserved legal activity under the Legal Services Act 2007, meaning that the writing of wills is not restricted to regulated lawyers, who are independently regulated by the Solicitors Regulation Authority and the Bar Standards Board respectively. Consequently, some consumers are unwittingly using unregulated private will-writing companies, whose will-writers may have had little training or have little expertise in putting together what is one of the most important legal documents a person will ever create. Concern about unregulated will-writers has grown so much that the BBC’s Panorama programme recently investigated the issue (click here.) Interestingly, across the border, will-writing in Scotland is expected to become a regulated activity very shortly, after the Legal Services (Scotland) Act 2010 received Royal Assent in November 2010.

The LSCP has received a lot of responses to its consultation, which closed on 15 December 2010, with both consumer bodies and the legal profession strongly supporting the regulation of will-writing. Full details of the responses are here.

The Law Society, which backs regulation, said that although will-writers should not have to have the same qualifications as solicitors, there should be a regulatory regime which has “minimum training requirements; compulsory insurance cover; a compulsory compensation fund; a code of conduct; a complaints management system; and a robust disciplinary mechanism.”

The Trades Union Congress, Remember a Charity, Citizens Advice and the National Consumer Federation, amongst many others, all called on will-writing to become a reserved activity. However, the Office of Fair Trading has said that it is yet to be convinced that regulation is required.

The LSCP will now report its findings back to the Legal Services Board, who will decide whether regulation should be introduced to the will-writing industry.

Matthew Arnold & Baldwin LLP is experienced in all matters relating to the preparation of wills. We offer quality tax, trusts and inheritance advice to ensure that your personal affairs are arranged as efficiently as possible, and that your assets are passed on to your heirs in the way you want them to be. If you would like to discuss writing a will, please contact me at iain.donaldson@mablaw.com, or my colleague Emma Alford at emma.alford@mablaw.com.

The departure of so many non-doms has confirmed widely-held fears that the £30,000 levy would drive them overseas. Although the levy may not be the only reason for the exodus, it has certainly played its part.

So, what is the cost to the UK? Well, it is possible that the loss to the UK economy will be greater than the actual income gained from the levy. Non-doms not only bring wealth and spending power to the UK, but also expertise and entrepreneurism, which in turn creates jobs.

Back in June last year, I wrote that the incoming Coalition Government had pledged to review the taxation of non-doms during its five-year term in office. According to HM Treasury’s ’Structural Reform Plan: Monthly Implementation Update’ for December 2010, this review is still “ongoing” and an announcement on the issue will be made in due course.

The exemption had meant that businesses in England with an empty property with a rateable value below £18,000 did not have to pay business rates. The government intends to lower the threshold from £18,000 to £2,600. Also, the government does not intend to re-introduce a 50% relief, and small firms will not be able to claim Small Business Rate Relief on the property.

The FSB have written to local government minister, Bob Neill, to protest that the changes could potentially put some small firms out of business. If the cuts cannot be avoided, the FSB claims, it would be better to provide per cent relief or at least to allow a business to claim Small Business Rate Relief on their empty property.

The press release can be viewed here.

The lower rate of corporation tax has a threshold of £300,000.  If you have two associated companies the threshold for each is reduced to £150,000.  If you have three, then the threshold reduces to £100,000 for each.  The same will apply to the upper threshold (£1.5m).

The case below shows how this rule can apply in quite unexpected ways.

Executive Benefit Services (UK) Limited v HMRC [2010] UKFTT 550 (TC).

The taxpayer company and its associated company had completely distinct businesses.  However, a shareholder of one was found to control both companies since he had become a loan creditor of the associated company for purely commercial reasons.  Essentially by virtue of lending the other company money (combines with a minority shareholding) he became entitled to the “greater part” of the company’s assets “available for distribution to participators”.

The First-tier Tribunal held that the associated company test applied irrespective of any tax avoidance motive in structuring a company’s financing and shareholdings. 

Conclusion

This is a good reminder of some of the mischief which can be caused by the associated companies rules. 

The facts here are clear that there was no tax avoidance motive, in fact the shareholder in question was clearly trying to help out his son (who was the owner of the second company).  The loan was interest-free with no fixed repayment date and with no other entitlements, such as voting control or a share of a distribution of profits in the event of a winding-up.  Despite all this, the tribunal held that the companies were associated and reduced the rate of tax for both companies accordingly.

This case is going to be of particular interest in these times when (as happened here) lenders are holding back the flow of credit and children are turning to the bank of Mum and Dad.  When Mum and Dad are themselves in business, they need to look very carefully at the position of both companies.

For more information please contact James Odds or Shimon Shaw on 01923 20 20 20.

The personal tax details for 2011/12 have now been released.  Some of the key points:

• The personal tax allowance will rise by £1000 to £7,475.
• The higher allowance for those aged 65-74 and aged 75 or more will both go up by £450 to £9,940 and £10,090 – though only if your income is less than £24,000 (up from £22,900 last year).  Over this the higher allowance tapers back down to the standard.
• Higher rate tax will begin to be paid on annual incomes above £42,475 which is £1,400 less than the limit this year (£43,875). Therefore higher rate tax payers will not gain from the £1k rise in the personal tax allowance.
• The 50% rate remains at £150,000 and the income at which the personal allowance begins to be clawed back remains at £100,000.  Anyone with an income between £100,000 and of £114,950 – when personal allowance disappears altogether – will be paying an effective marginal rate of tax of 60% on some of their income.

Tax returns for last year will be due in January.  If you need assitance in preparing your return, please contact James Odds on 01923 20 20 20.

According to the research, in the past year more than 20,000 pensioners were forced to sell their houses to meet residential care home fees – a rise of more than 17 per cent in the past five years. When a person enters care, they are “means tested” and most of their assets, including their home, are taken into account. If that person has assets of more than £23,250, he or she is deemed to be able to meet the full cost of their care. With the average care home fee reported to be £470 per week (according to Age Concern and Help the Aged), it is no surprise that people are being forced to sell their homes to meet these growing fees – meaning they are unable to pass their most valuable asset to their children or other beneficiaries through their will.

However, it doesn’t have to be this way.

With careful estate and trust planning, it is possible to protect your home and other assets, so that on your death they can be passed down to family members through your will.

If you would like to discuss your options, please contact me at iain.donaldson@mablaw.com.

All in all, over 1000 tax reliefs are under review. To view them all, please click here (it may take a minute or two to download the 64-page spreadsheet!)

Following the review, which ends on 30 November 2010, the OTS will evaluate the effectiveness and relevance of all the tax reliefs, and will then recommend which ones could be simplified or even repealed. According to HM Treasury, the OTS will recommend repealing those reliefs that are “largely historic, not frequently used, create distortions in the tax system or are complex for business or HM Revenue & Customs to administer.”

There is certainly a proliferation of some tax reliefs – for example, there are 43 different reliefs from personal capital gains tax; 89 reliefs from inheritance tax; 117 reliefs from various forms of stamp duty; and 225 reliefs from personal income tax. However, whilst a number of these reliefs are historic (such as the relief for trading losses to ‘black beer’, which is described as an “historic exemption from excise duty for a fermented beverage made from malt and molasses, often without hops” – number 247 in the spreadsheet list, if you are interested!), there is a danger that some important reliefs may be lost as well during this streamlining exercise.

After considering its findings and assessing all the comments made from interested parties, the OTS will produce a final report, including its recommendations, before the Chancellor’s Budget in March 2011.

I’m posting it since it’s amusing and with no reflection of whether or not I think it is accurate.  For one thing, if I have a hard time imagining the pub suggesting that they drop the price of beer by 20%, I don’t have words to describe my feelings as to the impossibility of the Govt dropping income tax by any amount at any time before they start campaigning for the next election!

Shimon

……………………………………..

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.
If they paid their bill the way we pay our taxes, it would go something like this..

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.

So, that’s what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem.   “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.”  Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes.   So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers?  How could they divide the £20 windfall so that everyone would get his fair share?  They realized that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fairer to reduce each man’s bill by a higher percentage.  They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).
Each of the last six was better off than before with the first four continuing to drink for free.

But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”  The nine men surrounded the tenth and beat him up.

The next week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important – they didn’t have enough money between all of them to pay for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.  Tax them too much, attack them for being wealthy and they just might not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics.

As well as summarising the responses to the discussion paper, the Government also included details of its future plans, which, most importantly, will see reductions made to the annual and lifetime pension allowances.

The Government has confirmed, amongst other things, the following:

1. Annual allowances: From April 2011, the annual allowance will be cut from £255,000 to £50,000;

2. Lifetime allowances: From April 2012, the lifetime allowance will be reduced from £1.8m to £1.5m;

3. Defined-benefit schemes: A flat-rate factor of 16 will be used to value further accruals in defined-benefit schemes;

4. Carry-forward mechanism: Individuals will be allowed to carry forward unused annual allowance from the previous three years;

5. Revaluing accrued benefits: An allowance for active members’ accrued benefits to be revalued will be incorporated into the regime; however, deferred members will be excluded from the regime. Any negative accruals will continue to be treated as zero.

6. Exemptions: Individuals who receive a serious ill-health lump sum in place of their benefits will be exempt. However, there will be no exemption for those who retire early on redundancy, or for those who have registered for enhanced protection. Also, the current exemption from the annual allowance test for individuals in their final year before drawing benefits will be abolished; and

7. Tax relief: Tax relief on pension saving will not be capped at 40 per cent. A taxpayer who is liable to pay income tax at the 50 per cent rate will be able to receive relief on pension saving at this rate (to the extent his income is taxed at 50 per cent.)

These changes replace the previous Labour government’s plans to restrict pensions tax relief for high-income individuals. The key measures will be implemented in the Finance Bill 2011, which will come into effect on 6 April 2011. Another consultation paper, which will seek further feedback from interested parties on some of the issues mentioned above, will be published later this month.  

In the meantime, if you have any concerns about how the Government’s plans will affect you, please contact me at iain.donaldson@mablaw.com.

This continues the trend in recent years of grandparents picking up increasingly more of the burden, both financially and in terms of time.

Unless your kids are really demanding, you probably won’t need to consult your solicitor to get you out of babysitting for the little darlings.  However, if you are a grandparent providing financial support (for example, school fees) there are a number of steps you can take to reduce the cost of helping.

For example, many grandparents put money or investments on trust for their grandchildren.  Any growth in the fund gives rise to tax on the grandchildren (which in most cases will mean that there is effectively no tax).  This may also be effective inheritance tax planning.

If you would like to discuss tax planning to provide for your grandchildren, please contact me or any member of the Wealth Management team on 01923 20 20 20.

If you miss the deadline it could be costly, as paper returns filed after this date could mean a £100 penalty.

An alternative to paper-filing is to file your return online, which benefits from a January deadline.

If you would like assistance in preparing and filing your tax returns, please contact James Odds on 01923 202020 or james.odds@mablaw.com.

The Treasury have just now issused the following press release, which we will consider in more detail and comment on in due course.

Financial Secretary to the Treasury announces changes to restricting pensions tax relief

Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.

This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers 80% of those will have incomes over £100,000.

The Government is committed to protecting individuals on low and moderate incomes as far as possible. To protect individuals who exceed the annual allowance due to one-off “spikes” in accrual, the Government will allow individuals to offset this against unused allowance from previous years.

We will also consult on options enabling people to meet tax charges out of their pensions in November.

In order to protect the public finances it is necessary to introduce the reduced annual allowance from April 2011. The Government plans to introduce the reduction in the lifetime allowance from April 2012.

Mark Hoban said:

We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

The Coalition Government believes that our system is fair, will preserve incentives to save and – compared to the last Government’s approach – will help UK businesses to attract and retain talent.

This investigation into will-writing follows recently-publicised concerns over the quality of wills and poor sales practices in the industry, which culminated in a Panorama investigation, aired in August 2010.

The Panel is investigating whether the will-writing industry should be regulated. Currently, will-writing is not a “reserved legal activity” under the Legal Services Act 2007; this means that the writing of wills is not restricted to solicitors and barristers, who are regulated by the Solicitors Regulation Authority (SRA) and the Bar Standards Board respectively. Unregulated private will-writing companies now claim to write about 10 per cent of all new wills, but consumers are often unaware that these companies are unregulated and that their will-writers can have little or no legal training. A survey published by the Society of Trust and Estate Practitioners (STEP) in August 2010 provided evidence of such companies charging ‘hidden’ fees that were not outlined in the stated price for a will, of companies going out of business and ‘disappearing’ with their clients’ wills, and general incompetence that resulted in consumers receiving additional tax bills.

The investigation also follows the Scottish Parliament’s decision in June 2010 to propose amendments to the Legal Services (Scotland) Bill, meaning that non-lawyer will-writers in Scotland are expected to become subject to the same regulation as their legally qualified counterparts from 2011. There is now growing support amongst lawyers and consumers for England and Wales to follow suit.  

The deadline for submissions to the investigation is 15 December 2010.

This consultation, which was due to end on 22 September 2010, has now been extended until 22 October 2010 to allow further time for interested parties to comment on its proposals. Further details of the consultation are available here.

The government announced earlier this year that it was acquiring the Swiss bank account details of up to 6,600 wealthy Britons suspected of evading tax.

If you have received one of these letters and would like advice as to your next steps, please contact your normal MAB solicitor or ask for the Wealth Management team on 01923 202020.

It must also be filed when no tax is due as a result of the transferable nil rate band applying.  Essentially, this would be on the second death of a married couple or civil partnership where the first to die did not use all of their nil rate band.  This rule was introduced in late 2007 and is currently being used in 27,000 full estate returns each year.

HMRC now proposes to extend this exemption to some cases where the transferable nil rate band rule applies.  HMRC estimates this will apply in three out of every four cases where transferable nil rate band is invoked.  In all other more complex cases a full estate return will still have to be completed.

Not only will this save time and benefit probate practitioners, but it could lead to cost savings for clients and would be a most welcome change.

If you would like to speak to someone about probate, wills or estate planning please contact us on 01923 202020 and ask to speak with the Wealth Management team.

A statutory will is a will made on behalf of someone who lacks the necessary capacity to do so themselves by application to the Court of Protection.

In the case of Re D (statutory will), the Court of Protection considered what principles should be applied in determining whether to order the execution of a statutory will for and on behalf of a person who lacked the mental testamentary capacity to do so.

The Court of Protection held that under the Mental Capacity Act it can authorise a statutory will on the grounds that the validity of an earlier will is in dispute.  Decisions taken on behalf of a mentally incapacitated adult must be taken in his or her best interests.  This can include being remembered for having done the ‘right thing’ in his or her will.  In this case the judge ruled that the ‘right thing’ meant ensuring Mrs D’s memory was not ‘tainted by the bitterness of a contested probate dispute between her children’.

Comment

It is heartening to see the Court taking such a practical (and sensitive) approach.  The alternative would have been for the beneficiaries to have waited until Mrs D had died and to then contest her will in the courts.  This would have been far more stressful and expensive and would almost certainly not have been what Mrs D would have wanted.

If you would like advice on statutory wills or mental capacity please contact me on iain.donaldson@mablaw.com or 01923 202020.

In February 2010, the Court of Appeal dismissed Mr Gaines-Cooper’s application for judicial review of HM Revenue & Customs’ (HMRC) refusal to treat him as non-resident in the UK for tax purposes. Mr Gaines-Cooper, who has lived in the Seychelles since 1976, claimed that HMRC failed to interpret its IR20 guidance correctly.

IR20 sets out HMRC’s understanding of the law on residence, ordinary residence and domicile; it states that if an individual leaves the UK permanently or for at least three years, he/she will be treated as non-resident providing that he/she does not visit the UK for more than 183 days in any tax year or for an average of more than 90 days. Although Mr Gaines-Cooper satisfied these requirements, HMRC argued that an individual could not expect to rely on IR20 as it was merely guidance, and that an individual’s status depended on his/her particular circumstances. The Court of Appeal agreed with HMRC that IR20 implied that Mr Gaines-Cooper had to demonstrate a ‘distinct break’ from his former social and family ties within the UK in order to claim that he had permanently or indefinitely left the UK. It ruled that he had failed to do this when he left the UK.

This decision highlights the need for an all-encompassing statutory definition of ‘residence’ and ‘non-residence’, but for now, individuals who choose to rely on IR20 (and its successor, HMRC6) must ensure that they fall within its terms. However, the forthcoming judicial review (for which no date has been given yet) means that the Court of Appeal ruling may now not be the end of the story…

NB: I should point out that a judicial review claim allows an individual to challenge the way in which a public authority, such as a government department (in this case, HMRC), has reached a decision. It is a separate process from appealing against the decision itself.

UPDATE: The judicial review appeal will be heard in the Supreme Court on 6 July 2011.

HMRC has indicated that the debt collectors will primarily (but not exclusively) focus on individuals who have smaller debts of up to £2,000; this would mirror the pilot scheme, where debt collectors reportedly focused on individuals who owed, on average, £1,000.

Before debt collectors are instructed, HMRC will write to the errant taxpayer to ask him or her to either pay the outstanding tax or reach an agreement on settling the debt. If the taxpayer does nothing, HMRC will then ask the debt collector to pursue the individual. However, debt collectors will not be allowed to recover debts by seizing an individual’s property, as only HMRC can do this through the courts. HMRC will pay the debt collection companies a percentage of the tax they recover.

The move has angered tax advisers, as HMRC has recently been criticised in the media for wrongly deducting nearly £250m of tax from employees and pensioners. It is therefore quite conceivable (and ludicrous) that a taxpayer who is owed money by HMRC could be pursued by a debt collection agency for unpaid tax.

Two sisters had each made a will in 1991.  They had made mutual promises to each other and as part of that had agreed that the will of the survivor would not be altered so as to change those gifts.  The surviving sister did, in fact, alter her will in 2003 and the persons who would have been the beneficiaries under the surviving sister’s original will went to court (after her death) to ask the court to give effect to the 1991 will.

Neither of the wills contained any record that they had been made pursuant to an agreement between the sisters but it was apparent from the provisions of the wills that the terms had been carefully discussed and agreed.  The court was asked to apply the doctrine of mutual wills.

The court ruled that for the doctrine of mutual wills to apply there had to be what amounted to a contract between the sisters that both wills would be irrevocable and remain unaltered.  A common intention, expectation or desire was not enough.  The mere execution of mirror or reciprocal wills did not imply any agreement either as to revocation or non-revocation.  The agreement had to be established by clear and satisfactory evidence on the balance of probabilities.

In the light of the evidence, there had been an agreement between the sisters at the time they had made their 1991 wills.  They had made mutual promises to each other and it was part of those promises that the will of the survivor would not be altered so as to change those gifts.

This case, once again, highlights the importance of proper and qualified legal advice when drafting wills.  None of this would have been necessary if the sisters advisers had ascertained their intentions as to revocation, advised as to the effect of making mutual wills and ensured that any agreement they wished to make was clearly and accurately recorded.

If you want to speak to someone about making a will please contact Suki Sandhu or Emma Alford on 01923 202020 or email info@mablaw.com.

If you have a concern about your entitlement under someone else’s will please contact Amanda Melton on 01923 202020 or amanda.melton@mablaw.com.

Within the qualifying period, these employers will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business and operate in selected countries and regions.

Subject to meeting the necessary legal requirements, the scheme is intended to start no later than September 2010. Any new business set up from 22 June which meets the criteria set out in the forthcoming announcement will benefit from the scheme.

The countries and regions which will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.

For more information HMRC have published questions and answers which can be found here.

Training is a professional requirement but for many doctors the cost of courses comes out of their own pockets.  They rightly want to know whether it is possible to obtain tax relief for these costs.

The case of CRC v Dr Piu Bannerjee (heard in the Court of Appeal) goes some way to answering some of those questions.  The taxpayer worked for the NHS as a specialist registrar in dermatology.  For those who aren’t familiar with the exact terminology, a registrar is still in training.  Under the terms of her contract she was required to attend external training courses.  She claimed back the expenses incurred in this training but HMRC argued against this.

The issue was whether the expenses incurred in attending the training courses and defrayed by the taxpayer were wholly, exclusively and necessarily in the performance of the duties of her employment.  HMRC argued that attendance at the course was simply a means to better performing her duties, improving her professional skills and as part of her training.  This meant that there was a duality of purpose behind the training and therefore it would not meet the test of exclusivity.

The Court of Appeal held that the taxpayer had been ‘employed exclusively for training purposes’, not just to attend to patients on the ward, but also to attend the compulsory training that was part of her obligations to her employer – and therefore there was no ‘dual purpose’ in incurring the related expenses.  The result was that HMRC’s appeal was dismissed.

Conclusion

This case could have ramifications not just for other doctors but for other professions too with rigorous professional training requirements (such as architects, surveyors, solicitors, accountants and actuaries).  Each case needs to be considered going forward, and it might be possible in some cases to amend prior returns in light of this decision. 

It also highlights the benefit of proper advice in preparing tax returns.

If you would like advice on claiming expenses or in relation to your tax return, please contact James Odds on james.odds@mablaw.com or 01923 202020.

Action has now been taken.

On 27 July 2010, HM Treasury published a discussion paper outlining its proposals for an alternative means of restricting pensions tax relief. The main proposals for discussion are as follows:

1. Reducing the annual allowance

The discussion paper says that the reduced level of the annual allowance would depend on how the restriction is designed, but it was likely to be between £30,000 and £45,000. The main points raised for discussion are:

a) A tailored annual allowance charge. Instead of the current flat-rate 40 per cent charge, contributions exceeding the annual allowance would be treated as the top slice of an individual’s income and subject to a recovery charge that would vary according to whether income is taxed at the higher rate or the additional rate;

b) Valuing defined benefit accruals. For valuing deemed contributions to defined benefit pension schemes, the Government proposes using a flat-rate factor in the region of 15-20 (the current factor being 10.) The Government Actuary’s Department suggests that a factor of 15-20 could lead to an annual allowance of £40,000 being needed;  

c) Treatment of deferred members. Carving out deferred members from the annual allowance test would ease administrative burdens on schemes, but could raise potential fairness issues over the treatment of active members;

d) Exemptions from the annual allowance test. The Government proposes that contributions or accruals would not be tested against the annual allowance on death or when a serious-ill-health lump-sum is paid; and

e) Reducing the lifetime allowance. To maintain cohesion between the annual allowance and the lifetime allowance, the Government proposes reducing the latter from its current £1.8m level. Consequently, it seeks views on whether the value of rights receiving primary or enhanced protection should be frozen.

2) Managing the impact of the annual allowance charge in defined benefit schemes

The discussion paper identifies a number of issues that may arise in defined benefit schemes, particularly unusual ‘spikes’ in accruals by individuals who are not normally subject to an annual allowance charge. The paper offers several suggestions for dealing with such situations, including capping or smoothing accruals so they do not exceed the annual allowance, or redesigning or removing benefit elements that may cause spikes. The Government has said that it will look out for actions that try to take advantage of the flat-rate valuation of defined benefit accruals, such as awarding large pension increases or bringing forward the normal pension age.

3) Paying the annual allowance charge

A revised annual allowance would still be assessed and collected through the self-assessment tax return. However, the Government has asked for views on whether the pension input period for the purposes of the annual allowance should be aligned with the tax year. Transitional measures will be included in legislation to cover those people who have already exceeded their reduced annual allowance by April 2011, but where their input period does not end until 2012.

4) Informing scheme members and HM Revenue & Customs

The Government suggests there is a case for requiring defined benefit schemes to inform members about their pension input amounts. Views are sought on whether schemes should be required to notify members specifically if their pension input amounts exceed the annual allowance.

What happens next?

All submissions to the discussion paper must be received by 27 August 2010. The Government will then decide by the end of September 2010 whether to proceed with reducing the annual allowance. If it does, the measures in the Finance Act 2010 to bring in a high income excess relief charge will be repealed.

However, this discussion paper shows that reducing the level of the annual allowance is potentially problematic for the Government. For example, there are fairness issues that need to be properly considered, particularly in relation to the comparative treatment of active and deferred members. Consequently, unless anti-avoidance provisions are included in any new legislation, it is possible that high-earners with substantial pension entitlements could manipulate the new regime to their advantage.

The Government has much to consider…

The case involved a deed of variation, which changed the terms of a will.  By way of background, it is possible for the effect of a will to be varied within two years of death, provided that various conditions are met, including the agreement of the affected beneficiaries.  In many cases wills are varied for tax reasons.

In the present case £10,000 plus some farmland of the £1.7m estate was to pass to the deceased’s husband and the rest was to pass to the deceased’s children.  The husband’s accountant suggested that the effect of the will should be varied to make it more tax efficient and a deed of variation was executed.  This was defective and led to an additional £33,000 of inheritance tax.  The parties attempted to rectify the deed of variation to the effect that the husband would not be liable to pay inheritance tax.  HMRC refused to accept the efficacy of the deed of rectification for tax purposes.  The claimant applied to the court seeking approval of the deed of rectification.

The court found in favour of the husband and allowed the deed of rectification.  The judge distinguished between a mistake as to the fiscal effect of the deed of variation and the document not giving effect to the true agreement or arrangement between the parties.  The court would not order rectification of a document if the parties’ rights would be unaffected, and if the only effect of the order would be to secure a fiscal benefit for one or more of them.  On the other hand, where the  mistake was as to the meaning or effect of a document, this might be amenable to rectification.

In many ways this case highlights just how flexible our legal system is.  The parties were not only able to amend the will, but when they got this wrong, they were then able to correct this mistake to give effect to their true intentions.

The case also highlights two other things.  First is the need for proper will planning – for if the deceased had received the correct advice while alive none of this would have needed to happen.  The other is the power of deeds of variation to create a much more favourable outcome for the beneficiaries.

If you would like to discuss any of the points raised here, please contact our Wealth Management team on 01923 202020.

Getting technical, there are nine consultation / discussion documents which invite views from the public and professions on:

• PAYE reform
• Furnished holiday lettings
• Pensions tax relief
• Associated company rules
• Disclosure of inheritance tax avoidance
• Foreign branch taxation
• Controlled foreign company interim improvements
• Modernisation of investment trust company rules
• National minimum wage regulations

This is supposed to be the start of a new era of openness and transparency.  It is hard, though, to escape the cynicism engendered by 13 years of Mr Brown at the tiller.  Under the last regime, consultations meant less and less as time went by.  It became increasingly clear that they were more of a statement of intent than a genuine request for views. Time will tell how the new Government will act.

Only the papers PAYE and national minimum wage have the potential to be of interest to the public at large (and even then, there is a limited audience).  The other consultations are of more interest to the professions and to business.

Many people will look carefully at the proposed changes to pensions tax, and associated companies which could have a genuine impact on owner managed businesses.  For tax planners, the outcome of the discussions on disclosure of inheritance tax avoidance and foreign branch taxation will be of particular interest.

If you would like to discuss the impact of any of these proposals please contact me on james.odds@mablaw.com or comment below.

Basics

Inheritance tax (IHT) generally arises on death. It is normally only a concern if the estate on death is over the nil-rate band threshold, currently set at £325,000 for a few years. Over this amount, IHT is charged at 40%. IHT is also charged on gifts made in the seven years prior to death.  IHT can be charged on gifts made during someone’s lifetime, including gifts made to trusts.  

Married couples and registered civil partners are able to benefit from the transferrable nil rate band.  This can effectively increase in the nil-rate band threshold when the second partner dies – to as much as £650,000 currently.

Saving IHT with business property relief

Business property relief (BPR) is one of the most useful IHT reliefs. BPR can reduce the value of the relevant assets in the estate by up to 100% of its value. It is available in respect of a range of shares, securities or other property classed as an interest in a business.  The relief is also available for unquoted shares, which includes shares in AIM listed companies. The business property needs to have been held for two years before relief is available.

Top Tips:

• Some providers offer investments in a selected portfolio of shares all of which qualify for business property relief after 2 years. Clearly there are risks involved in investing in shares, and proper advice should be taken.
• BPR is only available for businesses which are substantially trading businesses.  If the business comprises a mix of investments and trading stock, or even large amounts of cash, careful planning will be required to ensure that relief is not restricted.  Compare, for example a business which develops properties and then rents them.  The development trade would qualify but the property rental would not, potentially contaminating the overall BPR position.
• For business owners, will planning is essential.  Not only does this give the opportunity to plan for the continued success of the business but through careful use of the nil rate band and other reliefs, it may be possible to minimize the overall IHT burden on the estate.
• If you are owed money by your business then this is an asset in your estate (and therefore subject to IHT).  It may be possible to convert this into a security which can benefit from BPR.

For more information about these planning ideas (or others) or to discuss inheritance tax generally please contact me on james.odds@mablaw.com

Prior to 2003, the European Commission did not think it was necessary to examine whether member states’ IHT laws were compatible with the EU Treaty. However, it has now revised its opinion because, since that date, (1) a number of IHT cases have been referred from national courts to the European Court of Justice, and (2) it has received a growing number of complaints from EU citizens about problems arising from cross-border inheritance.

The consultation paper identifies two main areas in which individuals and businesses may face obstacles:

1. Discriminatory application of IHT rules. Member states’ IHT laws tend to be less favourable to citizens whose assets or beneficiaries are in another country. This fact is particularly evident when you consider that in the eight IHT disputes that have been referred to the European Court of Justice since 2003, the Court ruled in six of them that the IHT laws of the member state in question were incompatible with EU rules on the free movement of capital; and

2. Double or multiple taxation of an estate. Most EU Member States levy IHT upon the death of a person; however, problems can occur because some member states (such as the UK) tax the deceased’s estate, while other member states tax the deceased’s heirs, who may be living in another member state to the deceased. This problem is further highlighted by the fact that there are only 33 bilateral IHT treaties between member states (out of a possible 351.)

Aside from the financial impact that these issues can have on EU citizens, the European Commission has also identified a social problem: that is to say, the way member states’ IHT rules apply in cross-border situations may be hindering EU citizens from fully exercising and benefiting from their right to move, as well as operate, freely within the EU.

The consultation closes on 22 September 2010; the European Commission will then study its findings to try and find a solution to these problems (and any others that are identified during the course of the consultation.)

Well, the Chancellor did just that.

On the back of intense criticism of the planned changes, and lobbying from business groups and the pensions industry, the Chancellor announced that the Government will look at overhauling the previous Labour administration’s plans for restricting pensions tax relief for high earners.

The Chancellor said that the Government will launch a consultation to look at alternative ways to save money on pension contributions for high earners. One possibility is to limit the annual amount that people can save into a pension fund (the ‘annual allowance’), which is set at £255,000 for 2010/11. An HM Treasury document, published at the same time as the Budget, has suggested that a reduction in the current annual allowance from £255,000 to between £30,000-£45,000 would probably produce the same sort of saving as reducing pensions tax relief for people earning more than £150,000.

There is still, however, a lot of uncertainty. The upcoming Finance Bill will include powers to repeal the measures in the Finance Act 2010 which restrict pensions tax relief (otherwise known as the ‘high income excess relief charge’) – though this will only be done once the Government has decided what to replace it with. Consequently, there is no certainty that the repeal will definitely happen; it will depend on the outcome of the consultation and whether a suitable alternative to these measures can be identified.

So, it’s back to the drawing board for the Government.

On a slightly different, but related, note, one pension change that will definitely be happening on 6 April 2011 is the abolition of the rules that force members of a registered pension scheme to buy an annuity by the age of 75. This commitment was part of the Government’s Coalition Agreement, published in May.

In the 2009 Budget, the former Chancellor of the Exchequer Alistair Darling announced that the Government would restrict the availability of pensions tax relief for high earners from 6 April 2011. The aim was to ensure that tax relief is available only at the basic rate for individuals with annual gross incomes or more than £180,000. The value of employer pension contributions made on behalf of an individual would also be caught by the restrictions. This measure was passed by Parliament, without scrutiny, just before the House of commons was dissolved for the general election.

Key points:

1. Tax relief available for pension saving by individuals with annual gross incomes of £150,000 or more will be restricted (“gross income” includes the value of employer contributions to money purchase schemes, or the annual increase in value of defined benefit accruals);

2. A floor of £130,000 in annual pre-tax “relevant income” will apply, not including employer contributions or defined benefit accruals;

3. Tax relief will be reduced from 50 to 20 per cent for individuals with annual gross incomes of between £150,000 and £180,000, at a stepped rate of 1 per cent of relief for every £1,000 of gross income. For individuals with gross incomes exceeding £180,000, relief will only be available at the current basic rate of 20 per cent;

4. Further accruals in defined benefit schemes will be valued using a prescribed scale of two-way age-related factors (reflecting age and normal pension date);

5. The restriction of relief will not apply to contributions or accruals made in the tax year an individual dies or commutes his or her entire pension on grounds of serious ill-health;

6. Employers will be required to identify all employees earning £130,000 or more in a tax year and request benefit statements for them from pension scheme trustees; and

7. Under a “scheme pays” option, individuals facing recovery charges of £15,000 or more in a tax year will be able to require their scheme to pay the charge and deduct a corresponding amount from their benefits. The “scheme pays” mechanism will be implemented in the Finance Bill 2011.

The changes to pension tax relief (and the subsequent impact they will have) have largely ‘fallen below the radar’ of many high-earners, as the recent controversy surrounding expected capital gains tax rises has taken prominence. However, the CBI and the Institute of Directors, along with accountancy firms, have now called on the Government to reassess these measures before they take effect. It will be a case of ‘wait and see’, but, in the meantime, high earners need to ensure that they are aware of this tax change and that they take it into account in their pension planning.

UPDATE: In tomorrow’s emergency budget (22 June), the Government may announce its intention to amend, or even scrap, the previous administration’s plans for pension tax relief. We do not have long to wait to find out…

Under legislation brought in by the Labour government in April 2008, a non-domiciled or “ordinarily resident” individual, who has been resident in the UK for seven out of the preceding nine tax years (whether continuous or broken), and who claims the remittance basis, must pay £30,000 per year in order to continue to be taxed on the remittance basis (unless their unremitted foreign income and gains are less than £2,000 in the relevant tax year.) If an individual decides not to use the remittance basis (or not to pay the remittance charge), he or she will be taxed in the UK on his worldwide income and gains on an arising basis.

The Government’s failure to raise millions of pounds in extra revenue from non-doms is due to the fact that only 4,300 people chose to pay the £30,000 levy in 2008-9 – just one in twenty of the 86,000 people who completed a self-assessment tax return in 2006-7 on the basis that they were non-domiciled in the UK (this being the latest year for which such data is available.) Since the tax legislation was introduced in 2008, thousands of non-doms have left the UK and fewer people who would be eligible for non-dom status are moving here. In recent years, the number of non-doms in the UK was rising by about 4 per cent annually, but this is now slowing, with 2 per cent of non-doms having already left the UK and many others reducing the time they spend here. According to a recent report by The Financial Times, there has been a 25 per cent drop in applications from non-doms seeking residency in the UK, though this may be as much to do with the recession as the tax legislation.

So, what does the future hold? Well, the new coalition government has already stated in its recently-published Coalition Agreement that it will review the taxation of non-doms over the next five years. However, no detail of its plans were given. It is therefore worth bearing in mind what the Conservatives and Liberal Democrats were proposing before the general election. The Conservative Manifesto proposed introducing “a simple flat-rate levy” on non-doms, and the Liberal Democrat Manifesto proposed that the remittance basis regime should not be available to non-doms who have been resident in the UK for more than seven years.

It remains to be seen whether either of the Conservative or Liberal Democrat manifesto pledges will be implemented. Although the government review may not recommend any substantive changes to the non-dom rules, there is likely to be political pressure for non-doms to make a greater tax contribution, particularly if capital gains tax and VAT do rise in the emergency budget on 22 June. However, whilst we should expect changes in the future, the Government should not discourage wealthy entrepreneurs from entering (and remaining) in the UK. Non-doms have a lot to offer: they invest in UK businesses, bring entrepreneurial skills, and create employment (which in turn contributes tax revenues.)

The future for non-doms is currently uncertain, but hopefully the emergency budget will reveal some of the Government’s future plans.

There may, however, be tax traps for unwary home workers.  Here’s an article that I wrote for Accounting Web on the subject which sets out some of the issues you should consider, in particular if home working is something you do regularly.