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 March 2011, the Office of Tax Simplification (OTS) published its interim report on the simplification of the tax treatment of small businesses. In it, the OTS recommended that the income tax and NICs regimes should be amalgamated and that the Government should begin work towards this objective by the end of 2011.

Following the Government’s call for evidence on the matter in July 2011, it became obvious that there was a real desire for reform, with the majority of respondents stating that there are potential gains to be made from aligning income tax and NICs. Respondents recommended that (1) the system for calculating NICs should be altered to reflect how income tax is calculated, and that (2) the same employee earnings should be made subject to the calculations for both taxes.

However, any reform will take time (and will only happen if the benefits outweigh the costs of making the change.)

The Government intends to work with stakeholders over the next few months, with a view to identifying high level options for reform by Budget 2012. Even if this happens, the Government has predicted that, due to the number of consultations on reform that would have to take place and the need to give employers sufficient time to prepare for a new tax system, any reform would probably not take place until 2017. Also, it appears that any reform will focus on alignment, simplification or operational integration rather than a complete merger of the two regimes.

In the past, governments have steered away from merging or integrating income tax and NICs, so it is surprising that reform is now a real possibility. However, the Government has accepted that there could be winners and losers even if there is just an integration of income tax and NICs, so it will need to fully investigate the impact any reform could have on individuals before deciding to proceed.

The Government has also published a discussion paper that outlines its proposals for simplifying the administration of personal taxes, by making tax information more accessible to taxpayers. It believes that online and mobile technology can help to improve taxpayer awareness of their tax liabilities. The discussion paper looks at systems in other countries, where taxpayers are able to access (and input) their own tax information online throughout the tax year. HM Treasury’s view is that a system that encourages greater taxpayer engagement also encourages greater taxpayer compliance.

Interesting times…

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…

Although the Bill’s proposals on this issue were generally supported by respondents to the consultation and the Justice Committee, the Government has decided to defer any changes, pending the outcome of the Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Bill, a Private Member’s Bill that is currently before Parliament and which proposes the majority of the reforms on the law of succession contained in the Civil Law Reform Bill.

The proposals in the Civil Law Reform Bill sought to amend the law of succession so that where a person was disqualified or refused an inheritance, his or her heirs were not disinherited. The Bill intended to reform the law governing the distribution of estates of deceased persons in three areas; that is whereby:

1. An inheritance is disclaimed (i.e. rejected);

2. An inheritance is forfeited (i.e. where a person has killed another person and is disqualified by the forfeiture rule from inheriting property from his or her victim); and

3. A person loses (but not forfeits or disclaims) a benefit on intestacy by dying under the age of eighteen and without having married or formed a civil partnership.

Under current common law, any children of a disqualified heir are also disqualified from inheriting. The Law Commission, after conducting its own consultation on the issue in 2003, deemed this situation to be unfair and its proposals for change were incorporated into the Civil Law Reform Bill. To back its call for change, the Law Commission cited the Court of Appeal’s 2001 ruling in Re DWS deceased, in which two grandparents, who were murdered by their only son, died intestate (i.e. without leaving a valid will) and the Court reluctantly held that the law did not allow their grandson (the murderer’s son) to inherit the property whilst the son (the murderer) was still alive.

The Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Bill seeks to change the law by allowing the deceased’s property to be distributed as if the potential heir had died, rather than been disqualified through forfeiture. It also addresses the current situation whereby the children of a minor, who is entitled to inherit an interest in the estate of an intestate person but who dies unmarried and without entering a civil partnership before the age of eighteen, are unable to inherit their parent’s interest in that estate.

Although the Bill is supported by the Ministry of Justice, Private Member’s Bills are not usually allocated enough parliamentary time to be debated and, thus, become law. Consequently, even with the Ministry of Justice’s backing, there is no guarantee that the Bill will become law.

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.

EDMOs were introduced in 2006 by the previous Government in an attempt to reduce the number of unoccupied homes in the UK, and they allow local authorities to take over properties (and seize furniture, fixtures and fittings) that have been empty for as little as six months.

There are currently two types of EDMO – (1) an interim EDMO which gives a local authority one year to help the homeowner get the property back into use; and (2) a final EDMO (this occurs when no agreement has been reached between the local authority and homeowner; a final EDMO can last up to seven years.)

Under EDMOs, local authorities have the right to, amongst other things, seize properties after six months if:

1. They have been left vacant following the death of the occupant or owner. (Homes of the deceased can be confiscated for up to seven years, even if inheritance issues have not been finalised), or

2. The unoccupied home is on the property market, but the local authority believes the asking price is “unrealistic.”

The Government has now said that it will do the following:

1. Limit EDMOs to empty properties that have become targets for vandalism, squatters and other forms of anti-social behaviour;  

2. Only allow an EDMO to be obtained if a property has been empty for at least two years; and

3. Give property owners at least three months’ notice before issuing an EDMO.

This move, which is subject to consultation, will be welcomed by private homeowners, particularly those who regularly spend a lot of time away from their homes, as it will reduce the possibility of their properties being seized by local authorities. The news will also benefit bereaved families, who, during a traumatic time, may be unable to decide whether to occupy, sell or rent out their loved one’s home.

So, why are there so many disputes over wills?

Well, there are probably a number of reasons:

1. The recession. In a difficult economic climate, beneficiaries may be relying on an inheritance to ease financial pressures or even to clear their debts. If that inheritance proves to be less than they were expecting (or less than they believed was rightfully theirs), the disgruntled beneficiary may decide to take legal action to try and secure a bigger share of the deceased’s estate. The impact of the recession has also meant that many estates have significantly reduced in value - for example, due to falling house prices or diminishing share values - which can again leave beneficiaries receiving less than they expected. Disappointment can breed resentment and, in turn, one beneficiary can turn against another in order to receive a bigger ‘share of the pot’;

2. Family structures. Many 21^st century families are complex (especially when compared to those of even twenty years ago.) In many cases, families have become much bigger due to multiple marriages, divorces, births inside or outside of wedlock – all of which increases the number of potential beneficiaries. Also, to add further complications, any person who was financially dependent on the deceased at the time of his/her death, whether it be a child born out of wedlock, a cohabitee, or a mistress, may have a valid claim to part of the estate. This can create huge resentment (and emotional hurt) amongst other family members, particularly if they weren’t even aware of a mistress or child’s existence, and there are numerous court cases to prove how far beneficiaries will go to defend (and claim) what they believe is rightly theirs;

3. Outdated laws. The inheritance and intestacy laws were created in the 1920s and 1970s, when family structures were very different. Although there have been some changes over the years, the intestacy laws date back to 1925 and reflect the social conditions and attitudes of a very different Britain. The Inheritance (Provision for Family and Dependants) Act 1975 has not been comprehensively reviewed since its enactment, although it now covers cohabitants, civil partners and same-sex cohabitants. There is no doubt that the law has fallen behind the times and doesn’t fully reflect the society it operates within, and consequently it has been responsible in part for the rise in claims. However this is now being addressed. Earlier in the year, the Law Commission published a consultation paper that reviewed the rules on intestacy and family provision claims on death, making provisional proposals for changes to the law that aim to reflect the reasonable expectations of those who have been bereaved. A report and draft bill are due to be published in 2011; 

4. Do-it-yourself wills. The growing popularity of DIY wills has increased the risk of disputes. Individuals who do not seek professional advice when writing a will, or who use unregulated will-writing companies, run the risk of creating invalid wills (and dying intestate), or leaving their will open to a legal challenge; and

5. Dying intestate. According to a study by the National Centre for Social Research, which was conducted to provide the Law Commission with up-to-date information on public attitudes on inheritance laws, only one-third of people may have written a will. If someone dies without making a valid will, there is an order of entitlement under the intestacy rules, which dictates how a deceased’s property is distributed; however, if fair provision is deemed not to have been made, claims can be brought against the estate. A properly-drawn up, up-to-date will can help reduce any claims made against your estate.

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, thereby reducing the possibility of any unwanted claims against your estate. If you would like to discuss writing a will, or have any queries regarding anything I’ve discussed, please contact me at iain.donaldson@mablaw.com

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.

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.

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.

 This is a device of long lineage, first noted judicially in 1769 (the same year the last wild wolf was killed in the British Isles) in Dufour v Pereira a case tried by Lord Camden (yes, the man who founded Camden Town), who amongst the “haths” in his  judgment, had this to say

“It is a contract between the parties, which cannot be rescinded, but by the consent of both. The first that dies, carries his part of the contract into execution. Will the Court afterwards permit the other to break the contract? Certainly not.”

Sounds a bit scary, a bit like a suicide pact, but in reality it’s not, it is just an arrangement where two people irrevocably agree to leave their estates reciprocally . But aren’t all wills recovocable until death, I hear you say? Absolutely, and theoretically this is no exception to the rule, being in fact the application of a prior constructive trust.

Say A and B agree to make wills leaving all to each other, subject to a proviso that if the other dies first the estate passes to X. A dies and the estate passes to B, who contrary to the earlier  agreement with A, then makes another will leaving all to Z.  On B’s death X can apply to have the gift to Z set aside, citing the agreement for mutual wills as the document that sets out the terms of the prior trust. Don’t most husband’s and wives write wills in that form? Well yes, all apart from the agreement that the wills are to be in irrevocable mutual form.

The recent case that underlined the continuing effectiveness of mutual wills involved the estates of two sisters Ethel Willson and Mabel Cook.  Mrs Cook died in 1995 having made a mutual will by agreement with her sister Ethel, who died in 2006,  having made a new will 2 months before she with provision materially different from the earlier mutual will; Ethel cut out the earlier bequests to relatives and friends  in favour of the sisters’ hairdresser, who duly received the £390,000 estate. The disappointed relatives and friends took their greivance to Court, and in a case involving allegations of undue influence and mental incapacity, the Court concluded that the sisters had made mutual wills the terms of which should be upheld, such that Mrs Fraser was required to hand back the cash.

For understandable reasons such cases rarely come to Court.  In the opinion of the solicitor acting on behalf of the disappointed family and relatives such a proposition has been upheld only 3 times in the last 80 years. Such wills are rare, falling outside many a seasoned draftsman’s experience. It’s also quite likely that should the survivor of such an arrangement subsequently make a different will the fact that the provisions cut across an earlier mutual will may not be brought to anyone’s attention. Errors of drafting or administration in this particular field can still have spectacular consequences, as this case amply illustrates. Get thee to a lawyer if you are at all concerned!

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.

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.)

George Key, an 89 year old farmer lost his wife of 65 years in December 2006. A week later he made a Will leaving his two daughters £300,000 each, the bulk of his estate,  unchanged at his death in August 2008. His previous Will in 2001, in the context that his wife Sybil survived him, made provision for his daughter Jane to receive £10,000, his daughter Mary £5,000 and his 2 sons, Richard and John, Hall Farm and the residue of his estate.

The sons contested the 2006 Will, maintaining, in effect, that the 2001 version should prevail. After hearing evidence from 20 factual witnesses, including 2 expert psychiatrists, the issue for Mr Justice Briggs to decide was whether George Key, elderly and grief-ridden, had testamentary capacity in 2006 when he made the last Will. In a conclusion extending the ambit of the traditional tests of capacity, based on comprehension, laid down so long ago as 1870 in Banks v Goodfellow, the Court decided that “Mr Key was simply unable during the week following his wife’s death to exercise the decision-making powers required of a testator ” which ..”compels a conclusion that he did not know and approve the contents of his will”. The sisters were therefore subtantially disentitled, as the greter part of the Estate passed under the 2001 Will to their brothers.

The case is of interest not just for the furious family dispute put in evidence to the Court, but for the wider approach to capacity promoted in Mr Justice Briggs words “by the greater understanding of the mind now available from modern psychiatric medicine, in particular as to affective disorder.” It is also interesting in that it highlights that where you might have thought that in the 20 months or so before he died, if he thought at any time his Will did not reflect his current wishes, George Key could have changed it (and didn’t), that of itself is irrelevant. The key consideration is the testator’s capacity at the time the will is entered into, a circumstance which the solicitor on the case, a Mr Cadge, failed to take into account. Had he done so, then he would have obeyed the Golden Rule, requiring him to satisy himself of mental capacity with the assistance of a suitably qualified medical practitioner, as near as possible to the signing of the Will itself.

Mr Justice Briggs felt that whilst he had dealt with the legal issues before him the family would remain divided. It remains to be seen whether that  results in an appeal, or perhaps consideration of action against the draftsman and overseer of the overturned Will in this case. Either way, in matters of this nature, it pays to take appropriate steps during the testator’s lifetime.