Blog

17/09/18
Chancellor Philip Hammond should scrap the lifetime individual savings account (LISA), bring in flat-rate tax relief on pensions, and remove the lifetime allowance (LTA). These were the recommendations of the Treasury Select Committee, in a report published last week. The committee’s main recommendation is that the current system of tax relief – whereby savers get tax relief on pension contributions at their highest marginal rate of income tax – should be replaced with a single flat rate. As MPs point out, the current system means that savers on high incomes get a disproportionate share of the annual £41bn in pension tax relief – more than 50% goes to those earning above £50,000. The committee also believes that the government should scrap LISAs. Although LISAs are steadily growing in popularity, MPs complained that the LISA rules are confusing, and that the ability to save for a property might also dissuade people from saving into their workplace pension, where they benefit from an employer’s contributions.
07/09/18
In a recent case the High Court held, on the basis of witness evidence, that a married couple had made mutual wills, despite apparently express wording to the contrary in each will. There are not many mutual wills and there is even less case law on the subject so when a case like this happens it is bound to be interesting.

Married couples often execute wills which are identical in their provisions, frequently giving the estate to the surviving spouse or if the spouse does not survive to the children. This is commonly referred as "mirror wills". However, not every mirror will is a "mutual will", indeed very few mirror wills are mutual wills.

In both types of will the terms of the will of one person will mirror the other person's will. However, with an ordinary mirror will the survivor can make a new will after the death of the first to die without any constraints and without having to have regard to the will of the first to die. A mutual will on the other hand is a will which is also a mirror will but where the two testators enter into an agreement that they will not revoke their will without the consent of the other testator. The consequence of this is that if the first individual dies without having altered the mutual will, the surviving testator is not able to alter their own will. Indeed, if there is any later will made, it would be ineffective to the extent that its provisions are different to the mutual will.

The main reason why individuals make mutual wills is where both testators wish to ensure that specific intended beneficiaries benefit from their estate after the second testator dies. This is often what the testators will be adamant about despite the fact that the arrangement is totally inflexible after the first of them dies. It would be usual to have something in writing confirming that the will is intended to be mutual. Conversely, very often in a mirror will there will be a provision confirming that the will is not intended to be a mutual will.

In the recent case Legg and Others v Burton and Others [2017] EWHC 2088 (Ch) the Court found the wills to be mutual despite an apparent contrary wording in them. The judge also stated that mutual wills might not require a contract and that they could be based on proprietary estoppel. Estoppel is an equitable rule which applies in English law whereby a court may prevent, or "estop", a person from going back on a promise they have made.

The result was therefore somewhat surprising and is perhaps a warning that a will may be considered to be mutual when this may not have been actually intended.

The facts of the case where as follows.

Mr and Mrs Clark had each made mirror wills in July 2000, each giving their estate to the surviving spouse or if the spouse did not survive then to their two daughters in equal shares. The wills were professionally drafted by a solicitor who attested the execution. Both wills included the following clause:

“My trustees shall pay my residuary estate to my spouse absolutely and beneficially and without any sort of trust or obligation”.

The wills also appointed the two daughters as executors and trustees. Mr Clark died in 2001 and his estate passed to his widow without the need for probate. Between 2004 and her death in 2016 Mrs Clark had made 13 separate wills, the last one being in December 2014 which left only small legacies to the two daughters with the remainder going to other beneficiaries. In that will Mrs Clark appointed one of her grandsons as the executor and he duly obtained probate.

The daughters challenged the 2014 will asserting that the original will executed in 2000 was one of a pair of mutual wills which therefore could not have been revoked by the later wills. The grandson executor defended the case on the basis that the 2000 will expressly provided that the estate was passing to the surviving spouse absolutely and beneficially without any sort of trust or obligation, therefore it could not have been a mutual will.

The two daughters claimed that the parents had made an agreement not to change their wills and this was explained to both of them as well as to the rest of the family at the time the wills were made. The Judge listened to the evidence from witnesses and clearly was more impressed by the evidence from the two daughters. He also examined the will carefully and concluded that the additional words about the assets passing to the surviving spouse absolutely and beneficially did not exclude the possibility of mutual wills, rather that this was a standard form clause which is regularly found in wills of this kind.

In conclusion, despite there being no direct evidence that an agreement for mutual wills was entered into, the Judge decided based on the witness statements that an agreement had been made and that a promise not to change the wills given orally to the daughters was binding. The outcome of the case was that the two daughters inherited the entire estate and the beneficiaries named in the later will received nothing.

It may be of concern that even if the wills do not expressly state that they are mutual wills and there is an apparent provision that the survivor is to take absolutely and beneficially, this may not be enough to declare a will merely a mirror will. If there is a dispute, the Court is entitled to take into account extrinsic evidence and the reliability or otherwise of any witnesses will be of paramount importance.

Interestingly the Judge quoted a suggestion from an earlier case that it is inherently improbable that in this day and age a testator should be prepared to give up the possibility of changing his or her will in the future whatever the change of circumstances. It has to be said that, generally speaking, it would be unusual to recommend that clients should make mutual wills, given that changing circumstances in families these days are so wide ranging and frequent. Surely when drafting any will flexibility is likely to be an important factor. However, the Judge in the above case disagreed with this assertion, quoting an example of a testator who knows he is dying and therefore he will have little interest in preserving his freedom to change his will in the future but every interest in ensuring that his wishes are carried out even after the death of his own beneficiaries.

In short every testator’s circumstances will be different and all will depend on their wishes. Clearly it is important though that those making wills are aware of the consequences of their words both written and spoken.
03/09/18
The Department of Work & Pensions has confirmed that it will exclude insurance pay outs that are designed to cover mortgage payments, when calculating means-tested benefits. Namely since 6 April 2018 those who suffer a loss of income from sickness or other causes can no longer receive state benefits to cover their mortgage interest payments, instead some may be offered a Support for Mortgage Interest Loan (SMIL) in which case DWP will, where possible, put a charge on their property.

In light of these changes the Income Protection Taskforce and the Building Resilient Households Group sought clarification from the DWP about how pay outs from income protection policies will be treated under the new SMI system. The DWP has now clarified the position and the relevant statement from the DWP is as follows:
"If insurance payouts are restricted to the payment of a mortgage – for example if it is paid direct to the lender – then these payouts will be disregarded in full. However, if the claimant has choice over how to spend the payment then only “any portion which the DWP judge to be intended and used for mortgage cover” will be disregarded."

For Universal Credit (UC), the DWP said: “From 6 April 2018 any payments or any payments analogous to payments for mortgage protection should not be taken into account as unearned income in UC.” A similar clarification has also been made for the existing Job Seekers Allowance (JSA), Income Support, and Employment and Support Allowance (ESA) benefits.

In light of this announcement there has been quite a lot of discussion amongst providers, especially whether new products will be necessary to ensure, for example, that payments from an income protection plan (IPP) can be made directly to a mortgage lender. A number of providers of IPPs are considering new product development to cater for this.From the point of view of the DWP and means testing, given what they have said, clearly it is not essential that payments should be made directly to the lender. Therefore in practice it should not make any difference whether payments are made directly or not, although clearly if payments are made directly to the lender it would save the claimant having to prove how they spend the benefits received.

On the other hand if a life office offering an IPP wanted to provide such a facility, they would need to have administrative procedures to deal with making payments to a third party and potentially making two lots of payments in respect of each claim, e.g. where the amount of benefit exceeds the amount of the mortgage. It remains to be seen whether new IPPs appear.

The clarification from DWP is, of course, welcome. It also serves as a reminder of the usefulness of these policies. It doesn’t however do anything to help those who do not have mortgages, i.e. the generation of renters. Surely there cannot be justification in the treatment of these benefits depending on whether they are used for mortgage payments or for rent; in both cases the payments are to provide a home for the individual and their family. Let's hope the DWP will in due course confirm that the renters will benefit from the same treatment as home owners.
27/08/18
TPR has fined a DB scheme trustee for failure to complete 2 valuations to the tune of £25,000. A trustee has been fined £25,000 by The Pensions Regulator for failing to complete two valuations for its defined benefit scheme. Rentokil Initial Pension Trustee Limited failed to complete 2012 and 2015 valuations of the Initial Hospital Service Limited No.1 Pension Scheme by their respective deadlines (July 2013 and July 2016).

DB scheme trustees are required to complete valuations every three years and, if the scheme is in deficit, they must submit a recovery plan and a schedule of contributions to TPR. As part of its clearer, quicker, tougher approach, since April 2017, TPR has issued nine Warning Notices for late valuations.

Nicola Parish, TPR’s Executive Director of Frontline Regulation, said:
“Agreeing a triennial valuation is a key priority for the trustee of a scheme and its sponsoring employer. It allows us to check the health of a scheme and its ability to provide members with their expected retirement benefits.
“We are monitoring valuation due dates more regularly and this fine shows we will take tough action sooner to put things right where breaches occur.”


TPR was informed the reason for the delay in completing both Initial Hospital Service valuations was a planned merger with a separate scheme run by sponsoring employer, Rentokil Initial Plc. TPR repeatedly advised the trustee that the proposed merger was not a valid reason for failing to comply with the statutory requirements and they should progress with agreeing both valuations with the employer.

When the proposed merger failed to happen and the valuations had not been submitted by the end of 2017, TPR decided to take formal action. TPR’s Determinations Panel (DP) upheld the recommendation that the trustee should be issued with a £25,000 fine under section 10 of the Pensions Act 1995 for its failure to take all reasonable steps to complete the valuations. The DP’s findings are set out in a Determination Notice.
20/08/18
The online Trusts Registration Service (TRS) has now superseded the old paper based system for registering trusts that generate tax consequences and imposes additional obligations on those trusts that are required to register. Here, we take a look at which trusts need to register on the TRS and what all trustees need to be aware of to ensure that they comply with their reporting obligations.

The Trusts Registration Service (TRS) is a new online service that provides a single route for trustees and personal representatives of complex estates to comply with their registration obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI No. 2017/692), which came into force on 26 June 2017. The TRS replaces the paper 41G (Trust) form and the ad hoc process for trustees to notify HMRC of changes in their circumstances. Trusts that are required to register with HMRC are now required to do so through the TRS.

Which trusts need to register on the TRS?

• All UK express trusts where the trustees have incurred a tax liability in a given tax year; and
• All non-UK express trusts which receive UK source income or have UK assets on which the trustees have incurred a UK tax liability in a given tax year will need to register.

The term ‘express trust’ covers all trusts that have been deliberately created by a settlor (i.e. as opposed to statutory, resulting or constructive trusts); while a UK tax liability for these purposes includes a liability to income tax, capital gains tax, inheritance tax and/or stamp duty land tax.

As the 41G form did not collect sufficient information to meet the requirements of the new legislation, those trusts which registered with HMRC before the launch of the TRS will also need to use the service to provide all the information that is now required.

Note that if the trustees have not incurred a tax liability either because they have claimed a relief or because the liability falls on the settlor or on a beneficiary, registration on the TRS is not required. This would include the situation where income is mandated directly to an interest in possession beneficiary. Trusts that have no other UK tax liability other than a tax liability of less than £100 on bank or building society interest income are also exempted from the requirement to register.

Registration will not be required if the trust is a bare trust although trustees of bare trusts are nonetheless required to keep accurate and up-to-date written records of the beneficial owners, in the same way that trustees of any other trust type must do.

What is the position for trusts invested wholly in non-income producing assets such as life insurance investment bonds or capital redemption policies?
Trusts that are invested wholly in non-income producing life insurance policies or capital redemption policies will not usually be required to register on the TRS unless and until:
• a chargeable event under the policy arises at a time when the settlor is deceased or non-UK resident;
• there is a chargeable transfer for IHT purposes because funds or assets greater than the settlor’s available nil rate band are added to the trust and the trustees pay the tax; or
• a periodic charge or exit charge arises for IHT purposes.

If a chargeable event arises under the policy while the settlor is alive and UK resident, the tax liability will fall to be assessed on the settlor rather than the trustees and the trust will not therefore be required to register at that time.

Note that the requirement to register and/or update or confirm the information contained in the register only arises if the trust has a tax liability in the given tax year. This means that, in the case of a life policy trust, registration may be necessary in one year (perhaps because a part surrender is made and an excess arises) but the requirement to register or update may not then arise again for several years (i.e. until there is a further chargeable event).

What is the position for trusts that hold property?
Trusts that hold property will, like other trusts, only need to be registered if the trustees incur a liability to tax. Thus, if the property is occupied by a beneficiary – and is not income-producing - no requirement for registration will exist unless a taxable event occurs for IHT, CGT or SDLT purposes. If the trust holds an investment property which generates a rental income, then the trustees will usually need to register the trust on the TRS. The exception will be where the trust is an interest in possession trust where all the trust income is mandated directly to the beneficiary.

What are the deadlines for registration?
The deadline for registration depends on whether the trust is already registered for Self-Assessment (SA) for income tax or capital gains tax:

• If the trust is already registered for income tax or capital gains tax and the trustees of the trust have incurred a relevant UK tax liability in a given tax year, then registration must be completed by no later than 31 January after the end of that tax year;
• If the trust is not registered under SA but has incurred either an income tax or a capital gains tax liability for the first time in a given tax year then registration must be completed by no later than 5 October after the end of that tax year;
• If the trust is not already registered for SA or does not need to register for SA but has incurred either an inheritance tax, stamp duty land tax, stamp duty reserve tax, or a land and buildings transaction tax (Scotland) liability in that tax year, then registration must be completed by no later than 31 January after the end of that tax year.

Penalties will apply if deadlines are not met, however for the first year of the TRS only, HMRC have extended the TRS registration deadline for new trusts and complex estates, that have incurred a liability to income tax or capital gains tax for the first time in the tax year 2016 to 2017, from 5 October 2017 to 5 January 2018; and have extended the deadline for existing trusts from 31 January 2018 until 5 March 2018.

Who is responsible for registering the trust?
The responsibility for registration lies with the trustees although trustees can appoint a lead trustee to complete the registration process or may alternatively appoint an agent to register the trust on their behalf.

Are there any trust registration responsibilities for institutions who provide draft trusts or for advisers who use the draft trusts for their clients?

No. Providers of trust documents and financial advisers have no TRS obligations in relation to the trusts that they provide/advise on. However, advisers will need to ensure that they understand their clients’ reporting obligations under the new regulations and should make their clients aware of those obligations as part of the advice process when recommending trust-based solutions.

What steps must be followed to register a trust on the TRS?
Trustees who are required to register must do so online at https://www.tax.service.gov.uk/gg/sign-in?continue=/trusts-forms/form/registration-of-a-trust/new Before they can register, they must apply online for an “organisation” Government Gateway account to obtain a Unique Taxpayer Reference (UTR). A separate account is required for each trust even if the settlor and trustees are the same.

What information is required by the TRS?
The TRS will ask for:
• the name of the trust
• the trust address and telephone number
• the date the trust was established
• the country where the trust is resident
• details of the trust assets, including addresses of properties, and an estimated market valuation of assets held at the date that the assets were settled; and
• identity details (i.e. name, address, date of birth and NI (or passport /ID number if no NI) number) of the settlor, trustees, the beneficiaries (or class of beneficiaries where individual beneficiaries have yet to be determined or identified); and any person exercising effective control over the trust, such as a protector or appointor.

Agents acting on behalf of trustees will also be required to provide contact information about themselves, however, no information is required in respect of other advisers who may be providing legal, financial or tax advice to the trustees in relation to the trust.
What needs to be disclosed in relation to beneficiaries?

Under the TRS the trustees will need to disclose to HMRC the identities/names of all beneficiaries who are either actual or potential beneficiaries. Where the beneficiaries of a trust are not named, but there is simply a class of beneficiary, then a description of the class of beneficiaries should be recorded on the TRS. Trustees will however need to disclose the identity of any potential beneficiary who receives a financial or non-financial benefit from the trust after 26 June 2017.

What obligations exist post-first registration?
The trigger point for either first registration or updating details on the register is when the trustees incur a liability to pay any of the relevant UK taxes. So, in tax years where no tax liability arises then the trustees are not required to register or update in that tax year (although if changes have occurred, updates can be made on a voluntary basis if desired). If, however, the trustees have incurred a tax liability in a given year, the trust register will need to be updated to reflect any changes – for example, to trustee, settlor or beneficiary details - by 31 January after the end of the tax year in which the change occurred. Where no relevant changes have taken place since the end of the previous tax year, the update can be limited to confirmation that no such changes have occurred.

Note that the details of trust assets are only provided once at the first point of registration and there is no requirement to update information about the trust assets on the TRS even if these change over time. All other asset information is dealt with on the SA900 tax return, just as it was before TRS was introduced.

Is the information held on the Trust Register in the public domain?
No. The legislation specifies that information held on the TRS can only be shared by HMRC with law enforcement authorities in the UK or in another EEA member state, if requested. These include the Financial Conduct Authority, the National Crime Agency and the Police Service.

Further information
HMRC has produced some guidance on the TRS in the form of a series of Frequently Asked Questions. The latest version of the guidance is currently available in draft form only and can be accessed here. Regular updates on the TRS are published in HMRCs quarterly Trusts and Estates Newsletters. The December Trusts and Estates Newsletter can be accessed here.
Author
16/08/18
The Financial Ombudsman has upheld complaints about the role of an authorised company in selling failed mini-bonds that cost investors millions, offering hope that they may get their money back. Secured Energy Bonds collapsed in early 2015 after taking more than £7m of investors’ cash, intended to fund solar panel installations with an advertised return of 6.5% annually. The investment itself, as with all mini-bonds, was not regulated nor protected under the Financial Services Compensation Scheme. The fate of the SEB bond investors is good news for other retail investors who have been lured to mini-bonds by the promise of relatively high returns.
13/08/18
Debate on the House of Commons pulls together outcomes of various committees and looks to the future

On Thursday 12th July the House of Commons debated the collapse of Carillion and lessons to be learned from such a major business failing.

The subject for this debate was determined by the Backbench Business Committee, in response to a request from Rachel Reeves MP. In her bid to the committee, she noted that it is now some six months since the collapse of Carillion and that five select committees have looked into this area.

The reports from the committees are :

• The National Audit Office’s Investigation into the government’s handling of the collapse of Carillion (June 2018) examines issues including the government’s contingency planning for Carillion’s possible failure, the government’s response to Carillion’s request for support and Carillion in liquidation.

• The Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee held a joint inquiry into the collapse of Carillion, exploring the management and governance of Carillion, its sponsorship of its pension funds, and the implications for company and pension scheme law, regulation and policy.
They published their report, Carillion, in May 2018

• The Library briefing Carillion Pension Schemes looks at the position of the pension schemes, the regulatory framework, the role of the trustees and the role of the Pensions Regulator.

• The Public Administration and Constitutional Affairs Committee looked into the implications for public sector procurement – publishing a report After Carillion: Public sector outsourcing and contracting (9 July 2018)

• The Library briefing The collapse of Carillion (March 2018) discusses the causes and immediate consequences of Carillion's collapse.

• The Library briefing Corporate insolvency: consultations on reform examines three government consultations on insolvency and corporate governance. These seek views on improving arrangements, ensuring that lessons are learned from large company failures

So you could conclude there has been much discussion and report writing but with what outcome?

The debate outlines how much work has gone into safeguarding some 12,000 of the 18,000 jobs that were at risk and significant number of apprenticeships have been transferred to other business.

The debate makes interesting reading. Yet again the Pensions Regulator is criticised for not being involved and aware sooner (hence the raft of new regulatory powers that are currently being consulted on – with much bigger fines and imprisonment for those found culpable). The BHS and Carillion collapses are partly due to the huge pension deficits and clearly these deficits were not adequate managed. The result, well for Carillion members is that there are 9 separate schemes in the assessment period with the Pension Protection Fund. And the BHS members narrowly escaped the PPF by a payment from Philip Green.

There is huge amounts of criticism by the House of the role of the auditors, advisers and company boards in the run up to the business collapsing. The Pensions Regulator has taken some serious criticism of its failure to protect members. The role of the regulator is certainly changing in response to these events. The TPRs report and accounts published on 12th July headlines with The Pensions Regulator (TPR) has evolved into a more visible and proactive regulator and is working in a clearer, quicker and tougher way.

Watch this space.
05/08/18
The small print of the Autumn Budget’s Red Book included a statement that the government would issue “a call for evidence to establish how rent-a-room relief is used and ensure it is better targeted at longer-term lettings”. At the beginning of December, the relevant paper emerged to no great fanfare. On Friday 6 July the Treasury published a summary of responses alongside draft clauses for the Finance Bill 2018/2019.

The Treasury seemed to be taking aim at the digital disrupters of the property-letting business, such as Airbnb. The questions in the consultation suggested that the government wanted to narrow the scope of the relief, which currently exempts rental income of up to £7,500 per tax year. The possibility of minimum letting terms or excluding holiday lets were both raised.

In the event, the consultation process has highlighted the difficulties with such refinements. For example, a landlord may not wish to ask why a property is required for a short term let and there would be instances of mixed work/holiday use. The responses also revealed “no evidence that the length of a letting is an appropriate proxy for the government to achieve its objectives for rent a room relief”.

However, there is one proviso which the government has decided to apply: a shared occupancy test. This “will require the individual to be resident in the property and physically present for at least some part of the letting period”. The draft Finance Bill 2018/2019 clauses reveal that to satisfy this condition, the individual or a member of their household must have “the use of the residence as sleeping accommodation”. Thus, letting out a whole property would not qualify for relief. It is somewhat ironic that this idea should surface during Wimbledon fortnight, when many of that area’s residents desert their homes for two weeks and let out them out at high rents.

The change is due to take effect from 2019/2020.
30/07/18
Charity Tax Commission is undertaking full review of the tax system for charities and would welcomes comment on the current system and on what could be changed.

The last comprehensive review of charity taxation took place over 20 years ago. Since then, the voluntary sector and the environment in which it operates has changed significantly – the sector has grown in scale and charities now do far more.

Tax reliefs for charities are estimated to be worth £3.77bn a years, the main ones being business rates, Gift Aid and VAT relief, while reliefs for individuals are worth £1.47bn. The call for evidence welcomes general comments but, in particular, asks for opinions on the how the current system benefits charities and what could be changed. Areas of consideration include:

Business rates
  • Charities receive a mandatory 80% relief of their business rates bill.
  • Local authorities are able to grant discretionary relief for some or all of the remaining 20% that charities have to pay – on average they only receive a further 2.5% relief.

Gift Aid
  • Individuals with sufficient income can benefit from an increased basic rate band for Gift Aid donations.
  • The charity can recover basic rate tax from HMRC on the Gift Aid donations received from individuals.
  • The charity can also make use of the Gift Aid Small Donations Scheme where it is not feasible to collect Gift Aid Declarations.

VAT
  • While there is no general relief for charities there are various special reliefs, exemptions, zero-ratings and concessions which cover many supplies to and made by charities.
  • The current regime treats charities differently depending on the types of service they provide and whether or not they charge for their services. Despite these advantages, many charities still suffer irrecoverable VAT.

Capital Gains Tax
  • Charities are exempt from capital gains tax if the gain is applicable to and applied for charitable purposes.

Inheritance Tax
  • Leaving a legacy to a Charity is exempt for inheritance tax purposes.
  • Leaving part of the estate to a charity can also result in a lower inheritance tax rate applying to the estate.

Social Investment Tax Relief
  • Individuals that invest in charities or make loan to charities can claim an income tax reduction under the Social Investment Tax Relief regime.
  • The relief is up to 30% of the investment in shares in Community Interest Companies, or of the loan to a CIC or charity.

Stamp Duty Land Tax
  • Charities can get relief from stamp duty land tax when they buy property for charitable purposes.
  • A charity can claim some relief where there is a joint purchase with a non-charity buyer.
23/07/18
When you have entrusted someone to advise you on something as important as your financial affairs, you need to be sure that no only do they have the knowledge but also that you're treated fairly in terms of fees. We're keen for you to understand exactly what you're paying for, whether it's obvious or behind-the-scenes, so you can feel confident you're getting good value for money. With this in mind Wealth Design has developed a brochure “Our Fees Explained” which you can view here.