Articles

Headline UK tax issues for people thinking of becoming UK tax resident

Our tax year runs from 6th April to 5th April. For every individual it is necessary to determine their UK tax residence status to 5th April.

The general rule is that if an individual is UK tax resident for the year ended 5th April, they are liable to UK income tax and capital gains tax (‘CGT’) on their worldwide income and gains for that year whether or not enjoyed or remitted here. Further, the general rule is a UK tax resident individual to 5th April is fully within the scope of all of our tax anti-avoidance legislation including as it applies offshore the UK. 

In addition to determining an individual’s tax residence status to 5th April, it is also necessary to determine their domicile status as at the same date. If they are UK tax resident but not UK tax domiciled on 5th April, their exposure to UK tax on their foreign source income and gains to 5th April which are not ‘remitted’ here can be kept outside of UK tax until remitted.

There are 3 types of domicile:
– domicile of dependency;
– domicile of origin; and
– domicile of choice.

It is a reasonable assumption that most new immigrants are not UK domiciled when they first move here. Being a non domiciliary allows you to elect to HMRC to (in my words) put up a wall to 5th April and keep all your non UK source income and gains for the year to 5th April outside of UK income tax/CGT unless ‘remitted here’. This is called the remittance basis of taxation.

Those eligible to claim the remittance basis need to be aware
that (i) there is a wide definition of ‘remitted’ including via a ‘relevant person’; and (ii) we have ‘ordering’ rules that govern the order in which we treat withdrawals from a non UK bank account as being withdrawn. In effect the most UK tax expensive money is deemed accessed first (e.g. sums taxable as income) before capital gains or the cost of the asset sold. These rules are called the mixed bank account rules.

A UK tax resident to 5th April who is an electing ‘non dom’ needs to know they can’t avoid having a taxable UK remittance to 5th April by e.g. giving wealth abroad to a defined group of people including a non UK company that then brings the otherwise taxable sum to the UK e.g. to make an investment.

There is a UK tax cost to elect to 5th April to HMRC  to be taxed on the remittance basis. Every individual who makes the election is taxable in the UK from their first pound of taxable income or gains to 5th April. There is no access to a zero rate of tax.

In addition, as described below, there can be a tangible cost to making a ‘non dom’ election to 5th April.

Years UK resident                                              Remittance basis charge
UK tax resident 7 of the preceding
9 tax years                                                                            £30,000

UK tax resident for at least 12 of the preceding
14 tax years                                                                           £60,000

UK tax resident for 15 or more of the preceding  
20 tax years                                                               Ineligible to claim

A key tax planning point for non domiciliaries thinking of moving here is that if they realise non UK gains prior to 5th April in the year they plan to move here and prior to said 5th April they place such realised funds in a segregated wholly clean (never been used before) non UK account into which nothing further is ever added, this is a ‘clean capital’ account and funds from it can be remitted here free of any UK tax charge even once Person X is UK tax resident. 

Issues to watch out for if X is planning to become UK tax resident for the first time in the year ending 5th April include inadvertently making
– His/her non-UK private company UK tax resident; and/or
– His/her offshore trust UK tax resident.

If you have any questions, please get in touch.

Summary of recommendations made by The Office of Tax Simplification to HM Treasury as regards changes to the UK Capital Gains Tax regime

Rates and boundaries

1. If the government considers the simplification priority is to reduce distortions to behaviour, it should either:

  • consider more closely aligning Capital Gains Tax rates with Income Tax rates, or
  • consider addressing boundary issues as between Capital Gains Tax and Income Tax

2. If the government considers more closely aligning Capital Gains Tax and Income Tax rates it should also:

  • consider reintroducing a form of relief for inflationary gains,
  • consider the interactions with the tax position of companies, and
  • consider allowing a more flexible use of capital losses

3.  If there remains a disparity between Capital Gains Tax and Income Tax rates and the government wishes the simplification priority is to make tax liabilities easier to understand and predict, it should consider reducing the number of Capital Gains Tax rates and the extent to which liabilities depend on the level of a taxpayer’s income.

4.  If the government considers addressing Capital Gains Tax and Income Tax boundary issues, it should:

  • consider whether employees and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and, in particular
  • consider taxing more of the share-based rewards arising from employment, and of the accumulated retained earnings in smaller companies, at Income Tax rates.

The Annual Exempt Amount

5. If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level.

6. If the government does reduce the Annual Exempt Amount, it should do so in conjunction with:

  • considering reforming the current chattels exemption by introducing a broader exemption for personal effects, with only specific categories of assets being taxable,
  • formalising the administrative arrangements for the real time capital gains service, and linking up these returns to the Personal Tax Account, and  
  • exploring requiring investment managers and others to report Capital Gains Tax information to taxpayers and HMRC, to make tax compliance easier for individuals.

Capital transfers

7. Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

8. In addition, the government should consider removing the Capital Gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.

9. If the government does remove the capital gains uplift on death more widely, it should:

  • consider a rebasing of all assets, perhaps to the year 2000, and
  • consider extending Gift Holdover Relief to a broader range of assets.

Business reliefs

10. The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.

11. The government should abolish Investors’ Relief.

Robert Schon

UK tax issues to be aware of for professionals helping people move to the UK

Our tax year runs from 6th April to 5th April.

For every individual it is necessary to determine the following for the year ended 5th April
– their domicile; and
– their tax residence status
And from this their liability to UK income tax and capital gains tax to 5th April.

There are 3 types of domicile:
– domicile of dependency;
– domicile of origin;
– domicile of choice
It is a reasonable assumption that most new immigrants are not UK domiciled when they first move to the UK.

If you are UK tax resident to 5th April, why is being domiciled outside the UK beneficial from a UK income tax and CGT standpoint? It effectively allows you to elect to put up a wall to 5th April and keep all your non UK source income and gains for the year outside of UK income tax/CGT unless ‘remitted here’. This is called the remittance basis of taxation (‘RB’).
NB clients need to be aware
– that there is a wide definition of ‘remitted’ including via a ‘relevant person’; and
– of our ‘mixed’ bank account rules.

Clients,  UK tax resident to 5th April and electing ‘non doms’,  need to know they can’t avoid having a taxable UK remittance to 5th April by e.g. giving wealth abroad to a defined group of people including a non UK company they are involved with and that person bringing the otherwise taxable sum to the UK. They also need to know that if they remit funds here from an offshore bank account that has monies from many different sources in it e.g. salary; dividends; chargeable gains and gifts that HMRC has a statutory regime that taxes the remittance to the UK as if the most tax expensive sum has been brought here first.What does it cost to make a remittance basis election?

Years UK resident             Remittance basis charge
UK tax resident less than 7 of the preceding
9 tax years                        £30,000

UK tax resident for at least 12 of the preceding
14 tax years                      £60,000

UK tax resident for 15 or more of the preceding  
20 tax years                      Ineligible to claim RB

How do these rules apply e.g. to a Tier 1 Investor visa or a business visa applicant who wants to bring prior earned offshore income/gains to the UK to help buy a home here?

In order to apply our statutory residence test introduced by the Finance act 2015, one must determine X’s residence status to 5th April

Our self assessment system of taxation imposes on the taxpayer the obligation to self assesses their UK tax status and UK tax liability to 5th April and report it to HMRC.

Double tax treaties are a bilateral contract between e.g. the UK and a named 3rd country. It may be for the year of arrival (or departure) X is a tax resident of their country of departure and not their new ‘home’. This needs to be considered; assessed and if relevant claimed on a case by case basis. All double tax treaties have a residence tie breaker clause.

Issues to watch out for if X becomes UK tax resident for the first time in the year ending 5th April include inadvertently making
– His/her non-UK private company UK tax resident; and/or
– His/her offshore trust UK tax resident

Robert Schon

COVID-19 travel restrictions risk to tax residency

There is a risk that Covid travel restrictions might make non UK tax resident companies or trusts UK tax resident.

I recently attended a Zoom meeting of UK tax lawyers involved with international tax issues. One agenda item concerned UK tax resident directors of non UK tax resident companies where because of COVID-19 UK tax resident directors are not travelling abroad to attend in person board meetings. 

The concern tabled is that hitherto non UK tax resident companies might become UK tax resident for their current accounting period ending on e.g. 31st December exposing such companies (amongst other things) to UK corporation tax on their world wide income and gains to 31st December 2020. 

UK case law has held that the test of company residence is ‘where the central management and control actually abides’ (see Lord Loreburn in De Beers Consolidated Mines v Howe (5 TC 198). In broad terms this concept of central management and control is directed at the highest level of control of the business of a company. It is distinguished from the place where the main operations of the business are to be found. Successive decisions have 

–        emphasised that the place of central management and control for the accounting period is wholly a question of fact; and

–        attached importance to the place where the company’s board of directors meet insofar as those meetings constitute the medium through which central management and control is exercised. 

The location of board meetings, although important in the normal case, is not necessarily conclusive. Lord Radcliffe in Unit Construction pointed out [(1959 38 TC 712 at p738)] that the site of the meetings of the directors’ board has not been chosen at ‘the test’ of company residence. In some cases, for example, central management and control is exercised by a single individual. This may happen when a chair or managing director exercises powers formally conferred by the company’s Articles and the other board members are little more than ciphers, or by reason of a dominant shareholding or for some other reason. In those cases, the residence of the company is where the controlling individual exercises his/her powers. 

HMRC has not issued any guidance that covers non UK tax resident companies that might inadvertently become UK tax resident. If you think anything written here might have relevance to you/a company you are involved with please get in touch. I have a lot of experience of working in this area and am confident I can assist. 

Similar (but different) issues arise for hitherto non UK tax resident trusts that may become UK tax resident to 5th April because trustee meetings are de facto taking place here and not abroad. If you are a trustee of such a trust please get in touch.

Robert Schon

Wills

The Ministry of Justice Guidance on legal practitioners in the key worker category include Solicitors acting in connection with the execution of wills. We are continuing our usual practice of arranging meetings albeit now online or by telephone appointment.

Writing a will is a combination of thinking about what you want to happen after your death given your circumstances and how tax impacts your thinking/assets.

The key points to cover in thinking about a will are first to identify your assets and then:

  • Who you name as executors? Their job is to wind up your estate and settle your debts including Inheritance Tax due to HMRC. Beneficiaries can act as executors;
  • If you have minor children; who will be their guardians on the death of the 2nd parent?
  • If you want to detail any funeral wishes (e.g. burial or cremation) and if you would like a religious service?
  • Details of any gifts of money to be made on your death or gifts of personal possessions;
  • Details of any gifts to charity to be made upon your death; and
  • Details of the person or persons you wish to receive your residuary estate being those assets remaining in your estate after all taxes, debts, legacies and administration expenses and if more than one the order of priority amongst those persons e.g. to my spouse/civil partner if s/he survives me; otherwise to my children equally and if any have predeceased me their share to their children at 18 otherwise all to my surviving child/children and if none to charity.

If you think I might be able to help, please get in touch.

IHT

There have been a number of programmes and articles recently on the inequalities of lockdown and where the burden of repaying UK government debt should fall. I think it inevitable in the foreseeable future that our Inheritance Tax (IHT)/gift tax regime is going to change and the tax cost of making gifts increase. If you can afford to make lifetime gifts as part of your estate planning, I would encourage you to move this up your agenda.

As a tax and estate planning solicitor working in this community, I see my role to try and communicate issues that I think those who read these inserts might find interesting and should have on their radar.

I think we presently have a generous IHT regime for making gifts. So long as you can afford to give away, you can give away unlimited wealth free of IHT and make no IHT return to HMRC provided the transfer is by an individual by way of gift

  • To another individual; on condition that
  • The recipient takes possession and enjoyment of the property at the date of the gift or 7 years before the donor’s death if later; and
  • After the date of the gift, the property is enjoyed to the entire exclusion or virtually to the entire exclusion of the donor including at any time in the 7 years before the death of the donor.

Similarly generous rules apply when creating a trust for someone who is ‘disabled’.

A charge to Capital Gains Tax (CGT) on the donor can inhibit the making of lifetime gifts. Where the asset gifted is something other than cash, as a general rule the donor is deemed to receive consideration equal to the market value of the asset disposed of and CGT is due on the disposal.

In certain limited cases this charge to CGT can be ‘held over’ meaning the gift recipient takes the asset at the donor’s CGT base cost. This result can usually be achieved where:

  • The gift or transfer is of business assets to an individual or a trust; or
  • Where the transfer is a ‘chargeable transfer’ for IHT purposes e.g. a lifetime transfer into a trust.

If you think I can help-please get in touch.

CGT Mitigation and Spouses

This note is relevant to couples who are

  • married or in a civil partnership; and
  • each has a will saying ‘all to the other’;
  • where it is likely that one partner in particular (x) will predecease the other; and
  • both are tax resident (and the recipient is domiciled) in the UK; and
  • they own assets with substantial unrealised gains on which Capital Gains Tax (‘CGT’) would be due if sold.

In these circumstances if the spouse who is likely to survive

  • transfers all their investments that have inbuilt capital gains to their spouse who is likely to die first; so
  • s/he dies possessed of all assets with inbuilt capital gains owned by the couple; and
  • by their will all such assets are inherited by their surviving spouse;
  • s/he will inherit them at a restated CGT base cost equal to the market value of each asset on x’s date of death.

This planning is described further below. What follows comes from material published by the body set up by HMRC to decide if tax planning is or is not ‘acceptable’.

Gifts between spouses

This example is intended to show standard tax planning on gifts between spouses.

Background

This example considers the CGT position on an arrangement involving a gift of shares between spouses, followed by the death of the spouse receiving the gift.

The facts 

In January 2012 Mr and Mrs Jones are told that Mrs Jones is terminally ill. In February Mr Jones gives his shares in an investment company, which are standing at a significant gain, to his wife. Under the terms of her Will as drafted at the date of the gift he will inherit those shares when she dies. Mrs Jones has full capacity at the time of the gift.

Mrs Jones dies in June and the shares pass to Mr Jones under the terms of her Will. Mrs Jones has not executed a new Will since the gift. 

The relevant tax provisions

Sections 58, 62(1)(b) and 62(4)(a) Taxation of Chargeable Gains Act 1992 (‘TCGA’)

The taxpayer’s tax analysis

The gift of the shares is a transfer between a husband and wife who are living together. This transaction is treated, by s58 TCGA as taking place for such consideration as will give rise to neither a gain nor a loss. 

All the assets of the deceased which pass to his or her personal representatives are deemed to have been acquired by them, at market value, at the date of death under s62(1)(b)TCGA. When beneficial ownership of any asset of the estate passes from the personal representatives to a beneficiary, S62(4)(a) TCGA provides that no chargeable gain shall accrue to the personal representatives.

In summary, there is no chargeable gain on the gift of shares by Mr Jones to Mrs Jones and Mr Jones re-acquires the shares at market value at the date of his wife’s death. In effect, the gain that has accrued during the earlier ownership of shares by Mr Jones has disappeared. 

What is the analysis under the tax general anti abuse rule

The main purpose of the arrangement is to obtain a tax advantage. The gift of shares was made by Mr Jones in the hope of washing out the gains on the understanding that his wife would leave them back to him.  

Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions?

Yes. The principle of s58 TCGA  is to allow assets to be transferred between spouses and between civil partners on the basis of no gain/no loss. 

Assets passing on death to personal representatives are treated as taking place at market value and no gain is charged when the assets are passed to the beneficiaries.

Do the means of achieving the substantive tax results involve one or more contrived or abnormal steps?

The means of achieving the tax results depend upon the gift, the death of Mrs Jones and her choosing to leave the shares to Mr Jones in her Will. There are no abnormal or contrived steps here; the transactions are normal arrangements between spouses or civil partners. 

Are the arrangements intended to exploit any shortcomings in the relevant tax provisions?

No.

Do the tax arrangements accord with established practice and has HMRC indicated its acceptance of that practice?

Yes. HMRC sets out in its instruction manuals how these transactions are to be treated for Capital Gains Tax purposes. 

Conclusion 

These arrangements can be regarded as a reasonable course of action in relation to the tax provisions having regard to all the circumstances. The general anti abuse rule would not apply.

An alternative arrangement – What if the facts were the same as those above but the gift of shares was made on the day of Mrs Jones’ death?

HMRC’s view is that so long as Mrs Jones was in full capacity at the time of the gift the analysis would be the same and that the general anti abuse rule would not apply. This assumes of course that the gift was validly completed prior to death. 

Commentary

The ability to plan in this way is potentially very valuable to clients. Other taxes such as Stamp Duty, Stamp Duty Land Tax and Inheritance Tax need to be considered. If you think I can help, please get in touch.

Writing a will – leave your affairs tidily

About 50% of my practice is helping clients with their estate planning. This invariably concludes with their writing a will. In addition, it may involve lifetime gifts (perhaps into trust) and writing a finance and/or health lasting power and perhaps a living will. Sometimes it requires liaising with lawyers offshore if the client has a foreign citizenship and/or if s/he owns assets outside the UK.

Putting these pieces of paper in place in a way that works for the client and his/her heirs is something s/he cannot delegate. It is for this reason I describe the exercise as a communication of love. I want in this note to explain this sentiment and give some examples.

Writing a will is like playing a what if game. Let us assume the client is married/in a civil partnership and has children. A typical scenario is on the client’s death their will provides:

  1. All to my surviving spouse/civil partner;
  2. If s/he has died – all to my children in equal shares at [18];
  3. If a child predeceases their surviving parent and has children who survive the 2nd parent to die (‘X’); the dead child’s share goes equally to his/her children on their attaining [18];
  4. If no children/grandchildren survive X, their estate passes to … ; and
  5. If no named beneficiary is alive to inherit X’s estate, it passes to one or more named charities.

Prior to anyone inheriting the deceased’s assets, their financial affairs need to be brought to a conclusion. This is the job of the executor(s). If the deceased was an owner manager of a business it may be different executors need to be appointed to ‘manage’ the business for the estate to those executors appointed to manage the other assets of the deceased.  This is particularly true if the deceased was an owner of a regulated business such as a solicitor.

Should the client have children below the age of 18 additional matters need to be addressed. These include:

  • who the client appoints as guardian(s) for his/her children should both parents die prematurely; and
  • thinking how in these circumstances the guardian(s) can be compensated for the inevitable disruption in their life.

The assets of the deceased can be used for the education, maintenance and welfare of the deceased’s children. They cannot (unless other steps are taken) be used e.g. to pay for a loft conversion at the home of the guardian(s) to accommodate the deceased’s children.

A question I ask clients is if they care if their surviving spouse/civil partner re-marries and potentially leaves assets inherited from the deceased to persons other than their children. In my experience the older the client the less relaxed they are.

The Inheritance Tax Act 1984 (‘IHT’) covers this scenario by saying that the IHT spouse exemption is available where assets are left on trust to a surviving spouse for life and on their death whatever remains by way of capital is to pass e.g. to the children of the first spouse/civil partner to die.

This structure has advantages when it comes to assessing the capital of the surviving spouse available to meet care costs as the assets in the will trust are presently left out of account in calculating the available assets of the surviving spouse/civil partner.

I wrote a will for a client (‘C’) who had children from a prior marriage. C chose to put in place such a life interest trust for the surviving spouse (‘S’.) After C’s death, S found it undignified that the trustees included one or more of C’s children. The issue being if S wanted any capital from the trust (in addition to its income) the trustees needed to agree. Today – especially in a second marriage scenario – if clients want such a will trust structure I explore with them their leaving their surviving spouse/civil partner some capital outright so their need to access the trust for capital is reduced.

The difference between a will and a lasting power of attorney (‘LPA’) finance

The contrast is that a will has no affect during the lifetime of the person who wrote it and a finance LPA has no affect after death.

A finance LPA allows the donor to

  • nominate who s/he wants to manage their financial affairs if the donor ceases to have capacity; and is
  • much cheaper and easier to put in place than the family needing to apply to the court for a deputy to be appointed to perform the same function if no finance LPA exists and x has ceased to have capacity.

A health LPA allows you to appoint who you want to liaise with ‘authority’ on issues concerning your care; medical wellbeing and receipt or not of life sustaining treatment.

I sincerely believe that doing the required thinking to put in place the pieces of paper I describe above, so they truly work when the time comes for you and your family/nearest and dearest, is only a job you can do. I do my best to make it an exercise you enjoy and complete feeling ‘it fits-it works’.

If you think I can be of help-please get in touch.

Robert Schon

Guidance for grandparents when writing their will

Inspired by an item by Helena Luckhurst of the London law firm Fladgate LLP.

This note offers guidance to anyone who wants to leave assets to minor grandchildren in their Will. Its focus is making provision for minor grandchildren and the tax consequences of the different options. I will shortly write on the options for making provision in a will for minor children. This note is not exhaustive; for example, it doesn’t mention the special types of trust that may be available for minors who are disabled. Its purpose is to raise awareness of the different options available to grandparents when thinking about writing a will.

Where the client has children, most wills say:

  • All to my spouse/civil partner if s/he survives me;
  • If I am the second to die; all to my children in equal shares; and
  • If a child has predeceased me leaving a child or children, that child or children are to take the share of their deceased parent in equal shares.

Clients are frequently content for minors to inherit modest amounts outright. My experience is clients do not want a minor to inherit substantial sums at 18 or younger. It may be the last option described below is the most flexible choice. Grandparents must make their own decision from the alternatives described.

A bare trust for a minor – this is the only option available to a grandparent for a minor to inherit at an age younger than 18

If at the time of the grandparent’s death the grandchild is a minor, the only issue preventing the minor from taking their inheritance is the grandchild’s minority. Assets passing to the grandchild are, therefore, assented to a bare trustee(s) who will hold and manage the assets for the grandchild pending their attaining 18.

At 18 the grandchild is able to call for their inheritance. From the date of the grandparent’s death the inheritance belongs in law to the grandchild. For example, if the grandchild died whilst a minor their assets would be within their estate for Inheritance Tax (‘IHT’) purposes and would, as a general rule, pass under English intestacy rules.

Whilst the grandchild is less than 18 income or capital from their inheritance can be applied for their benefit. The grandchild will annually to 5th April be subject to income tax and capital gains tax (‘CGT’) on income or gains arising in excess of any available personal allowance or annual CGT exemption. The minor may need to file a tax return.

On the grandchild attaining 18 there is no IHT on the assets being transferred into their name from that of the bare trustee(s).

A key issue when drafting the will is who the grandparent appoints as bare trustee(s) pending their grandchild attaining 18. It is the job of the bare trustee to manage the grandchild’s inheritance pending the grandchild attaining 18.

Where the grandparent does not want to set an age for the minor grandchildren to inherit

Grandparents have 2 choices. Their will can either create an immediate post death interest trust (‘IPDI’) or a discretionary trust. Each has its own tax regime. Grandparents need to have these in mind in making their decision as to how they structure via their will how any grandchild inherits.

A discretionary trust

A grandparent preferring to keep their options completely open can provide in their will after their death for a minor’s inheritance to pass into a discretionary trust. The trust can last for up to 125 years and the class of beneficiaries can be very widely drawn to include for example all the heirs and their spouses/civil partners of the client’s parents. This breadth means inheritances can be reallocated between family members as the needs of the different family members become clear. It also allows inter-generational IHT planning because it allows family wealth to pass down the family tree (or between siblings) without the 40% IHT charge that can apply when a family member passes their wealth them self on their death to a family member.

The discretionary will trust trustees will usually be guided by written advice (a letter of wishes) written and signed in the lifetime of the grandparent to the trustees setting out the thinking of the grandparent(s) on when income and capital distributions should be made from the trust to a beneficiary e.g. for each grandchild to receive their share of capital at age 25.

Whilst assets remain within the discretionary trust, trust income or capital can be applied by the trustees to or for a beneficiary’s benefit both pre and post minority.

Discretionary trusts are subject to the IHT periodic charge regime throughout the lifetime of the will trust. In essence the trust fund is subject to a maximum 6% rate of IHT every 10 years from its creation and after the first 10 years it is subject to an IHT exit charge when assets leave the will trust. The rate of the exit charge depends on how long the assets have been in trust after the last 10 year anniversary and their exit from the trust. For example, a capital distribution after 15 years would trigger an IHT exit charge (at current rates) of 3%.

Gains realised on capital distributions from a discretionary trust to a beneficiary (e.g. when the trustees transfer shares or real estate absolutely into the name of a grandchild) can be deferred until the beneficiary disposes of the asset i.e. the gain can be ‘rolled over’ thereby deferring any CGT charge.

An IPDI

An IPDI is the vehicle for a grandparent who does not want their grandchild to inherit outright on their death and who does not want to have any IHT 10 year charge or exit charge applying to the minor’s inheritance while it is in trust-see above.

An IPDI must by law give the grandchild the right to the income of their inheritance as it arises-no matter what the age of the grandchild. The income is taxed as the grandchild’s.

The terms of the IPDI can provide for the trustees to be given the power to distribute the inheritance to the child at any age. The timing of capital distributions remains at the discretion of the trustees. The grandparent can however give guidance to the trustees via a letter of wishes as to the age they consider a transfer of capital to the grandchild appropriate. As with all trusts, the choice of who the client appoints as the IPDI trustees is crucial.

The flexibility an IPDI trust offers can be very helpful in protecting the minor as s/he gains financial maturity.

The price for avoiding the IHT 10 year charge and exit charge described above for discretionary trusts is that the IPDI assets form part of the IHT estate of the minor and will be subject to IHT whenever s/he dies and at whatever age. This risk can be covered by insurance.

The transfer of capital assets out of the IPDI trust to a beneficiary e.g. the minor on attaining 25 is a disposal for CGT purposes for which the gain usually cannot be deferred. CGT will be payable at the trustees’ rate of CGT being presently 20% unless the asset being disposed of is e.g. a buy to let residential property when the rate is 28%.

The grandparent keeping their options open

A discretionary trust can be included in the grandparent’s will with a power to appoint capital onto different trusts. The IHT and CGT law allows the trustees of the discretionary will trust to have up to 2 years after the grandparent’s death to turn the trust into any of the options described above. For IHT and CGT purposes the consequences will be the same as if the grandparent’s will had included that option in the first place. The key is for the grandparent to trust their choice of will trustees to make the right decision when the time comes. The grandparent can write them a letter of wishes to set out their thinking but the decision will be that of the will trustees.

Concluding thoughts

I am embarrassed at the complexity of this topic. It may be the grandparent(s) should consult each of their children and agree together for each child the approach they think best serves that child’s family.

I enjoy helping a client write their will. I describe a will as being the last communication of love one leaves.  As such (in my opinion) it should seek to minimise family division and be as useful as possible. Only the person writing their will can look at their family and their loved ones and decide in the light of the choices available what they think is likely to work best for their heirs. If you think I might be able to assist you, please get in touch.

Robert Schon

A Lasting Power of Attorney-financial decisions

One of my definitions of real love is leaving your affairs tidy. As we age this is something we alone can do. It isn’t something we can delegate.

I am surprised but quite a number of people seem not to know the difference between a will and a financial decisions lasting power of attorney.

A will speaks from death and is the document detailing

(i) who is to bring your financial affairs to a tidy end; and
(ii) who is to inherit whatever remains. A will has no application in your lifetime. In contrast a financial decisions lasting power of attorney only applies in lifetime and has no relevance on death.

So long as you have mental capacity, writing a financial decisions lasting power is the ‘easy’ mechanism to appoint named others to administer your financial affairs should you cease to have capacity.

Should you lose capacity and not have a financial decisions lasting power in place, before anyone can access your funds or manage your assets they need to apply to the Court of Protection to be appointed your Deputy. In every single way I can imagine this is a process best avoided. No one will thank you for not having written a financial decisions lasting power.

Within the lasting power document you can specify if you have financial ‘preferences’ for your attorney(s) to follow (e.g. ‘I prefer to invest in ethical funds’) or if you have ‘instructions’ they must follow. In its guidance the Office of the Public Guardian says ‘The only circumstance in which you must write an instruction is in a finance lasting power if (i) you have investments managed by a bank and want that to continue; [and] (ii) you want to allow your attorneys to let a bank manage your investments.’

Many of us have funds managed on our behalf by a discretionary manager. Should we lose capacity, if we want our funds to remain managed by that manager, our financial decisions lasting power has to authorise it as an instruction e.g. ‘My attorney(s) may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.’

Attorneys must be careful when making gifts pursuant to the lasting power. There are strict limits on the kinds of gifts that attorneys can give on behalf of the person who has lost capacity (‘the donor’). They can only give presents on ‘customary occasions’ which are defined to include weddings, birthdays and religious holidays. Gifts should be reasonable in size and take into account how much money the donor has. The Office of the Public Guardian guidance says ‘Your attorneys must apply to the Court of Protection if they want to make gifts  … on your behalf like the payment of school fees for grandchildren or the making of interest free loans to family’. This is the case even if such payments or loans were a regular occurrence when the donor had capacity.

In a 2018 case, the Court of Protection considered the issues it would take into account when considering if to authorise a gift by the donor to minimise Inheritance Tax (‘IHT’) on her death. The donor was 72, a widow, her assets were circa £17m and her attorneys wanted to give away £7m in the hope she would survive 7 years (or at least 3 years) and thereby save IHT of up to £2.8m. There was no question that £10m was more than amply sufficient to meet her needs.

In reaching its decision the court had reference to the donor’s attitude and generosity in lifetime to making gifts and her known views on tax mitigation.

The conclusion I take from the case is that if the donor might want their financial decisions attorney(s) to make gifts on their behalf, they should leave evidence with their finance lasting power as to their attitude and approach to lifetime giving and tax mitigation so the Court of Protection knows their views when it is asked to consider the matter.

There is a second lasting power dealing with the donor’s health and care should the donor cease to have capacity. Should, for example, the donor have a preference to die at home in their bed; their place to say this is in the preferences section of their health and care lasting power. In this situation there is a read across to their financial decisions lasting power in that they might want to say in the preferences section of that document if needs be their attorneys should fund their elder care by equity release. In essence in a semi coded way saying to children who are appointed to act as their attorney(s) ‘please be generous to me with my money.’

You can write lasting powers without seeking help from a knowledgeable specialist. Frequently there are complexities that I think warrant involving an expert. If I might be able to help, please get in touch.