Welcome to the Autumn edition of our Wealth,

Health and Inheritance Briefing. Retired judge Denzil Lush excited a great deal of debate recently when he said that he would not enter into a lasting power of attorney. In this issue we consider his remarks and whether or not you, and your clients, should draw up an LPA or rely on a deputy appointed by the court.

The Law Commission’s report on reform of the law relating to Wills also made the news. We discuss the pros and cons of electronic Wills.

Trustees have suffered a blizzard of regulation in recent years and there’s more on the way with the Trusts Registration Service recently launched by HMRC. The deadlines for compliance are approaching fast and our article sets out what trustees need to know and do.

Finally on the inheritance tax front we set out five tips to reduce your clients’ inheritance tax bills and look at how pre-2007 nil rate band discretionary will trusts could increase your clients’ tax bills.

As always any feedback, comments or suggestions are very welcome.

Anthony FairweatherPartner0345 209 1265anthony.fairweather@clarkewillmott.com

Wealth, Health & Inheritance Briefing

Wealth, Health & Inheritance Briefing September 2017

clarkewillmott.com Great service... Great people...

In an attempt to remove some of the barriers to making a Will, the Commission asks whether, in some situations, it might be possible for a Will to be prepared, executed and stored electronically.

Are electronic Wills a step forward?

Fully electronic Wills could provide prospective testators with the convenience and efficiency that technology already provides in other areas of their lives. If Will making were easier to access then the numbers of individuals dying intestate (with often undesirable tax or other consequences) could be reduced. The method of storage of electronic Wills needs to be sufficiently secure so there is less chance of documents being lost or destroyed than at present but the concept of a Will being electronically stored and submitted to probate on a testator’s death is an attractive one.

The type of technology used to generate the Will would be key. It is good to see that the Law Commission expresses some scepticism about video Wills on the basis that spoken language can be imprecise, and the use of exact, unambiguous language is particularly important in Will making.

The Law Commission identifies a number of current practical difficulties in introducing fully electronic Wills. A method of ensuring that Wills do not become inaccessible by the time of the testator’s death needs to be identified, in case, for example, the technology used to draw up the Will becomes obsolete.

The method of execution must be as least as secure as a manuscript signature on paper. The Law Commission recognises that the current

formality requirements set out in the Victorian Wills Act 1837 cannot easily be stretched to govern the execution of electronic Wills, so new formality requirements for electronic execution would need to be introduced.

Aside from these current difficulties, there may be further drawbacks to fully electronic Wills. While greater accessibility and convenience is to be welcomed, it should be recognised that a Will is arguably one of the most important documents that most individuals will ever draw up. Since it is essential to use precise language in a Will advice from a skilled professional can prove invaluable during the drafting stages. Electronic Wills must not allow the Will making process to become a “tick box” exercise with insufficient thought being given to the content of the document and it is essential that current safeguards against fraud are maintained or strengthened.

It is difficult to see where the impetus will come from to introduce the infrastructure that the Law Commission recognises as being essential if electronic Wills are to have a sufficient level of security.

At present the demand from testators does not seem to exist to any great degree, making commercial investment in this area an uncertain venture. The government has promoted and facilitated the on-line completion of lasting powers of attorney and the electronic submission of probate applications and inheritance tax returns is being introduced.

Continues on page 2

Are electronic Wills the future?The recent Law Commission consultation on the reform of the law relating to Wills considers how the process of making a Will could better reflect how people use technology in their everyday lives.

B i r m i n g h a m • B r i s t o l • C a r d i f f • L o n d o n • M a n c h e s t e r • S o u t h a m p t o n • Ta u n t o n

02 Wealth, Health & Inheritance Briefing September 2017

Are electronic Wills the future? - ContinuedThese ventures would seem to have benefits for the nation’s finances in encouraging the making of LPAs (and reducing the workload of the court of protection) and in reducing processing time and staff input on probate applications. It is harder to see how public finances would benefit from fully electronic Wills meaning public investment in this area is also less likely.

It should be remembered that many people making Wills are elderly, ill or vulnerable. The current generation of elderly people do not have the same technological abilities as their children and grandchildren so a system of Will making that was predominantly electronic might in fact make the process more inaccessible to them. This of course will not be the case for succeeding generations who might feel more at home making a Will via an app rather than using more traditional processes.

Technology is already an accepted part of the Will making process. Instructions are regularly given or confirmed by email and Wills are produced on computers, often using fully automated software. After detailed consideration, however, the Law Commission’s consultation paper concludes that legislation enabling electronic Wills should not be included in the primary legislation enacting other recommended aspects of Will law reform, but that the Lord Chancellor should be given the power to make provision for electronic Wills by statutory instrument at some future point.

The electronic Will may therefore have its day but, as recognised by the Law Commission, that day has yet to dawn.

For further information please contact: David Maddock Partner 0345 209 1205 david.maddock@clarkewillmott.com

Nil rate band discretionary trusts and the residence nil rate band

The problem in practice

For example, Marcus died in December 2006 when the nil rate band was £285,000. The family home was valued in 2006 at £450,000 and Marcus owned other assets in his sole name. Marcus’s Will contained a NRBDT. His half share of the house was charged with £225,000 and the house then transferred to his wife Nicola who then owned the house subject to the charge due to the NRBDT trustees. The balance of the assets in the trust comprised cash which was also lent to Nicola on an unsecured loan.

Nicola’s total estate (after deduction of the amounts due to the NRBDT) is worth £1 million in 2017 and the house is currently valued at £525,000. If Nicola dies after 6 April 2020 she will be able to claim RNRB transferable from Marcus of £175,000 and her own £175,000 allowance provided she leaves a share in the house worth this amount (£350,000) to her children, grandchildren and their spouses.

However, Nicola’s house is charged with £225,000 (and possibly more if the Will provided for indexing of the loan or payment of interest on the outstanding balance). This means that the value of the house for the purpose of the RNRB is £300,000 and the amount of the RNRB claimable by Nicola’s executors is restricted to £300,000 rather than the full £350,000. Consequently the inheritance tax payable on Nicola’s estate would be £150,000, while if the full RNRB had been available the IHT bill would be reduced by £20,000 to £130,000.

This problem will only apply to a limited number of clients. Those with more valuable properties whose estates qualify for the RNRB may find that the equity in their homes is sufficient to claim the RNRB in full notwithstanding the existence of the charge. Future growth in the value of the property might also resolve the problem. However, it is sensible for clients like Nicola to review their circumstances and to contact their advisers so that any necessary desirable action can be taken.

For further information please contact: Liz Smithers Partner 0345 209 1115 elizabeth.smithers@clarkewillmott.com

Nil rate band discretionary trusts (NRBDTs) were frequently used in Wills before the inheritance tax nil rate band became transferable between spouses and civil partners in 2007 and they maintain a role in current Wills. However, the introduction of the residence nil rate band (RNRB) earlier this year has, in some cases, impacted on the tax efficacy of NRBDTs where the testator has already died leaving a surviving spouse. We look at why this might be the case.

NRBDTs before 2007

NRBDTs in Wills drafted before 2007 generally contained provisions stating that the NRBDT could be constituted by a loan of the trust assets from the trustees to the surviving spouse. These provisions were usually included to enable the whole of the family home to be owned outright by the surviving spouse, with the trust asset comprising the loan. This was preferable for many spouses and also avoided a situation where the tax saving failed to materialise (which was considered to be a danger if the deceased spouse’s half share in the house fell into the trust and the surviving spouse continued to live there). For stamp duty reasons, and sometimes other tax reasons, the loan was generally secured by a charge over the family home. This device worked well for some years prior to 2007 and ensured that two inheritance tax nil rate bands could ultimately be claimed against a couple’s joint estate.

How has the RNRB affected some of these trusts?

The RNRB was introduced in April this year and when fully in force in 2019/20 a further £350,000 of a married couple’s estate will be free from inheritance tax if the estate has a property in it of sufficient value which is “closely inherited” ie broadly given to children, grandchildren or their spouses.

The crucial point to note here is that there must be a property of sufficient value in the estate at the date of death to utilise all the available RNRB, or alternatively the deceased must have downsized since 8 July 2015, so enabling a more valuable property that was previously owned by the testator to be taken into account in calculating the RNRB.

If the Will of the first spouse to die contained a NRBDT, and their share of the family home (charged with the amount due to the NRBDT) passed to their surviving spouse, the amount owed to the trust will reduce the surviving spouse’s equity in the house. This may seem attractive for tax purposes on the face of it but it may also mean that full advantage cannot be taken of the RNRB so leading to a possible higher inheritance tax bill.

Fully electronic Wills could provide prospective testators with the convenience and efficiency that technology already provides in other areas of their lives.

Lasting powers of attorney: does your client need one?

03 Wealth, Health & Inheritance Briefing September 2017

F o l l o w u s o n Tw i t t e r @ C l a r k e W i l l m o t t @ C W C o P @ C W P r i v a t e C l i e n t

Mr Lush cites a lack of safeguards, accountability and transparency in the LPA process. His remarks come at a time when the office of the public guardian (OPG) is encouraging individuals to consider entering into LPAs. Mr Lush acknowledges, however, that “the vast majority of LPAs work satisfactorily” and that there is “no real research on the extent of abuse.” His own estimate that one in eight LPAs involves abuse is not backed by any research and may perhaps be affected by the fact that, as a court of protection judge, Mr Lush most often dealt with the cases that had gone wrong in some way.

Should your client consider an LPA?

An LPA is a powerful legal document which is drawn up when someone who has full mental capacity appoints a person or persons of their choice to act as their attorney to deal with their financial affairs in the event they become incapable of doing so. If no LPA is in place then a deputy will be appointed by the court of protection to run the incapacitated person’s affairs.

Mr Lush is correct that the appointment of a deputy does have greater safeguards built into the process than an LPA, particularly one drawn up online without advice. For example, a deputy is required to enter into a security bond with an insurance company that compensates the incapacitated person if the deputy should abuse his position. A deputy is also required to provide accounts on an annual basis to the court. However, this higher level of oversight does come at a cost; the premium for the bond is payable by the incapacitated person and the set up cost of the appointment of a deputy typically runs into thousands of pounds rather than the hundreds paid when creating an LPA with professional advice. In addition, it can take many months from the time your client becomes incapacitated for the deputy to be appointed while, if the LPA has been registered in advance, it can be used immediately.

When considering whether to draw up an LPA it should be remembered that if your client consults a solicitor who is experienced in this area of work they will be alert to the possibility that pressure might be being brought to bear on your client to draw up the LPA in favour of a particular person. They will also discuss the ways of building safeguards into the LPA process. Your client could, for example, provide that expenditure over a specified amount has to

be authorised by all the attorneys rather than by one acting alone. Your client could also consider providing in the LPA that their attorneys should produce accounts to an independent person on a yearly basis thus replicating some of the safeguards included in the court of protection process.

Who should be attorney?

Your client’s choice of attorney is crucial. Mr Lush points out that when abuse occurs it is most often carried out by family members, usually children. Your client’s child is therefore not necessarily the best choice to act as their attorney, particularly if they have shown in the past that they are not skilled at managing finances. Similarly if your client has more than one child, and there is any kind of friction between them, your client should think carefully before appointing their children: if only some of the children are appointed this can lead to suspicion and bad feeling, while if all of the children are appointed they may disagree over how best to administer your client’s affairs, potentially leading to deadlock.

Your client could consider appointing another family member, a close friend or a professional person to act on their behalf if their children are not appropriate choices. This has the advantage that the choice of the attorney is made by your client and not by a court who may have limited information as to your client’s preferences. If there is no other appropriate person, and they do not wish to appoint a professional, then in these circumstances relying on the appointment of a deputy if necessary might be the best option.

In a straightforward case, however, building safeguards into the LPA process by appropriate provisions, and seeking professional advice from the outset, would avoid the delays, cost and lack of control associated with the court of protection deputyship process while incorporating some of the advantages of a deputyship.

For further information please contact: Anne Minihane Partner and Court of Protection professional deputy 0345 209 1391 anne.minihane@clarkewillmott.com

Denzil Lush, a retired court of protection judge, is reported to have said in the foreword to his new book that he would not draw up a lasting power of attorney (LPA) and that if he were to become incapacitated he would prefer to rely on the court appointing a deputy to manage his affairs.

04 Wealth, Health & Inheritance Briefing September 2017

Great service... Great people...R e a d o u r b l o g a t w w w . c l a r k e w i l l m o t t . c o m / b l o g /

Required reading for trustees

HMRC has, however, just announced that in the first year to allow sufficient time to collate and provide all the necessary information for new tax-paying trusts there will be a two month extension of the deadline to 5 December 2017.

All trusts, whether or not they currently have UK tax consequences, will have to maintain accurate and up-to-date records of all existing beneficial owners of the trust, and of all potential beneficiaries.

What sort of information will be required?

The information required includes :

• Details of the trust assets, including any applicable addresses and values;

• The identity of the settlor (the person who created the trust or provided funds for it), the trustees, any protector, any persons exercising effective control over the trust and the beneficiaries or class of beneficiaries; and

• The name, date of birth, national insurance number (for UK residents) and (for non-UK residents) their passport or ID number (including country of issue and expiry date of the passport or ID) of all of the above named persons.

As mentioned above, to comply with the new anti-money laundering regulations, all trustees are obliged to maintain accurate and up-to-date written records of all beneficial owners of a trust including details of potential beneficiaries. “Beneficial owner” is defined as:

• The settlor

• The trustees

• The beneficiaries

• The class of persons in whose main interest the trust is set up or operates if the beneficiaries have not yet been determined

• Anyone who has control over the trust (which is defined by the relevant regulations).

Feeling daunted?

If the administration of your client’s trust is not currently carried out professionally, we would be happy to advise them on the above requirements and to give them details about our trusts administration service.

For further information please contact: Carol Cummins Consultant 0345 209 1275 carol.cummins@clarkewillmott.com

Trustees can be forgiven for becoming a little weary at the blitz of regulation that has come their way in recent years from FATCA to CRS and now the recently introduced trusts registration service. Action is imperative, however, to comply with the new rules and the relevant deadlines are only a matter of months away. What is happening?

The Fourth Anti-Money Laundering Directive puts certain obligations onto EU member states and legislation making these requirements part of UK law came into force on 26 June 2017. One of the obligations is for member states to record particular information in respect of trusts. As part of the implementation HMRC has created an online trusts registration service (TRS) accessed through the government gateway. This will enable HMRC to maintain the required register of beneficial ownership. This register will not be open for public inspection.

Which trusts will be affected?

All trusts will be affected to a greater or lesser extent. The extent will depend on whether the trust has UK tax consequences in any particular tax year. Any trust which currently submits a tax return will have UK tax consequences (ie the trustees will be liable to pay, for example, income tax or capital gains tax) and a current non-tax paying trust could have UK tax consequences in the future.

All trusts with tax consequences not currently on HMRC’s records will have to be registered with the TRS by 5 October following the tax year in which the trust was created or first had tax consequences (if later). Existing trusts already registered with HMRC under the previous paper system will have to confirm or amend the information held by HMRC by 31 January 2018.

For example:

• Trust A pays income tax and completes a tax return each year. It will have to confirm, or amend, the information held by HMRC by 31 January 2018.

• Trust B was created on 20 September 2016 and is also liable to income tax; it has until 5 October 2017 to register with the TRS.

• Trust C holds non-income producing assets and does not need to register yet as it is not liable to pay any UK tax. However, when in 2018/19 it disposes of some investments and becomes liable to capital gains tax the trust will need to register with the TRS by 5 October 2019.

...to comply with the new anti-money laundering regulations, all trustees are obliged to maintain written records of beneficial owners

05 Wealth, Health & Inheritance Briefing September 2017

Five tips to reduce an estate’s inheritance tax bill

If you would like to receive future editions of our Wealth, Health & Inheritance Briefing please contact news@clarkewillmott.com

OfficesBirmingham office 138 Edmund Street, Birmingham B3 2ES t: 0121 222 1000

Bristol office 1 Georges Square, Bath Street, Bristol BS1 6BA t: 0117 314 9000

Cardiff office 2nd Floor, Emperor House, Scott Harbour, Pierhead Street, Cardiff, CF10 4PH t: 0292 060 6000

London office 1 Chancery Lane, London WC2A 1LF t: 0203 733 6000

Manchester office 19 Spring Gardens, Manchester M2 1FB t: 0161 638 3000

Southampton office Burlington House, Botleigh Grange Business Park, Hedge End, Southampton SO30 2AF t: 0238 008 2000

Taunton office Blackbrook Gate, Blackbrook Park Avenue, Taunton TA1 2PG t: 0182 323 0100

clarkewillmott.com

Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC344818. It is authorised and regulated by the Solicitors Regulation Authority (SRA number 510689), whose rules can be found at http://www.sra.org.uk/handbook/. Its registered office is 138 Edmund Street, Birmingham, West Midlands, B3 2ES. Any reference to a ‘partner’ is to a member of Clarke Willmott LLP or an employee or consultant who is a lawyer with equivalent standing and qualifications and is not a reference to a partner in a partnership. The articles in this briefing are not intended to be definitive statements of the law but instead provide general guidance.

Great service... Great people...

Much of this record take must be attributable to the fact that the IHT nil rate band has been frozen at £325,000 since 2009 while asset values have continued to rise. We set out a few tips on how your clients can reduce their contribution to these record receipts:

1. If your client has excess income not needed to maintain their normal standard of living then they could consider making regular gifts out of income to their intended beneficiaries. Such gifts are completely IHT free however long your client survives them. It is important that the gifts are made regularly and that your client records their intentions in respect of future gifts. If your client’s children are still young then the gifts can be made to a trust and a decision about when and whether they benefit can be made in due course.

2. The IHT regime contains a number of valuable exemptions and reliefs but in many cases the rules governing these reliefs can be complicated. For example, if your client is a small company owner they should benefit from business property relief after two years of ownership but the availability of this relief can be compromised if, among other things, the company owns investment property or holds excessive cash reserves. If your client owns business or agricultural property, they should therefore review the structure of their business to ensure that maximum reliefs will be due to their estate.

3. The newest IHT relief is the residence nil rate band (RNRB) which, in this tax year, exempts £100,000 of your client’s estate from tax if they leave a residential property to their children, grandchildren or their

spouses. The relief tapers away on estates that exceed £2 million until it is worth nothing if the estate exceeds £2.2 million in 2017/18. The RNRB is a complicated relief and your client should review their Will to ensure that they qualify. In calculating the £2 million limit, assets that might be free of IHT, such as business property, are included. Action can be taken to reduce the impact of this by drawing up Wills in a way that ensures the estate of the survivor of a couple is minimised for tax purposes and the amount of the RNRB is thus maximised.

4. One way for your client to reduce the normal 40% IHT charge on their estate is by leaving 10% of their net estate to charity. This reduces the IHT rate applicable to the estate by 4% to 36%. If your client’s current Will includes charitable gifts that fall short of a 10% legacy, increasing the charitable legacies to 10% can actually have the side effect of increasing the amounts due to the non-charitable beneficiaries.

5. Your client should write any life insurance policies in trust so that they do not form part of their taxable estate and the proceeds can be obtained quickly and easily without awaiting the issue of a grant of probate to your client’s estate.

For further information please contact: Emma Pope Partner 0345 209 1823 emma.pope@clarkewillmott.com

Recent statistics show that HMRC collected £5.1 billion in inheritance tax (IHT) in the period from June 2016 to May 2017, a 9% rise on the previous year’s receipts.