A time of change

The Chancellor’s Summer Budget on 8 July 2015 was a full Budget in terms of content for wealth management practitioners. ?The Finance Bill (No 2) 2015 was published on ?15 July but, at time of writing, has not received royal assent (expected in the late autumn).

As expected, the Summer Budget included a new inheritance tax (IHT) residence nil-rate band (RNRB) for the family home, with the aim of allowing a family home worth up to £1m to pass ?on death free of IHT. However, there are notable restrictions in the detail, and the announcement, while welcome in principle, is exclusive in practice. 

The RNRB will be phased in for deaths from ?6 April 2017, beginning at £100,000 and rising to £175,000 from 6 April 2020. It will be transferable between spouses and civil partners, bringing the total nil-rate band available to spouses and civil partners to £1m between them from April 2020. 

However, the family home must pass to ‘direct descendants’ (broadly, children or their spouses, civil partners, or widow/ers), meaning childless couples cannot benefit, and relief will be tapered for those estates exceeding £2m, such that, ?from 2020/21, the allowance will be nil for estates ?worth in excess of £2.7m (assuming the maximum transferable RNRB of £350,000 is available). 

The Budget also included a package of measures to reduce the tax benefits enjoyed by non-UK domiciled individuals, all of which are subject to consultation, with legislation expected in the Finance Bills 2016 and 2017. UK ‘deemed domiciled’ status will be introduced for all tax purposes for those non-doms who have been resident in the UK for 15 out of the last 20 tax years. A separate UK ‘deemed domiciled’ status will be introduced for ‘returning UK domiciliaries’ (to prevent those with a UK domicile of origin who subsequently acquire a foreign domicile of choice from keeping that foreign domicile if they take up residence in the UK). 

Lastly, there was a final blow for offshore structures holding UK residential property, already heavily taxed following the introduction of the annual tax on enveloped dwellings, with the announcement that they will be brought within the IHT net in respect of their UK property. ?We await the consultation documents on ?these announcements.

The Finance Bill (No 2) 2015 also included the changes announced in the Autumn Statement 2014 to the taxation of IHT-relevant property charges, most notably the introduction of ‘same day addition’ rules affecting multiple or pilot trusts. From the date of royal assent, it will no longer be possible to set up pilot trusts to receive a lump sum from a will in order to give each trust its own nil-rate band for IHT-relevant property purposes. As the trusts will receive their shares of the estate on the same day (i.e. the date of death), their values will effectively be aggregated for IHT purposes and will share a single nil-rate band. Existing affected pilot trusts are ‘protected’ (subject to conditions) until 6 April 2017.

LPAs and deputies

On 1 July 2015, new lasting power of attorney (LPA) forms, whereby individuals can appoint someone to manage their financial affairs and make decisions regarding their health and welfare in ?the event that they may lack capacity to do ?so themselves in the future, were introduced. ?The new forms do away with some of the previous formalities for making an LPA, as well as being shorter and easier to use. This is a welcome improvement in the LPA-making process, the benefit of which should filter down to the client ?as the costs for solicitors instructed to prepare these should now reduce.

For those who do not have the opportunity to make an LPA, the Court of Protection has agreed that successive deputies can be appointed where the facts require. In the case of Re H [2015] EWCOP 52, the court agreed to appoint successive deputies for a severely autistic young woman ?(H) lacking mental capacity to manage both her financial affairs and welfare in the event her parents could no longer continue to act as deputies. The overriding factor in the appointment in this case was providing H’s parents with peace ?of mind in knowing that persons they had chosen would continue to manage H’s affairs when they were no longer able to do so. 

This was an unusual decision as, although it is possible to appoint successive attorneys under ?an LPA, the court has rarely appointed successive deputies, seeking to ensure that deputyship orders are as limited in scope and duration as practicable. The case indicates the court will move away from routinely dismissing such applications, as appeared to be the approach previously. 

Challenges to wills

There has been much in the press about the case ?of Ilott v Mitson [2015] EWCA Civ 797, where the deceased’s only daughter successfully challenged her late mother’s will, which left her estate to charity, so that she was awarded a one-third share in the estate. 

In England and Wales, individuals can leave their estate to whomever they like. However, claims for reasonable financial provision from their estate can be made following their death by their spouse, civil partner, cohabiting partner, child or someone treated as their child, and someone maintained ?by the deceased. 

Successful claims by able-bodied adults who can earn their own living, such as the daughter in the Ilott case, have previously been limited. The press have therefore described the case as opening the floodgates to more claims being brought against estates by dissatisfied relatives and undermining the principle of testamentary freedom. 

While this case does show that able-bodied adults can bring successful claims against estates for financial provision, each case will depend on its individual facts. In the Ilott case, the fact that the deceased had little connection to the charities she named in her will and apparently no good reason to exclude her daughter from benefit, ?tied in with the fact that her daughter would face poverty without financial provision while the animal charities named in the will had no such human need, were significant in the court reaching its decision. 

Testamentary freedom still remains following Ilott. However, the case highlights the need for testators to carefully consider their reasons for excluding certain family members from their wills and ensuring that the reasons are explained in a side letter to a will to seek to prevent successful claims against their estate. 

Brussels IV

On 17 August 2015, the EU Succession ?Regulation 650/2012, colloquially known as Brussels IV, came into effect. The regulation aims to harmonise succession laws across the EU with the introduction of a single set of rules to which all member states (which have adopted the regulation) are subject. Previously, member states had their own separate succession laws, which often led to confusion, delay, and expense for citizens with cross-border estates while it was determined which country’s laws applied. 

The default position under the regulation is that the law of the country in which the deceased was habitually resident when they died will be recognised as the governing law for the succession to all assets in the deceased’s estate.

However, the regulation also allows those with EU assets to make an express election in their ?will for the law of their nationality to govern ?the succession to their worldwide estate. ?Such an election can also be implied in certain circumstances. The regulation therefore simplifies, and revolutionises, cross-border ?EU succession, and for the first time allows individuals to control the succession to their assets with effect across the EU – but there are question marks over how the regulation will ?work in practice from a UK perspective. 

The UK has not opted in to the regulation (neither have Ireland or Denmark), but it will nevertheless affect UK citizens with EU connections. One of the key areas of doubt is whether the UK is defined as a ‘third state’ or ‘member state’ for the purposes of the regulation, as this affects whether or not the private international law concept of ‘renvoi’ still applies, and ultimately whether the law of England and Wales will be recognised by EU courts in certain situations, for land and buildings in an EU state in particular. 

We are likely to need European Court of Justice case law before there is absolute clarity on how the regulation will work in UK-EU cross-border cases, but, in the meantime, clients with EU connections should consider whether to ?make an express election in their will.

Victoria Mahon de Palacios is a senior associate at Wedlake Bell @WedlakeBell www.wedlakebell.com