All that glitters: highlights of 2012

The end of a year is always a time for review. We look at events, try to assess their significance and look forward to what may be to come.

This article rounds up the key developments in the private client world during 2012, together with a glance at the future.

Legal practice: costs

There is an increasing tendency for courts to penalise litigants who conduct litigation in an unduly hostile manner, or who make unjustified allegations, or include numerous allegations which complicate the litigation unnecessarily.

In Wharton v Bancroft [2012] EWHC 91 (Ch) Norris J ordered costs on the indemnity basis against the deceased’s daughters who had unsuccessfully challenged their father’s will and, in the course of doing so, had criticised the conduct of the solicitor who had taken instructions for the will (see below, ‘vulnerable clients: the golden rule’) and made allegations of undue influence against the main beneficiary, which were not substantiated.

He said that the daughters had “persisted in making enquiries about matters that were simply irrelevant to the question whether the September 2008 will-making process had resulted in a valid will” and referred to “the aggressive conduct of the action by the daughters’ solicitors”.

The costs were eye watering. Interim orders were made for £455,000 for the widow and £60,000 for the executor. The final orders will be substantially in excess of that.

In Lilleyman v Lilleyman [2012] EWHC 1056 (Ch) a widow had made a successful claim under the Inheritance (Provision for Family and Dependants) Act 1975, but had failed ?to beat a offer made in accordance ?with part 36 of the Civil Procedure Rules. The normal effect of failing to beat a part 36 offer is to give the person making the offer a right to recover his costs from that point on.

The court’s discretion is much ?more circumscribed than its normal broad discretion in relation to costs under Civil Procedure Rules, R44. However, R36 14(4) does allow the court to ‘take into account all the circumstances of the case’.

Briggs J concluded that it would be wrong to prevent a trial judge modifying the normal rule if he is satisfied that “aspects of the offering party’s conduct of the litigation subsequent to the making of the offer have not served the interests of justice”.

He decided that this was such a case and referred to “the no holds barred way” in which the litigation had been pursued, rather than “making sensible early concessions so as to reduce the scope of the trial and therefore the cost of its preparation. I have in mind in particular the defendants’ refusal to concede until the last moment that the will had not made reasonable provision.”

He went on to say that: “While it may be that a ‘no holds barred’ approach to certain types of litigation is entirely appropriate, it is not in my judgment at all appropriate in the context of claims under the Inheritance Act, where, even in a big money case, the costs are likely to form an ever-increasing part of the subject matter of the dispute until, as appears largely to have occurred in the present case, it is the costs burden alone which prevents settlement.”

He made a 20 per cent disallowance of the defendants’ costs after the date of the offer. Even so, the result was very unfortunate for Mrs Lilleyman, whose initial award had not been overly generous and who was then left with a substantial costs bill.

It is a salutary illustration of the dangers of litigation and the importance of carefully considering part 36 offers. As Briggs J said: “The unfortunate reality is that Mrs Lilleyman was engaged in a high-risk venture in which she played for high stakes and, in substance, lost.”

Tax: penalties

HMRC continues to push hard ?on penalties. Taxpayers who make a mistake can expect to be asked for a penalty on the basis that they carelessly gave an incorrect account (Finance Act 2007, schedule 1, para 1). However, the decision in Hanson v HMRC [2012] UKFTT 314 (TC) is extremely useful ?to taxpayers.

A taxpayer’s accountant had wrongly advised the taxpayer that he was entitled to capital gains tax loss relief and HMRC had imposed a penalty on him. Cannan J quashed the penalty on the basis that the Finance Act 2007, schedule 24, para 18 provides that: “P is not liable to a penalty in respect of anything done or omitted by P’s agent where P satisfies HMRC that P took reasonable care to avoid inaccuracy.”

The judge said at para 21 of his judgment: “In my view, if a taxpayer reasonably relies on a reputable accountant for advice in relation to the content of his tax return, then he will not be liable to a penalty under schedule 24.”

The key is, of course, that the reliance must be reasonable. A person cannot abrogate responsibility.

Cannan J referred to para 84540 of the Compliance Handbook and said that he agreed with its general thrust, in particular that a taxpayer cannot simply leave everything to his agent, but went on to say: “However, in matters that would not be straightforward to a reasonable taxpayer and where advice from an agent has been sought, which is ostensibly within the agent’s area of competence, the taxpayer is entitled to rely on that advice”.

Obviously what amounts to reasonable care in any particular case will depend on all the circumstances, including the nature of the transaction, the identity and experience of the agent, the experience of the taxpayer and the nature of the professional relationship between the taxpayer and the agent.

Tax: APR and BPR

There were two cheering First Tier Tribunal decisions on agricultural and business property relief (APR and BPR), but HMRC have appealed both cases so it will be a question of ‘watch this space’.

In Hanson v HMRC [2012] UKFTT 95 (TC) the Tribunal held that when deciding whether a farmhouse is of a character appropriate to ‘the property’, it was permissible to take into account all land occupied with the house in question, not just land in common ownership with the house.

In N v Pawson [2012] UKFTT 51 (TC), the Tribunal held that a holiday letting was not mainly an investment business and that as a result business property relief was available.

At para 50 the Tribunal said: ?“We have no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active ?an operation for it to come under ?that heading.”

Obviously, the possibility of ?obtaining BPR on holiday lettings is extremely attractive for taxpayers, but it’s worth noting that the taxpayer in Pawson managed the property herself. Even if the Upper Tribunal upholds the decision on its facts, it’s difficult to see relief being granted in a case where the taxpayer ?uses a managing agent.

Tax: charities

The reduced rate of inheritance tax (IHT) for estates in which at least ten per cent of the baseline amount is given to charity came into effect on 6 April 2012. It’s too early to tell what effect, if any, it will have on charitable giving.

Most people suspect the effect to be limited, as the reduction from 40 per cent to 36 per cent is not unduly generous. Some charities have expressed the fear that it will actually reduce giving, as potential donors may decide not to make lifetime gifts, but to wait and make their gifts by will.

What is clear is that it adds complexity, not just to taking instructions for a will, but also to the administration of estates. The relief depends on hitting the ten per cent requirement, so in a case where, say, nine per cent is going to charity, the beneficiaries can increase the amount they take from the estate by entering into a post-death variation to push the charitable gifts to the magic ?ten per cent.

Query whether professional advisers have any obligation to point this out. There is a really useful online calculator which works out the size of charitable legacy necessary to qualify for the lower rate of IHT at www.hmrc.gov.uk/tools/iht-reduced-rate/index.htm.

A potential trap introduced by the Finance Act 2012 is that no post-death variation giving property to charity will be read back for IHT unless the taxpayer provides HMRC with confirmation that the charity knows of the variation.

New subsections (3A) and (3B) are inserted into the Inheritance Tax Act (IHTA) 1984 section 142 to achieve this result (if the property is to be held on trust for charitable purposes rather than for a named charity, it is the trustees who must supply the confirmation).

The change is apparently to deal with suspicions that, in some cases, taxpayers were executing deeds of variation, claiming the charity exemption, but never actually passing funds on to the charities.

Tax: GAAR

Finally, what will undoubtedly be big news in 2013, the proposed general anti-abuse rule (GAAR).

As part of the June 2010 Budget, the government announced that it would consider introducing a general anti-avoidance rule to ensure that there was overarching legislation to combat undesirable tax avoidance.

It appointed a study group, led by Graham Aaronson QC, and, in the 2012 Budget, announced that it accepted the group’s recommendation that a broad spectrum anti-avoidance rule would not be beneficial to the UK. Instead, there should be a GAAR targeted at “artificial and abusive” ?tax avoidance.

On 12 June 2012, HMRC ?published a consultation paper setting out the government’s proposals for, and draft legislation for the main operative provisions of, a GAAR. The proposals ?are broadly consistent with the recommendations of the GAAR ?study group.

However, there are two ?important differences:

1. there is no intention to provide informal or formal clearance. Unless exceptionally clear guidance is provided, life will be extremely difficult for professional advisers; and,

2. contrary to the recommendation of the study group, the government proposes that the GAAR should ?cover IHT and specifically sought views on this. ? IHT, of course, has its own detailed anti-avoidance rules (associated operations, reservation of benefit and the pre-owned assets tax) but, more importantly, it sits very awkwardly within the proposed legislation, where one of the indications of an abusive tax arrangement is that “the arrangements involve a transaction or agreement the consideration for which is an amount or value significantly different from market value or which otherwise contains non-commercial terms”.

?We really will be holding our breath for the results of the consultation.

Vulnerable clients: the ?‘golden rule’

The golden rule stems from the judgment of Templeman J in Kenward v Adams [1975] CLY 3591, where he said that: “In the case of an aged testator or a testator who has suffered a serious illness, there is one golden rule which should always be observed, however straightforward matters may appear, and however difficult or tactless it may be to suggest that precautions be taken.

“The making of a will by such a testator ought to be witnessed or approved by a medical practitioner who satisfies himself of the capacity and understanding of the testator, and records and preserves his examination and findings.”

The purpose of the rule is to ?provide contemporaneous evidence to assist the parties in cases where a testator’s capacity is in doubt. The medical opinion will not be conclusive as the question of capacity is one for the court to decide.

However, the rule is significant for practitioners because failure to obtain evidence may lead to suggestions that the practitioner is responsible for litigation which might have been avoided had evidence been available.

For example in Key v Key [2010] EWHC 408 (Ch), the solicitor who prepared a will for an elderly and recently bereaved man without obtaining medical advice was criticised on the basis that his “failure to comply with what has come to be well known in the profession as the golden rule has greatly increased the difficulties to which this dispute has given rise and aggravated the depths of mistrust into which his client’s children have subsequently fallen”.

However, in Wharton v Bancroft [2012] EWHC 91 (Ch), a solicitor preparing a will was criticised by family members for failing to obtain a medical opinion, but Norris J was firmly on the side of the solicitor.

When speaking of the problems faced by those called to deathbeds, he made the point that they “cannot simply conjure up a medical attendant” and continued “I do not think [the solicitor] is to be criticised for deciding to make his own assessment”.

There is an important distinction between the two cases. In Key v Key the solicitor did not appear to have considered the question of capacity, whereas in Wharton the solicitor considered it very carefully and made a full attendance note covering the elements of the Banks v Goodfellow test.

Wills: construction

The dispute over the will of Bernard Matthews (Scarfe v Matthews [2012] All ER (D) 25 (Sep), see www.privateclientadviser.co.uk/feature/international/case-digest-scarfe-v-matthews), may prove to be of lasting significance. The personalities and facts of this case would guarantee its interest to many of us but, in addition, it has an important discussion of the modern approach to the construction of wills.

Nicholas Strauss QC, sitting as a judge, said the essential question is always, what did the testator say, expressly or by necessary implication. The very strict approach to the construction of wills seems to have gone (see Lord Hoffman’s judgments in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, together with Williams on Wills 9th edition, paras 50.1, 57.3).

Wills: regulation

On 27 September 2012, after consultation launched in April 2012, the Legal Services Board concluded, predominantly on consumer protection grounds, that will-writing and estate administration should be reserved activities. It will make recommendations to the Lord Chancellor early in 2013.

Given the high level of support for targeted regulation revealed in submissions to the Board, it seems likely that the recommendation will be followed. Inevitably, a great deal of adjustment will be required, however ‘targeted’ and ‘proportionate’ the regulation is. Let’s hope that, as the Legal Services Board suggests, regulation can help to prevent the damage caused by incompetence and misdemeanour.

Professor Lesley King of the College of Law is a director of LK Law Limited and a published author and columnist