Estate planning update

Inheritance tax

HM Revenue & Customs has been successful in two recent inheritance tax cases. In Watkins and Harvey v HMRC [2011] UKFTT 745 (TC), the First-tier Tribunal agreed with HMRC on the correct approach to valuing a retained interest in an income stream reserved by the late Mrs Watkins out of a discounted gift trust.

The tribunal found that the late Mrs Watkins' rights reserved from the discounted gift trust settled less than two years before her death should not be valued by hypothesising what the value would be in the open market as proposed by the claimants. This was because there was no evidence of an actual existing market for Mrs Watkins' reserved rights, in part because of her age at the relevant time (89 years) and her actuarial life expectancy, which meant that it was unlikely that her life could be insured to provide security for a hypothetical purchaser of the retained interest.

The tribunal found instead that it is correct to look at what would happen in closely comparable situations for which there are accepted valuation techniques, such as the sale of a life interest in an existing trust. On this basis, the value reserved by the late Mrs Watkins would only be nominal and the size of the failed gift that became chargeable for inheritance tax on her death would be nearly the full value of the gift.

Turning now to the availability of agricultural property relief (APR) on farmhouses, in HMRC v Atkinson [2011] UKUT B26 (TCC) the Upper Tribunal has allowed an appeal by HMRC against the First-tier Tribunal's decision (FTC/61/2010), that the executors of the late Mr Atkinson could claim APR on the bungalow in which he had lived until four years before his death. The late Mr Atkinson had been a partner in a farming partnership and had lived in a bungalow on the farm in that capacity. However, in the last four years of his life he was in hospital or a care home and he did not return to live at the property before his death. During that time he remained a partner in the farming partnership, his belongings were kept in the bungalow and no one else lived there.

The Upper Tribunal found that the First-tier Tribunal had failed to identify the correct questions of fact when considering whether the bungalow had been occupied 'for the purposes of agriculture' for the whole of the seven years before his death as required under section 117(b) of the Inheritance Tax Act 1984.

In particular, the Upper Tribunal found that there was an insufficient objective connection between the need for occupation of the bungalow and the agricultural activity once it was clear that Mr Atkinson would never be able to return to the bungalow.

The Upper Tribunal's review of the case considered instances in which the vacation of a property does not always mean it is no longer 'occupied' for the purposes of section 117(b), such as where a farm building is empty following a change of enterprise.

It is also interesting to note that relevant agricultural activity can be considered quite broadly; for example, to include a bookkeeper employed in the farm business.

Testamentary capacity and the golden rule

In Wharton v Bancroft and others [2011] EWHC (Ch) 3250, Norris J recognised the practical issues that arise for practitioners in following the so-called 'golden rule' when preparing a will for a testator who is elderly or seriously ill.

There had been criticism of the solicitor who prepared the will of George Wharton, who was 78 and was on his deathbed at the relevant time, and which was in favour of his partner of 32 years whom he had married immediately before executing the will. The solicitor had not observed the golden rule, which required him to arrange for a medical practitioner to satisfy himself of the testator's capacity and understanding and to keep a contemporaneous record of his examination and findings.

The solicitor had not followed the golden rule in this case. Nonetheless, it was accepted that a solicitor 'cannot simply conjure up a medical attendant' and so it was held that in the particular circumstances of this case he had acted correctly in deciding to make his own assessment of the testator's testamentary capacity (which was accepted as correct) and proceeding to prepare the will.

This case contains a useful reminder of the preparations and arrangements a solicitor has to make to adhere to the golden rule and other considerations when preparing a dying person's will.

Forfeiture law reform

On 1 December 2011, the Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Act 2011 (Commencement) Order (SI 2011/2913) was made, bringing the substantive provisions of the Act into force on 1 February 2012.

The Act reforms the law of forfeiture by preserving the succession rights of the descendants of a person who disclaims an inheritance in an estate or forfeits his succession rights by killing the deceased.

It also amends the current law so that the children of a minor are now able to inherit their parent's interest in an intestate's estate where the parent died under the age of 18 without having married or formed a civil partnership.

Intestacy and family provision claims

The Law Commission report, Intestacy and Family Provision Claims on Death (2011) Law Com No 331, was published on 14 December 2011 following an extensive consultation exercise. The Law Commission makes a number of recommendations for the reform of the intestacy rules, the Inheritance (Provision for Family and Dependants) Act 1975 and the powers of maintenance and advancement in sections 31 and 32 of the Trustee Act 1925. The proposed changes would particularly affect spouses, civil partners and cohabitees.

The report contains two draft bills that would give effect to the recommendations and those recommendations relating to the intestacy rules and cohabitees.

The draft Inheritance and Trustees' Powers Bill includes reforms to ensure that, where the deceased left no children or other descendants, a surviving spouse or civil partner would inherit all assets on the deceased's intestacy. It would also simplify the sharing of assets between a surviving spouse or civil partner and children or other descendants '“ this would certainly be a welcome simplification of the current law involving a life interest in many cases.

The Law Commission recommends removing certain other traps in the current legislation, so as to protect children who are subsequently adopted after the death of a parent (who currently lose contingent rights under the intestacy rules) and also to change the presumption that an unmarried father has predeceased his child when such child dies intestate. The recommendation is that the pre-sumption should not apply if the person is recorded as the father on the deceased's birth certificate.

This draft bill would also permit claims for family provision under the 1975 Act where the deceased died domiciled outside England and Wales in certain circumstances, namely that English succession law applies to any part of the estate. This is a very significant potential statutory development of which advisers of UK resident non-domiciliaries should be aware when advice is sought by clients in connection with a proposed move to the UK, investments in the UK or the making of an English will.

Reduced IHT rate

More draft legislation was published on 6 December 2011, this time dealing with the proposed reduction of the inheritance tax rate from 40 per cent to 36 per cent for individuals who leave at least ten per cent of their net estate to charities or registered community amateur sports clubs (CASCs).

Also published was the response to HMRC's consultation of 10 June 2011. The draft legislation is open for technical comment until 10 February 2012 and will be included in the Finance Bill 2012.

The government has previously rejected criticism from professional bodies that the proposals are unnecessarily complicated and not likely to increase charitable giving significantly. It will take time to know the true effect of the lower inheritance tax rate on the level of charitable bequests. In the meantime, it is helpful to note that the draft legislation and response represents some changes to and clarification of the original proposal.

There are further details as to how the relief will apply: in cases where there is no aggregable property, the value on which the ten per cent threshold will be based will be the value of the net estate after deducting all available reliefs, exemptions and available nil-rate band, but excluding the charitable legacy itself. The total amount of charitable legacies will be compared against that net estate value to ascertain whether the 'charitable giving condition' is met.

The draft legislation also contains provision to elect to 'opt out' from the lower rate of inheritance tax. The relief will apply equally to gifts to charity under instruments of variation (post-death) as under a will, provided that evidence is provided that the charity has been informed of the increased bequest.

This is helpful to practitioners advising individuals who are making wills now and want to quantify the lower rate if they die after the legislation comes into force.