Wealth management update

Guidance was issued by the president of the Family Division in January 2014 requiring Court of Protection judges to give permission for judgments to be published in cases concerned with the restraint of a person from acting as an attorney or deputy, or where such an appointment should be revoked or his or her powers should be reduced, with a view to there being greater transparency in the court.

The judgment in Re DP (CoP case no: 1235 1387)on 24 January 2014 was the first of such cases for which permission to report was given.

In this case, the public guardian obtained an order from the court to revoke and cancel registration of a lasting power of attorney (LPA) made by DP, who lacked capacity to manage her financial affairs. DP’s attorney, her former gardener, had made a gift to himself of £38,000 and artificially remunerated himself for 365 days’ house clearance and rubbish removal out of DP’s monies as well as attempting to encash DP’s investment bond and retain the proceeds.

In the judgment, the court explained the difference between police investigations into an attorney’s actions and those by the Office of the Public Guardian (OPG); even if the police decide not to prosecute an attorney for theft or fraud, the Court of Protection can nonetheless revoke an attorney’s appointment on the basis that they have contravened their authority under the Mental Capacity Act 2005 (MCA 2005), have breached their fiduciary duties under common law or have not acted in the best interests of the person lacking capacity.

The standard of proof in Court of Protection proceedings is lower than that in criminal proceedings where guilt must be proved beyond reasonable doubt.

Mental capacity

The report by the House of Lords’ select committee, appointed to consider the MCA 2005, was published in February 2014 following feedback from professionals who work in the industry on the effect of the Act.

The 143-page findings were overwhelmingly negative. Although the committee was of the view that the Act was important, with much potential to assist the vulnerable, it found that the Act was not working well due to lack of awareness and understanding of it.

The committee has made recommendations to the government for reform; the most pressing on the financial side being the need for the government to address the poor levels of awareness and understanding of LPAs as a useful tool for advance planning. The committee found that LPAs are widely underused and their effectiveness is restricted by the fact that the powers they grant are often not recognised, most notably in the banking sector. Training of all customer-facing staff to ensure good knowledge of the Act and the relevant procedures operated by their institutions is therefore called for.

Age UK, the Alzheimer’s Society and the OPG have previously sought to address these problems by increasing awareness of LPAs and deputy orders, and some of the organisations were involved in new guidance issued by the British Bankers Association and the Building Societies Association last year with a view to improving recognition of LPAs in the banking sector. We wait to see how problems regarding recognition of LPAs are now addressed following the
committee’s report.

Budget 2014

Chancellor George Osborne delivered his Budget speech on 19 March 2014.

The main headline was the changes to the taxation regime for high-value residential property, with the annual tax on enveloped dwellings (ATED) and related capital gains tax (CGT) charges being extended to two new bands of property: (i) from 1 April 2015, for those worth more than £1m and not more than £2m (the annual charge being £7,000); and (ii) from 1 April 2016, for properties worth more than £500,000 and not more than £1m (the annual charge
being £3,500).

Currently, the ATED starting band is £2m to £5m. There was a corresponding measure relating to stamp duty land tax (SDLT) with the threshold for the top 15 per cent rate lowered from £2m to £500,000, as of 20 March 2014.

As first announced in the Autumn Statement 2013, the reduction in the final period exemption (from 36 to 18 months) for principal private residence relief (PPR) for CGT was confirmed as applying from 6 April 2014.

There was some good news for owners of heritage assets with the announcement that the cap on claiming tax relief under the Cultural Gifts Scheme and the Acceptance in Lieu Scheme is being raised from £30m to £40m as of 6 April 2014. The hope is that this will lead to many more valuable heritage items being donated for the public benefit going forward.

Castle Howard

In an unusual case on the scope of the ‘wasting assets’ exemption for CGT, the Court of Appeal ruled on 19 March 2014 in HMRC v the Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278 that an ‘Old Master’ painting by Sir Joshua Reynolds kept at Castle Howard and worth £9.4m, qualified as a ‘wasting asset’ on the basis that it was ‘plant’ within the meaning of section 45 of the Taxation of Chargeable Gains Act 1992 and consequently exempt from CGT.

The decision has been met with surprise in the industry as to how a valuable heritage asset could be classified as an asset with limited life, but the definition of ‘plant’ is clear and the painting fell within it, leaving the court little option. Under section 44(1)(c) of the Act, an asset will qualify as ‘plant’, and thus be a ‘wasting asset’, regardless of its anticipated life expectancy. To be ‘plant’, the asset must be used for carrying on a business, which is why most heritage assets will struggle to qualify; but here, the painting was used as part of Castle Howard’s tourist trade, so there was the requisite commercial connection. It will be interesting to see whether owners of other similar heritage assets now make claims under the wasting asset exemption, or whether HMRC will further appeal the decision.

CGT consultation

It was first announced in the Autumn Statement 2013 that CGT would be extended to non-UK residents owning UK property as of 6 April 2015, but how this would work in practice would be subject to a public consultation and this was published on 28 March 2014.

The consultation proposes that CGT be extended to non-UK residents (including trusts) holding UK residential property at a rate of 18 per cent or 28 per cent (depending on their level of income). Views were invited on changing the current principal private residence (PPR) regime so as to prevent non-UK residents getting around the charge by electing their UK property to be their ‘main residence’ for PPR, regardless of whether it is in fact so. The consultation closed on
20 June 2014.

EU trusts

On 11 March 2014, the EU parliament voted on the latest draft of the Fourth Anti-Money Laundering Directive. This included the proposal that each EU country create and maintain a public register of trusts to help combat tax avoidance and money laundering using trust structures.

The vote was overwhelmingly in favour. The legislative process is not yet complete but if the proposals go through, they could have a significant impact in the UK.

At present, there is no public record of trusts in the UK and trusts remain private and confidential to those who create and are involved with them, for good reason. With family trusts in particular, information on beneficiaries and assets can be closely guarded to protect the various interests and relationships involved.

Proposals to establish public registers of company beneficial ownership have formed part of the directive for some time, and are generally well supported in the UK, but the decision to include similar provisions for trusts was only added following a vote in the EU parliament on 20 February 2014 and has come as something of a shock to the wealth management sector.

The vast majority of EU countries do not use trusts and many feel this has led to them wrongly viewing trusts with suspicion. The UK government has openly opposed the proposals and is seeking to negotiate amendments to the draft directive. We will know more once the EU parliament and EU council deliberate the final text of the directive during the second half of this year. SJ

Victoria Mahon de Palacios is a senior associate at Wedlake Bell