This is a transcript of a Stubb Legal CPD training course.

What follows is the full text of the script used to produce the audio recording. This script has been read verbatim, and lasts approximately one hour. Once you have listened to the audio recording, you should be able to answer the Multiple Choice Test at the end of this page.

 

STUBB LEGAL AUDIO RECORDING SCRIPT
Subscription Area: Property
Month of Production: December 2011

This audio recording will concentrate on Inheritance Tax.
Quotations from judgments of the House of Lords are the copyright of the United Kingdom Parliament and from other judgments are Crown copyright. Quotations from statutory legislation are Crown copyright.


PART ONE - LIABILITY & DOMICILE

1 The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 {SI 2011/170}

DOMICILE
Inheritance tax is charged on the diminution in value of an estate belonging to a UK taxpayer. Inheritance tax depends upon being domiciled in the UK. Domicile is a general law concept; it refers to the country which is the permanent home of a person. A person can only have one domicile at any given time. There are a range of factors that can affect domicile, and domicile can change during the testator's lifetime. Domicile status is usually acquired from the testator's father. A new domicile can be acquired when a testator settles in a new country, with the intention of permanently living there.
Questions of a deceasedís domicile are also important in determining liability of an estate to the possibility of a claim being made against the estate under the Inheritance (Provision for Family and Dependants) Act 1975.
In the recent case of Allen v HM Revenue & Customs {SpC 481}, domicile was in issue. The deceased had been born in England in 1922. Between 1953 and 1982, she and her husband had lived abroad as a result of his job for an oil company. They did not own a house until 1982 when her husband retired and they bought a property in Spain. They visited the UK infrequently. In 1996 her husband died unexpectedly. The deceased brought her husbandís ashes back to the UK to be interred in his parentís grave and she stayed with her half-sister and brother-in-law. She described herself as a visitor and played no part in the running of the house. She retained her house in Spain in a constant state of readiness for her return. She kept her principal investments and bank accounts outside the UK. Her health deteriorated during 1997 due to Parkinson's disease and it was clear that she could not live alone. Her half-sister and brother-in-law acted as carers. She visited Spain whenever she could and, when she did so, ran the house. However, her visits ceased after 1999 owing to her deteriorating condition. In June 2001, to relieve the strain on her half-sister and brother-in-law, the deceased bought the adjoining house, intending to have it converted to her needs. However, she was admitted to hospital in February 2002 and died in August 2002.
It was agreed that she had acquired a domicile of choice in Spain. The question was whether she had abandoned it and acquired a new domicile in England and Wales. The burden of proof was on the Inland Revenue. It was necessary to prove that the deceased had both ceased to reside in Spain and ceased to intend to reside there permanently or indefinitely.
The special commissioner found that the Revenue had not proved this. Significant points were: the deceased had lived the whole of her married life outside the UK; she had retained a residence in Spain until her death, although she could not be said to reside there once her visits ceased; however, she retained the intention to return to Spain if possible and her actions preserved the possibility that she might be able to return there with her half-sister and brother-in-law as carers.
In the recent case of Dellar v Zivy {[2007] EWHC 2266 (Ch)}, the High Court considered the question of domicile. The testator was a French citizen who moved to London in the late 1970s. He died in 2001, unmarried and childless. By his will, the testator left the residue of his estate to his sister, provided - as occurred - she survived him for 56 days; and subject to that, his shares in a French company, were to pass to various nephews and nieces. The testator's sister survived the deceased for 56 days. However, the nieces brought proceedings in France, apparently on the back of advice that the effect of the will under French law was that the shares in the French company would pass to them. The French court held it had jurisdiction, but the testator's sister and the executor, appealed that decision. The executor then instituted proceedings in the High Court for a declaration that the shares passed to the testator's sister, and applied for summary judgment on the claim. The nieces cross-applied to strike out or stay the executor's claim on forum non conveniens grounds. The French Court of Appeal stayed the French proceedings until the English claim had been heard.
The main issue for the English court was whether English or French law should apply to the interpretation of the will. The High Court rejected the nieces's contention that a will containing a disposition of movable property should be interpreted according to the law of the testator's domicile at death. While that may be correct where questions of material or essential validity of such wills are concerned, the clear rule is that "a will is to be interpreted in accordance with the law intended by the testator. In the absence of indications to the contrary, this is presumed to be the law of his domicile at the time when the will is made". Here, it was absolutely clear that, whatever the testator's domicile at the time the will was made, he intended it to be interpreted in accordance with English law. Among other things, the will was made in England by English solicitors, written in English and expressly declared the testator's domicile to be England; it appointed an English solicitor as executor and directed that English solicitors be consulted in all matters concerning the estate's administration; and it created a trust for sale - a mechanism not known to French law. It followed that the shares passed to the testator's sister. Moreover, although the French court was first seised, England was clearly the most appropriate forum: the will, draftsman and relevant law were all English; the fact that the nieces were French, and that the shares were in a French company, was of less importance.

FOREIGN PROPERTY
Generally, if the testator was domiciled in the UK, inheritance tax applies to his assets wherever they are situated. Although that is the general rule, in some cases HMRC will charge inheritance tax on a testator who was domiciled abroad. However, this depends upon whether there is a double taxation convention in force.
In Kempe v IRC {SpC 424, 22 July 2004}, the testator died domiciled in England but had worked for and was a member of the Time Warner insurance scheme in the US. Under that scheme, the testator had insured his life and had designated as beneficiaries his two sisters. The scheme stipulated that they would receive the sum assured when he died. For US purposes, the sum assured was not taxable. However, the Inland Revenue assessed the sum to tax as part of the testator's estate on the basis, amongst others, that the terms of the policy, which were much more flexible than is usual under a UK policy, effectively conferred on the testator a general power of appointment under section 5 of the Inheritance Tax Act 1984. The special commissioner found the sum taxable as, regardless of the position in the US, there was no general exemption from tax for death benefits in the UK. Where such benefits are discretionary in nature and nominated to the deceased's dependants outside his estate, they were not charged to inheritance tax. In this case however, the designated beneficiaries were entitled as of right to the payment. The testator did have a general power to enable him to dispose of the sum assured, meaning that he was beneficially entitled to it so that the sum assured farmed part of his estate for inheritance tax purposes.
Testators who were domiciled abroad are not taxed on excluded property. The best example of excluded property is government securities. In addition, British government securities held by persons who are not ordinarily resident in the UK will be free of inheritance tax. This is an extremely generous exemption which may not be widely appreciated by those who have taken up residence abroad, but perhaps without the commitment necessary to have established a foreign domicile.

FOREIGN SETTLEMENTS
Solicitors often advise private clients to set up an offshore trust, but this advice is fraught with complications. It may be correct to advise from a tax point of view that the trustees should be based in Bermuda, but the lawyer should also be aware of section 218 of the Inheritance Tax Act 1984. Section 218 applies to any person who in the course of his trade or profession has been concerned with the making of a settlement and knows that the settlor was domiciled in the UK and that the trustees are not resident in the UK. Such a person is required to make a return to the Inland Revenue giving details of the settlor and the trustees. This obligation has been around for more than 20 years. The adviser might only advise on the matter generally leaving the client to take whatever action he wishes in the light of his advice, in which case he cannot sensibly be brought within the scope of the section. He may have been concerned with the making of the settlement but this presupposes that the settlement had been established. The adviser may not know what the client eventually decided to do. The adviser may not know the identity of the trustees or indeed any relevant details of the settlor and these obligations can only apply to those who are able to provide the information under the section. In many cases the adviser will not know where the settlor is domiciled. The duty to notify only arises if he knows or has reason to believe that the settlor is domiciled in the UK.
There are also complications where a UK trust is moved offshore. When a UK resident settlement ceases to be resident in the UK, section 80 of the Taxation of Chargeable Gains Act 1992 applies to bring all unrealised gains in the trust into charge to capital gains tax by the normal mechanism of a deemed disposal and reacquisition of all the assets.
As with other taxes, there is now a duty to report to the Revenue any tax avoidance schemes. The relevant statutory instrument is the The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 {SI 2011/170}. These Regulations prescribe arrangements which enable, or might be expected to enable, a person to obtain an advantage in relation to Inheritance Tax and which a promoter is required to notify to Her Majestyís Revenue and Customs under Part 7 of the Finance Act 2004. Regulation 2 prescribes arrangements in relation to inheritance tax which must be notified. Regulation 3 provides that the duty to notify does not arise in relation to arrangements first made available for implementation, or entered into before 6th April 2011, or in respect of which a promoter first made a firm approach to another person before that date.

VALUATIONS
When determining the value of any real property for the purpose of obtaining probate, the personal representative should obtain a valuation. Ideally, the personal representatives should obtain three valuations from different estate agents {or one RICS valuation if a definitive figure is required}. The personal representative has a duty to take reasonable care to ascertain the value of the property. Of course, the valuation must satisfy section 160 of the Inheritance Tax Act 1984 which defines the market value for the purposes of inheritance tax as follows.
"The price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time."
Falling stockmarket and land prices can cause inheritance tax headaches for families. Inheritance tax valuations are made at the date of death so, families may find they are being forced to pay tax on a value that can no longer be realised. In an environment of falling house prices, personal representatives sometimes wish to reduce valuations after probate because prices continue to fall. HMRC says that it will only consider a revision if the original valuation was undertaken with incomplete or incorrect information.
We know from IRC v Clay {[1914] 3 KB 466}, that there should be no discount for a quick sale.
A further problem is that, once the inheritance tax value is fixed, no account is taken of falls in value unless relief is available under sections 178-198 of the Inheritance Tax Act 1984. This relief requires qualifying investments to be sold within 12 months of death, and land and interests in land within four years of death at less than probate value.
Many estates include quoted shares which are now worth substantially less than they were at the date of death. The beneficiaries of the estate may feel that it is better for the personal representatives to hang on to the shares and wait for an eventual upturn. It is important that everyone involved appreciates that inheritance tax will have to be paid on the original figure and that no loss on sale relief will be available once the 12-month period has elapsed, however low the eventual sale price. Even if the personal representatives do sell within the 12-month period, the relief is not given automatically; it has to be claimed. There is relief available where shares are suspended or cancelled and HM Revenue & Customs has special guidance available on its website for estates which included shares in Northern Rock.
In relation to land the period for sale is four years - extended in the last property slump from three years - so the problem is not quite so acute. However, many practitioners are complaining that they have property which is genuinely unsaleable, such as retirement flats where many flats in the block are empty and sales can only be made to certain categories of buyer. In cases where the pool of purchasers is not restricted in this way, it may sometimes be possible to sell to a beneficiary of the estate to crystallise the relief. Section 191 of the act provides that the relief is not available if the sale is to a person beneficially entitled to property comprising the interest sold or to a spouse, civil partner or issue of such a person.

VARIATIONS & DISCLAIMERS
If the personal representatives are unable to discharge the liability for inheritance tax, the beneficiary may be found liable. A beneficiary can escape liability by executing a disclaimer of the gift. Also, a beneficiary may wish to disclaim a gift, for instance, if the asset appears to require considerable expenditure. Like deeds of variation, disclaimers must be made in writing within two years of the death, not necessarily by deed provided it is clear what is being disclaimed and by whom. Unlike a deed of variation, one cannot disclaim part of a gift. The disclaiming beneficiary must not have benefited from the disclaimed gift between the death and the disclaimer. Section 142 of the Inheritance Tax Act 1984 applies to disclaimers as well as deeds of variation in this respect. The court has jurisdiction to vary trusts under the Variation of Trusts Act 1958. The starting point for both deeds of variation and disclaimers is section 142 of the Inheritance Tax Act 1984 Section 142 reads as follows.
ďwhere within the period of two years after a personís death:
(a) any of the dispositions (whether effected by Will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied or;
(b) the benefit conferred by any of those dispositions is disclaimed;
by an instrument in writing made by the person or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.Ē
Section 120 of the Finance Act 2002 has amended this section to the effect that a written election is no longer needed for a deed of variation to be treated as retrospective to the death, but instead the deed of variation must contain a statement made by all the relevant persons that they intend section 142 to apply to it so that it should be so treated. It is still possible to state that the deed shall operate for inheritance tax but not for capital gains tax or vice versa, for both taxes, or for neither. The effect of the new subsection 2 is, however, to compel the redirecting beneficiary to make that decision when the deed is drafted instead of having, as previously, a further six months from the execution of the deed to make a formal election. The technical inheritance tax requirements for a valid deed of variation, and other points to be borne in mind, are as follows.
A deed is not necessary and a letter will be enough, provided the other requirements are fulfilled.
The recipient need not be an existing beneficiary under the will or intestacy, nor need he be a member of the deceasedís family, and as indicated earlier a beneficiary can vary his entitlement even though he has already received it in whole or part from the personal representatives.
There must be no extraneous consideration for the variation. The only permitted consideration is the making, in respect of another of the dispositions, of a variation or disclaimer.
Interests created by a deed of variation which must end within two years of the date of death are ignored. Although more than one deed of variation can be executed if each relates to a separate asset, one cannot use a deed of variation to redirect property, the devolution of which has already been varied by an earlier deed. On the other hand, the use of section 142 to create a discretionary trust, followed by an appointment out of the discretionary trust within two years of the death to which section 144 applies, is not regarded as a double variation and the end result can operate retrospectively to the death. The appointment out of the discretionary trust should not, however, take place within three months of the death, since section 144 requires an event on which tax would be chargeable to have taken place since the death, and appointments from a discretionary trust within three months of the death do not constitute such an event {see Frankland v lRC [1997] STC 1450}.
The personal representatives of a deceased beneficiary can with the approval of the beneficiaries redirect a benefit. Care should be taken to consider the grossing up provisions of the inheritance tax legislation where residue is wholly or partly exempt and the deed increases the value of the taxable specific gifts to the point where the nil rate band is exceeded. One should also consider where relevant the effect of the deed on the complex rules relating to the attribution of business or agricultural relief to residuary gifts {contained in section 39A of the Inheritance Tax Act 1984}. An important point is that if a deed of variation is made retrospective to the death for inheritance tax purposes, the gift with reservation rules will not apply to it so that, for example, a widow may by deed of variation redirect some of her late husbandís chattels to their children whilst still retaining them in her home and without the need to pay a market rent for them. The chattels will not then become liable to inheritance tax on her death, whenever it occurs. A copy of the deed only needs to be submitted to the Revenue where the amount of inheritance tax payable is altered as a result of the deed. If the inheritance tax does increase, a copy must be sent to the Revenue within six months of execution of the deed.
Unlike a deed of variation, a disclaimer cannot operate over the deceasedís share of jointly owned property. The disclaiming beneficiary can only benefit the beneficiary who would have been entitled but for the provision of the Will containing the disclaimed gift, or who would have been next entitled on intestacy. Unlike deeds of variation, there is no requirement for such a statement and if the disclaimer otherwise fulfils the requirements it will automatically be treated for inheritance tax purposes as though the disclaimed property had passed to the recipient on the death.
The capital gains tax position on both deeds of variation and disclaimers is governed by section 62 of the Taxation of Chargeable Gains Act 1992. It is similar to section 142 of the Inheritance Tax Act 1984 in relation to inheritance tax, but instead of referring to ďthe property comprised in his estateĒ the reference is instead to ďthe property of which he was competent to disposeĒ. It is however difficult to see any practical distinction now between the two. If the deed of variation or disclaimer complies with section 62 its execution does not constitute a disposal for the purposes of capital gains tax provided that, in the case of a deed of variation only, the persons making it state that they intend the subsection to apply in that way. This requirement has, as in the case of inheritance tax, replaced the need for an election, and, again, requires the decision about how the deed is to operate to be made when it is drafted. It appears, however, no longer to be necessary to submit a copy of the deed to HM Inspector of Taxes for it to be treated as retrospective to the death for capital gains tax purposes, although one may of course be asked to submit one subsequently, eg to establish the identity of the settlor if the deed creates a trust. Care should however be taken in deciding whether to include a statement that the deed is intended to be retrospective for capital gains tax purposes. If the redirected asset has risen in value since the death, and the beneficiary making the redirection has unused annual exemption or losses which will absorb that gain and provide the recipient with a higher base value, it may not be appropriate for the statement to be included. Care will also be needed if the assets have fallen in value and are redirected in favour of a connected person. Unless the statement is included the redirecting beneficiary can only set the loss arising on the redirection against gains on subsequent gifts to the same recipient and cannot use them against other gains, and the recipientís acquisition cost will be the value of the asset at the date of redirection. If the statement is included he takes the asset at probate value and the connected persons provisions will not apply. Even if the statement is included, the redirecting beneficiary may still be treated as the settlor for the purposes of capital gains tax, if the assets pass under the deed to a trust for that personís minor children or if the offshore trust provisions apply to it.


MULTIPLE CHOICE TEST

Subscription Area: Property
Title of Recording: Inheritance Tax (Dec 2011)


NAME OF LAWYER...............................................................................................

RING THE CORRECT ANSWER

PART ONE - LIABILITY & DOMICILE
Question 1: Henry and Kate Percy jointly owned a substantial estate comprising: a holiday home in Italy; a portfolio of UK shares; an account at the bank; their farm in England, which they operate as a business. Each of these four assets is worth half a million pounds. They have one son, Hotspur. Neither Henry nor Kate has a will. Henry died in April 2011. How much IHT will be payable?
A £800,000
B none, as everything passes by survivorship
C none, as everything enjoys spouse exemption

Question 2: Is the home in Italy included in the estate?
A yes
B only if they have English ancestry
C no

Question 3: In order to improve the tax position for Hotspur, what action could Kate take?
A make a disclaimer of £325,000 of the bank funds
B make a variation of £325,000 in favour of Hotspur
C apply under the Inheritance (Provision for Dependants) Act 1975

PART TWO - RATES & EXEMPTION
Question 4: At what rate would Kate pay IHT, if any is due?
A 50%
B 40%
C 25%

Question 5: Will any of their property qualify for business property relief?
A no
B the portfolio of shares
C the farm

Question 6: What form will be used by the personal representatives to submit the calculation of IHT?
A IHT400
B IHT205
C IHT200

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