Lifetime giving: tips and traps - STEP...4.1 Exceptions to GWROB Rules Sharing arrangements (1) FA...

Lifetime giving: tips and traps

John D. Bunker LL.B CTA TEP

Solicitor, tax adviser & lecturer

STEP UK TAX, TRUSTS AND ESTATES

CONFERENCE 2018

Bristol

16 October 2018

Lifetime giving: tips and trapsContents

I. When not to make gifts

1.1-1.4 Intro and Professional concerns: who is the client?

2.1-2.6 Issues which may militate against lifetime gifts

II. Tax issues:

3.1 IHT Lifetime exemptions

3.2 PET or Chargeable Transfer?

3.3/4 Bare trusts

4. Reservation of benefit and exceptions to GWROB

5. Deathbed giving to beat RNRB taper threshold

6. Stamp Duty Land Tax (SDLT)

7. the new IHT DOTAS Regulations

III. Reasons for invalidity

8. Formalities

9. The legal test of capacity

10. Undue influence

11. Unauthorised gifts on behalf of P

I. When not to make gifts1.1 Introduction: Lifetime gifts are attractive

So many good reasons to make gifts:-

Generosity & helping out need e.g. to start on housing ladder;

Saving Probate fees

Tax planning

saving income tax –if pass income to those with lower marginal rates;

& CGT –splintering gains to use different CGT exemptions/lower rates;

especially to save IHT:

Use of exemptions;

PETs –to save IHT if live 7 years;

Assets that may increase in value;

RNRB planning – e.g. around the £2m taper threshold;

Owning land with non-spouses to secure co-ownership discounts

I. When not to make gifts1.2 Lifetime gifts: other issues to consider

But we need to consider other issues

That may mean gifts should not be made:

Professional concerns: who is the Client?

See 1.3-1.4

Issues that may militate against gifts

See 2.1-2.

I. When not to make gifts1.3 Professional concerns: who is the client?

Take care re professional obligations,

especially if issues arise with property lawyer not used to these aspects

Does client:-

understand implications of gift?

have capacity?

Is client under undue influence?

Professionals often good at considering these aspects of Wills

But sometimes less clear when arises in a property purchase/transfer

E.g. buying property & told to buy in name of child = gift

It can be difficult to be certain

but if in doubt –it’s better not to act

I. When not to make gifts1.4 Professional concerns: Cases

Litigation following gifts by elderly donor Hackett v. CPS & Hackett (2011)

profoundly deaf, couldn’t speak, read or write

Transfer of prop set aside as only son to “translate” for mother; and

client couldn’t read Solicitor’s advice letter = undue influence

Pearce v. Beverley (2013)

elderly man with Parkinsons & cancer

Transfer of house to joint names with Def set aside

Also will and nomination as beneficiary of life policy

Lack of capacity & undue influence

Kicks v. Leigh (2014)

Sale of elderly lady’s house, Solicitor instructed by Daughter +son-in-law

All correspondence & net proceeds to Daughter +son-in-law

Conveyancing solicitor gave no advice on implications of gift


2.1 Issues which may militate

against lifetime gifts

1. PETs only fully exempt if survive 7 years &

Taper Relief after 3 years:

only if gift exceeds NRB at time of death

Is buying BPR eligible assets a better option?

so IHT free after 2 years.

Watch financial planning –e.g. risk tolerance.

2. RNRB planning?

Gifts of a residence to descendants won’t qualify for RNRB

Unless within Downsizing provisions

So be careful gifting any of residence


2.2 Other pitfalls -may militate against lifetime gifts

3. Be careful with ‘salami sliced’ gifts:

IHT value is loss to transferor’s estate, not its value in donee’s hands

Green v RCC [23% share gifted & 77% retained]

Value of transfer is not 23% of value of house less 10% (£341,550)

but difference between 100% and 77% (£583,000).

4. Dangers of retaining benefit:

GROB & POAT


2.3 Other pitfalls -may militate against lifetime gifts

5. CGT: a gift is a disposal: no general H/O relief

& lose tax free uplift on death

6. Gifts may be invalid for:

lack of capacity, undue influence, incorrect formalities,

Lack of authority for gifts on behalf of P;

See part III

I. When not to make gifts2.4 Other pitfalls -may militate against lifetime gifts

7. Gifts may be attacked by creditors.

8. Deliberate deprivation rules may mean:

gifted property is treated as “notional capital” of donor

Local authorities should consider

“(a) whether avoiding the care and support charge was a significant

motivation in the timing of the disposal of the asset;

“at the point the capital was disposed of could the person have a

reasonable expectation of the need for care and support?”

I. When not to make gifts2.5 Asset Protection trusts?

Family home settled on life interest trusts.

Charge to IHT if value exceeds available NRB.

Deliberate deprivation?

Further away from need for care the lower the risk.

Can be attacked under Insolvency Act 1986 s.423:

putting assets beyond reach of potential creditors.

Big disadvantage is uncertainty.

I. When not to make gifts2.6 “Care home” wills

First spouse to die leaves their share of the house on trust.

NRB discretionary trust

or IPDI trust for survivor

With power to advance capital to “top up” fees

Interest of first spouse is protected.

Interest of survivor’s is not.

Co-ownership discount may reduce:

the IHT value of the survivor’s interest.

II. Tax Issues:

3.1 Common lifetime exemptions

• Small gifts, Annual exemption

• Normal expenditure out of income.

• Gifts in consideration of marriage.

• Gifts for family maintenance.

II. Tax Issues:3.2 PET or chargeable transfer?

Lifetime transfers to all trusts

except trusts for a disabled beneficiary

or genuine bare trusts

are immediately chargeable at half rates.

But, may not matter:

A couple could each settle £325K + £6K

without an entry charge.

Exits tax free in first 10 years.

Anniversary charges relatively low.

II. Tax Issues:3.3 Bare Trusts (1)

A trust where one person is entitled to income and capital

‘Trustee’ is a fiduciary.

A bare trust is not a settlement for IHT or CGT.

The property is the child’s.

Income is taxed as child’s

unless parental settlements rule applies.

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II. Tax Issues:3.4 Bare Trusts (2)

Useful for Grandparents

& anyone who doesn’t want a trust proper.

Disadvantage is entitlement at 18.

BUT trustees can use Trustee Act 1925, s32 power

to defer entitlement:

creates relevant property settlement,

no transfer of value but a disposal,

settlor interested for CGT and income tax.

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II. Tax Issues:4.1 Exceptions to GWROB Rules

Sharing arrangements (1)

FA 1986, s102B(4)

Gift of an undivided share of an interest in land,

GWROB rules do not apply where:

donor and donee occupy the land, &

the donor does not receive any benefit,

other than a negligible one,

at the expense of the donee.

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There must be a gift of a share in the land,

not the whole.

Not limited to 50%

but consider carefully how much to give:

donor makes a PET and value transferred is reduction in estate;

If donee dies before donor = IHT payable on his share of residence.

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Occupation must be shared.

Evidence is crucial.

Doesn’t matter if donor moves out

but can be fatal if donee does – unless pay a market rent.

Expenses:

Donee must not pay a disproportionate share,

Or Donor would be receiving a benefit

but donor can pay more- or all- of the expenses.

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Other escapes

FA 1986 s 102B(3)

Where there is a gift of an undivided share of an interest in land,

GWR rules do not apply if the donor:

does not occupy the land, or

occupies the land to the exclusion of the donee for full consideration

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Tapered withdrawal if estate over £2 million

Lose £1 for every £2 over limit

Doesn’t apply to lifetime gifts

Scope for death-bed gifts as a last resort

To reduce estate below £2m threshold

“Estate” includes aggregated trust interests

which are subject to IHT on death,

Consider “deemed gifts” by termination of life interest

in aggregable trust, which would be taxed on death for IHT

May be way round any capacity issue

if life tenant not a trustee

II. Tax Issues:

5.1 Giving to beat RNRB taper threshold:

Key points

CGT: on disposal and loss of uplift.

Timing: can gift be completed?

Capacity issues

attorneys will need court’s consent

if gift is outside terms of MCA, s12

a post-death variation is a gift for this purpose

5.2 Giving to beat RNRB taper threshold

It works, but watch out for:

II. Tax Issues:

6.1 SDLT: Gifts can cause higher tax bills later

There are 2 SDLT dangers

for donees of residential property:

• 3% higher rate on additional dwellings - HRAD,

&

• the loss of first time buyers’ relief - FTBR

II. Tax Issues:

6.2 SDLT: The 3% higher rate

SDLT is payable at the additional rate if:

• at the end of the day of purchase,

• the buyer has a ‘major interest’ in another ‘dwelling’,

• which has a market value of £40,000 or more, and

• the dwelling being purchased is not replacing

– the purchaser’s only or main residence.

II. Tax Issues: 6.3 SDLT:

The 3% higher rate: Implications

(1) Gift may be inadvisable

• Example

Grandma gives a buy-to-let to her 4 grandchildren.

• The value of the property is £200,000.

– i.e. £50,000 each ¼ share

• Each grandchild will be liable to additional rates of SDLT

– when they purchase their first home –if still hold interest

– & also lose FTBR –see 6.5/6.6 - even if sold before buy

II. Tax Issues: 6.4 SDLT:

The 3% higher rate: Implications (2)

(2) Parents helping children buy cannot be co-owners

• They will need to lend or give cash.

(3) A beneficiary with an interest in possession (IIP)

• in a trust which owns a property has an ‘interest’.

• Unless property being bought as beneficiary’s own main residence:

• Can the interest be terminated before the purchase?

II. Tax Issues: 6.5 SDLT: FTBR

First time buyer’s relief: basics

• Purchased interest must be a major interest

– in a single dwelling.

• Price is no more than £500,000.

• Each purchaser is a first time buyer.

• The transaction is not linked to another.

II. Tax Issues: 6.6 SDLT: FTBR

First time buyer’s relief - issues

(i) A first time buyer cannot ever have had a property interest

– Any beneficial interest

– including a bare trust, but not an IIP.

(ii) No £40K de minimis.

– So however small the interest, it denies relief!

(iii) No equivalent of 3 year inheritance rule.

– So lose FTBR relief if inherit, once:

• assent or appropriation of property or estate otherwise complete

Original hallmark was obtaining

- ‘an IHT advantage’,

- in relation to the entry charge for a relevant property trust’

Very little reporting because hallmark so narrow.

7.1 Extension of IHT DOTAS Regulations

Disclosure of Tax Avoidance Schemes

Arrangements must be disclosed

if reasonable to expect an informed observer to conclude:

Condition 1 the main purpose (or one of the main purposes)

is obtaining an IHT advantage,

in relation to certain transactions,

Condition 2Using one or more contrived or abnormal steps

without which the tax advantage could not be obtained.

7.2 Extension of IHT DOTAS Regns

New Regns from 1 April 2018

18 examples given are not the most helpful, but all we have.

Only 1 example that “might be notifiable”

& 2 that would be notifiable, incl:

Example 17: Creation of a reversionary lease

But note the comments on those that are not notifiable,

as examples of HMRC thinking;

Including Example 6 re Deeds of Variation:

Not a breach of Condition 1 to redirect a gift to an exempt beneficiary

But what about e.g. creating a NRB Disc Trust on death of 1st spouse,

With surviving spouse as a beneficiary?

What form of DOV might be in breach?

7.3 New IHT DOTAS Regns from 1 April 2018

HMRC Guidance issued on 29 March 2018

Two examples that use statutory exemptions in IHTA

& both breach condition 1

just not condition 2:

An informed observer would not conclude

a contrived or abnormal step needed to obtain tax advantage

Example 9: Gift, continued occupation + pay full consideration

Example 10: Gift of share of property used by both donor & donee “The analysis might be different where the donor only retained a very small

proportion of the property in comparison with the level of occupation”

So avoid gifts of larger shares of equity, retaining only say 5 or 10%?

& watch this example with anything less than straightforward.

7.4 New IHT DOTAS Regns from 1 April 2018

HMRC Guidance issued on 29 March 2018

7.5 DOTAS & IHT: Cf. PCRT rules for STEP members

Keep in mind when giving tax advice on gifts

PROFESSIONAL CONDUCT IN RELATION TO TAXATION (PCRT)

Extract from Updated Guidance effective 1 March 2017

“Tax planning arrangements: Members must not create, encourage or promote tax planning arrangements or structures that

i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or

ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation”

STEP Members need to comply –or could face disciplinary proceedings.

& SRA says all Solicitors should comply with PCRT.

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7.6 DOTAS & IHT: PCRT rules for STEP members

Compare PCRT with DOTAS

Cf. PCRT with DOTAS:

one or more contrived or abnormal steps

Not “highly” – so lower threshold than PCRT

& is there a difference between “artificial” & “abnormal”?!

PCRT issued by STEP, CIOT, ATT, AAT, ICAEW, ICAS & ACCA

STEP Members need to comply –or could face disciplinary proceedings.

SRA says all Solicitors should comply with PCRT.

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III. IS THE GIFT VALID?

8.1 Formalities: outright gift or trust

• Gifts may be outright or settled.

• If settled, may be by:

• transfer to trustees or

• declaration of trust by settlor.


8.2 Formalities: Transfer

Formalities vary depending on the asset transferred,

e.g.

land

shares

chattels

choses in action

existing equitable interest

Settlements are often created in pilot form

with assets transferred later. 36

III. IS THE GIFT VALID?8.3 Formalities: Declaration of trust

Easier. No formalities - except for land.

Writing desirable.

Declarations of trust very useful where:

there are restrictions on transfer,

the gift is to a minor,

there is a need for speed,

assets are non-assignable.

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III. IS THE GIFT VALID?9. Capacity

Test is the common law test set out in Re Beaney

not the statutory MCA test:

Rule in Parker v Felgate applies to lifetime transactions:

Singellos v Singellos.

No previous authority.

Void or voidable?

- Unclear38

III. IS THE GIFT VALID?10. Undue Influence

More than mere persuasion.

Undue influence is presumed, if there is

a fiduciary relationship, and

a transaction calling for explanation

Presumption can be rebutted,

for example by evidence of independent legal advice.

• Attorneys have limited powers to make gifts.

– LPAs - MCA 2005, s12.

• Instrument can restrict but cannot widen powers.

– Court can authorise gifts.

• ‘Best Interests’ test, taking into account s.4 factors, eg:

- wishes and feelings of P,

- views of those caring for P or named by P.


11. Gifts on behalf of P

What did we do?

When not to make gifts

Tax:

IHT, SDLT, DOTAS

Validity:

formalities, capacity, undue influence,

gifts made on behalf of P

John Bunker LLB. CTA TEPHead of Knowledge Development, Tax Trusts & Estates, of Irwin Mitchell Private Wealth and freelance lecturer

John has over 25 years of experience as a solicitor specialising in wills, trusts, estate and tax planning.

A Chartered Tax Adviser for over 20 years, he serves as Chair of CIOT’s Succession Taxes Sub-committee, and on HMRC’s Capital Taxes Liaison Group and TACT’s Private Trusts Committee.

John moved in 2012 to his role responsible for technical development, know-how and legal education within the 100 strong Private Client team of Thomas Eggar, after 23 years as a partner.

This role has developed within Irwin Mitchell, since the 2015 merger, with the national Tax, Trusts and Estates team as part of IM Private Wealth.

John also developed external training work in a freelance capacity. With enthusiasm for his subject, John seeks to illuminate technical details with practical insight, in training for local law societies, branches of STEP, CIOT, SFE and other professional groups, as well as MBL, CLT, SJ Live, the Ark Group, and individual firms.

Contact details

John D Bunker LL.B CTA TEPSolicitor, tax adviser and lecturer

JDB Legal and Tax Training Ltd

www. Jdbtraining.co.uk

Email: [email protected]

Tel: 07507 914931

Copyright: JDB Legal and Tax Training Ltd

Disclaimer: The content of this presentation is intended as guidelines for those attending the course and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.

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Lifetime giving: tips and traps - STEP...4.1 Exceptions to GWROB Rules Sharing arrangements (1) FA...

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