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LIFETIME GIFTS

by

Professor Lesley King

Email lesley.king888@gmail.com

These notes are intended as an aid to stimulate debate: delegates must take expert advice before taking or refraining from any action on the basis of these notes and the speaker can accept no responsibility or liability for any action or omission taken by delegates based on the information in these notes or the lectures

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Contents

I. WHEN NOT TO MAKE LIFETIME GIFTS

1. Professional concerns: who is the client?

2. Issues which may militate against lifetime gifts

II. TAX ISSUES

1. IHT lifetime exemptions

2. PET or chargeable transfer?

3. Bare trusts

4. Reservation of benefit

5. Deathbed giving to beat the RNRB taper threshold

6. SDLT

7. The new IHT DOTAS Regulations

III. REASONS FOR INVALIDITY

1. Formalities 2. The legal test of capacity

3. Undue influence

4. Unauthorised gifts on behalf of P

Objectives

Delegates will be able to advise on

situations in which lifetime gifts should, and should not, be considered

requirements for valid gifts

tax implications of lifetime gifts

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I. WHEN NOT TO MAKE LIFETIME GIFTS

Lifetime gifts are attractive for many reasons:

As a way of helping the next generation (“Bank of Mum and Dad”).

Should the increase in probate fees threatened last year takes place, lifetime gifts will reduce the probate estate.

They can save IHT. For example, where

- the transferor makes a PET and survives 7 years,

- assets are expected to increase in value,

- a parent’s estate exceeds the RNRB taper threshold,

- lifetime exemptions are available,

- ownership of land can be split between non-spouses or civil partners so that the owners benefit from a co-ownership discount.

They may protect assets from creditors or care home costs (but may not, see below).

However, there are pitfalls for professionals and clients may need advice on aspects of lifetime giving which they have not considered and which may make gifts unattractive.

1. Professional Concerns: who is the client?

Professionals are most likely to be involved with lifetime gifts when the asset to be given is land. Caution is required. A common scenario is an elderly parent brought along by an adult child. It is important to be alert to the fact that the parent is the client.

Does the client understand the implications of the proposed gift? Does the client have capacity? Is undue influence being exerted? If in doubt, it is better not to act. Let someone else get involved in the arguments that are likely to arise when the transaction comes to light.

For examples of litigation following gifts by elderly donor, see:

V Hackett v CPS and D Hackett [2011] EWHC 1170 (Admin). The claimant was profoundly deaf, had not learnt to speak, could not read or write and understood only some basic signs of sign language. She could do some lip-reading and communicated with her hands. Her son took her to see a solicitor to arrange the transfer to him of her only major asset, an investment property. He translated the solicitor’s advice to his mother. The solicitor wrote a letter of advice but, of course, she could not read it. Silber J set aside the transfer on the basis that he was not satisfied that the mother had made the decision to transfer the property after “full, free and informed thought”. Her claim based on presumed undue influence, therefore, succeeded.

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Pearce v Beverley [2013] EWHC 2627 (Ch). An elderly man suffering from Parkinson’s Disease and prostate cancer transferred his house into joint names with the defendant (described variously as “partner, ex-partner, friend, carer”), made a will in her favour and nominated her as the beneficiary of a life assurance policy. All the transactions were set aside on the basis of lack of capacity and undue influence.

Kicks v Leigh [2014] EWHC 3926 (Ch). Conveyancing solicitors were instructed to sell the house of an elderly lady by her daughter and son-in-law. All correspondence went to the daughter and son-in-law. The net proceeds of sale were transferred by the conveyancing solicitors to a bank account in the joint names of the daughter and son-in-law. The conveyancing solicitors gave no advice on the implications of making of the gift.

2. Issues which may militate against lifetime gifts

A number of matters may militate against lifetime gifts and clients may need an explanation, for example:

(1) There is normally no IHT advantage to making PETs if the donor is unlikely to

survive 7 years. If the donor survives three years, any tax payable on the gift is

reduced by taper relief so this is only a benefit if the gift exceeds the nil rate

threshold so that there is some tax to be paid.

Buying property eligible for business property relief may be more attractive than

making potentially exempt transfers as the assets only have to be owned for

two years1 to obtain relief2.

One situation where a PET may be worthwhile despite imminent death is where

the client’s estate exceeds the taper threshold for the RNRB. Reducing the

death estate is then worthwhile although it is necessary to consider the CGT

implications of a lifetime gift. See II.5 below.

(2) The RNRB is not available where a residence is given to lineal descendants by

lifetime transfer (save where the reservation of benefit rules apply). A

downsizing allowance may be available but it will be limited to the value of

assets left on death to lineal descendants. It is therefore inadvisable to give

away a valuable residence leaving a very small death estate. See II.5 below.

(3) Sometimes a gift is made in slices to take advantage of annual exemptions.

1 IHTA 1984, s 106. 2 The downside of purchasing such property is that it may be regarded as a “risky” type of

investment which may secure a reduction in IHT but lose value. However, a number of commercial providers offer taxpayers the opportunity to invest in a “bundle” of AIM companies, thus spreading the risk. These providers give an assurance that the investment will continue to qualify for business property relief. By contrast an investment in a single business is not certain to attract relief on death as the nature of the business may change.

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Remember that tax is charged on the loss in value to the transferor’s estate not on the benefit received so the first slice is likely to produce a disproportionate loss.

See Green v HMRC [2015] UKFTT 334 (TC) where a taxpayer transferred 85% of a property to a trust in two tranches. The first tranche was 23% of the property and the taxpayer valued this at 23% of the value of the property (£379,500); the taxpayer reduced this further by a 10% co-ownership discount to £341,550. However, the basis of calculation was wrong. The loss to the estate was the difference between the initial value and the value of the 77% remaining which was £583,000.

(4) If the donor derives any benefit from the property, there is the risk of pre-

owned assets tax or the reservation of benefit rules.

(5) A gift is a disposal for CGT purposes and so may give rise to an immediate CGT liability. Holdover relief is only available if the disposal is:

- immediately chargeable to IHT, ie is to a relevant property settlement (TCGA 1992, s260), or

- of property eligible for BPR or APR (TCGA 1992, s165).

If the donor is likely to die in the near future and the asset is pregnant with gain, weigh up the IHT payable if the property is retained within the estate against the loss of the tax free uplift on death.

(6) Gifts will be ineffective if they are invalid on the basis of:

- lack of capacity,

- undue influence,

- failure to comply with formalities,

- lack of authority where gifts made on behalf of P by a deputy or attorney.

See III. below.

(7) Statutory provisions exist which allow creditors to recover gifted assets in certain circumstances:

- Insolvency Act 1986, s 423 (entered into for the purpose of putting

assets beyond the reach of a creditor or potential creditor) - Insolvency Act 1986, s 340 and s339 (transactions at an undervalue

and preferences). (8) Deliberate deprivation rules may mean that assets given away are treated as

part of the donor’s capital when assessment of resources is made for care fees.

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Despite the Care Act 2014 delayed changes3 to the basis of funding mean that, in practice, the funding and means-test system continues to be broadly similar to the previous system. Guidance is available in ‘Care and Support Statutory Guidance 2014’. Section 8 deals with ‘Charging and financial assessment’, and there are a number of Annexes including:

Annex B: Treatment of capital

Annex C: Treatment of income

Annex D: Recovery of Debts

Annex E: Deprivation of assets

Annex B includes this:

“(28) In some circumstances a person may be treated as possessing a capital asset even where they do not actually possess it. This is called notional capital.

(29) Notional capital may be capital which:

(a) would be available to the person if they applied for it, (b) is paid to a third party in respect of the person, (c) the person has deprived themselves of in order to reduce the

amount of charge they have to pay for their care

(30) A person’s capital should therefore be the total of both actual and notional capital.”

Annex E includes:

“What is meant by deprivation of assets?

Deprivation of assets means where a person has intentionally deprived or decreased their overall assets in order to reduce the amount they are charged towards their care. This means that they must have known that they needed care and support and have reduced their assets in order to reduce the contribution they are asked to make towards the cost of that care and support.”

And

“There may be many reasons for a person depriving themselves of an asset. A local authority should therefore consider the following before deciding whether deprivation for the purpose of avoiding care and support charges has occurred:

(a) whether avoiding the care and support charge was a significant motivation in the timing of the disposal of the asset; at the point

3 The Care Act 2014 and supporting regulations was introduced in April 2015. The Act was

intended to come into force in two stages in April 2015 and April 2016. However, in July 2015, the Government decided to delay the second stage of the changes until 2020.

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the capital was disposed of could the person have a reasonable expectation of the need for care and support?

(b) did the person have a reasonable expectation of needing to contribute to the cost of their eligible care needs?

For example, it would be unreasonable to decide that a person had disposed of an asset in order to reduce the level of charges for their care and support needs if at the time the disposal took place they were fit and healthy and could not have foreseen the need for care and support.”

Note 1: Asset Protection Trusts

These are widely (and aggressively) marketed. They normally involve settling the family home on life interest trusts. There are significant problems with these arrangements.

If the value of the settlor’s interest exceeds the available nil rate threshold, a charge to IHT is triggered at half the death rates (the full rate becomes payable if death occurs within 7 years).

Because the residence is given away before death RNRB

is not available.

The settlement is clearly vulnerable to attack on the basis of deliberate deprivation although the further away from needing care the settlor is, the lower the risk.

The settlement can also be attacked on the basis of Insolvency Act 1986, s423 (transaction entered into at an undervalue entered into the purpose of putting assets beyond the reach of a person who is making or may at some time make a claim against him, or otherwise prejudicing the interests of such a person).

The section was used successfully by Derbyshire County Council in Derbyshire County Council & Anr v Stephen Akrill [2005] EWCA Civ 308 though the facts were particularly provocative: a father transferred his only asset of any value (his house) to his two children, three weeks before he went into care. The Court of Appeal said that for the trial judge to have found that the requirements of the section were not met would have been ‘perverse’.

The big disadvantage of these arrangements is the uncertainty as to whether the local authority will allege deliberate deprivation.

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Note 2: Care home wills

A more certain course of action is a care home will. It protects only half of the value of a home and is only useful following the first death, but it is secure.

The first spouse or civil partner to die leaves his/her interest in the matrimonial home to a trust. If the interest is worth less than the nil rate threshold, the trust can be discretionary. If the interest is worth more, the trust should be an IPDI trust for the survivor so that the IHT spouse exemption is available.

If the survivor goes into care, their own interest will be taken into account when assessing their ability to pay but the other interest is protected. There is also the advantage that, where the trust is a relevant property trust, a co-ownership discount will reduce the value of their interest for IHT purposes4. Also, if probate fees are increased, the value of the first spouse’s interest is not within the probate estate of the survivor.

Remember to record the severing of any joint tenancy.

4 But not if it’s an IPDI.

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II. TAX ISSUES

1. IHT Lifetime Exemptions There are a number of IHT exemptions which are available only for lifetime gifts:

• Annual exemption. small gifts and gifts in consideration of marriage, • Normal expenditure out of income, • Gifts for family maintenance.

Where gifts falling within the exemptions are affordable, significant tax savings can be made on death. Normal expenditure out of income is probably the most useful.

2. PET or chargeable transfer?

An outright transfer is a PET but a transfer to any sort of trust is an immediately chargeable transfer unless the settlement:

qualifies as a trust for the disabled5,

is a bare trust, or

is exempt, for example under the normal expenditure out of income example.

This is because all lifetime settlements since FA 2006 have been relevant property settlements. Being a relevant property settlement may have little or no IHT downside:

Example A couple wanting to create a trust for their grandchildren can each settle up to £325,000 (plus £6,000 if unused annual exemptions are available) without an entry charge. Each trust would have a nil rate band available so exits would be tax free in the first 10 years and anniversary charges would be relatively low.

However many people dislike the idea of ongoing tax charges and there is an administrative and regulatory cost to having a traditional trust. A bare trust as an alternative. See 3. below.

3. Bare Trusts

A bare trust is one in which a single beneficiary has an immediate and absolute title to both income and capital. The beneficiary is entitled to the entire beneficial interest in the trust fund and his entitlement is not subject to any contingency. It may appear that the trustee has no duties other than holding the property for the beneficiary.

However, this is not correct. A bare trustee is still in a fiduciary position so that, for example, the rule against self-dealing, will apply. Further, a trust for a minor or an incapacitated person who is absolutely entitled to the property gives the trustees active duties to perform: for instance in respect of the management and investment of the trust fund. A bare trustee has the obligations and powers of any other trustee

5 There are different types but the most useful is contained in IHTA 1984, s89.

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Tax treatment

IHT

Under IHTA 1984, s 43(2)(a) ‘settlement’ is defined to include property held in trust for persons in succession or subject to a contingency. If Trustee Act 1925, s 31 has not been excluded, the trustees can withhold income or distribute it at their discretion. However, this does not turn the bare trust into a settlement. Any accumulations belong to the infant’s estate and would be chargeable to IHT on death.

Hence a gift of property ‘on trust for my infant son absolutely’ will be an outright gift and so a PET. HMRC have confirmed that it does not regard a bare trust as a settlement for IHT purposes.

On the death of the beneficiary, the trust property (including any retentions of income) is treated as his so that if the child dies (whether before or after 18) the funds form part of his estate for IHT purposes. If he dies before the age of 18 the property will pass under the intestacy rules and therefore normally to the child’s parents. After the age of 18 the fund will pass according to the will of the child (or on his intestacy if there is no will).

CGT

For CGT purposes there is no settlement where assets are held as bare trustee for another. Hence actual disposals will be treated as made by the child. The annual exemption of the child will be available to set against any gains and, will be taxed at the child’s rates. Assuming the child has limited income, gains are likely to be taxed at the rate of 10% rather than the 20% which applies to trust gains.

Income tax

For income tax purposes the income will be treated as that of the child (unless the parental settlement rules apply6).

When is it appropriate to consider the use of a bare trust?

Grandparents who wish to give substantial property to young grandchildren should consider a bare trust as an alternative to a relevant property settlement. The

6 Income produced by a settlement which is paid during the settlor’s lifetime to or for the benefit of

the settlor’s minor child who is neither married nor in a civil partnership is normally taxed as the income of the settlor in the tax year when it is distributed. “Settlement” is defined widely by ITTOIA 2005, s620 to include ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’.

Where the total income paid to the child under a settlement does not exceed £100 in any year (the £100 limit is per settlor-parent), it will not be taxed on the settlor. If income is accumulated under an irrevocable settlement of capital for a child, the income is not taxed as that of the settlor. However, the trusts rate of tax (45% on income in excess of £1,000) is unattractive – though no higher than the parent would probably be paying so many parents may take the view that getting capital out of the estate is worthwhile. If payments are later made out of the trust fund to the child at a time when the child is still under 18 and neither married nor in a civil partnership these are treated as the settlor’s income up to the amount of the accumulations.

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advantages are that the creation of the bare trust will be a PET and the property can be held until 18 without incurring IHT exit and anniversary charges, CGT and income tax will be payable at the child’s rates instead of the trust rates. The regulatory requirements relating to trusts will not be relevant.

There are disadvantages

(1) There is a practical problem if there may be future born grandchildren. New trusts have to be created as each new grandchild is born.

(2) The beneficiary is entitled to the property at 18.

However, the trustees can use the power in Trustee Act 1925, s32 to defer an entitlement by settling the property on further trusts if it seems appropriate. The tax analysis of such a settled advance is quite difficult:

(a) IHT

There is probably not a chargeable transfer of value so there is no charge to IHT. A transfer of value is defined in IHTA 1984, s3(1) as “a disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition.”

There is no statutory definition of disposition. It is said to be an ordinary English word of wide meaning. In this case the beneficiary has not intentionally divested himself of his beneficial ownership of the property; this has been done by the trustees. So, arguably there is no disposition and therefore no chargeable transfer by the minor.

The trust created will be a relevant property trust so anniversary and exit charges will arise.

The beneficiary has not made a gift so the reservation of benefit rules contained in FA 1986, s 102 will not apply and the advance does not come within the limited anti-avoidance provisions contained in s 102ZA.

(2) CGT

For CGT there is a disposal since the property now becomes settled. CGT will be payable if assets have increased by more than the annual exemption.

HMRC consider that the minor beneficiary is the settlor of the settled advance. (They take a similar view where the court consents to a variation of trust on behalf of a minor beneficiary.)

For CGT this means that the trust is settlor-interested so that if the assets being settled by exercise of the trustees’ powers of advancement show a gain, a hold-over claim is not possible because it is a disposal to a settlor-interested trust.

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(3) Income Tax

HMRC also considers the minor beneficiary to be the settlor for income tax purposes. The main consequence if the beneficiary is treated as the settlor is that no deduction is possible for trust management expenses and the beneficiary is taxed on the gross income whether or not he receives all of it. He will also be taxable on any deemed income such as the proceeds of share buy-backs.

See APPENDIX 1 for a suitable declaration of trust.

4. Statutory exceptions from the IHT reservation of benefit rules

Where a donor makes a gift and is not entirely excluded from benefit there is a gift with a reservation of benefit (GWR) and the value of the property will be included in the donor’s estate on death. Finance Act 1986 introduced some specific exceptions which apply where there is a gift of an undivided share of an interest in land.

4.1 Section 102B(4): Sharing Arrangements

There is no GWR where

(a) there is a gift of a share in land and:

(b) the donor and the donee both occupy the land; and

(c) the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift.

Note

(1) It must be a gift of a share. If the donor gives the whole of the property, the section does not apply.

(2) There is no ceiling on the size of the share that can be gifted and so a donor could gift 90% of his interest in the property, retaining only a 10% share. Consider the overall value of the taxpayer’s estate and by how much he needs to reduce that (for instance, so that what is left may come within the IHT nil rate band). HMRC guidance on the new DOTAS Regulations (see 7. below) suggests that a gift of a very large share might have to be reported.

(3) The gift is a PET and so the donor must survive for 7 years if tax is to be avoided. Remember that a gift of 20% will cause a bigger than 20% reduction in the value of the transferor’s estate because the share retained is now a mere interest in the property and will be subject to a co-ownership discount. It may be unwise to make a very large gift in case the donee dies and there are insufficient funds to pay the IHT on the donee’s estate.

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(4) There must be occupation but persons can occupy more than one property, for instance, a town flat and a country cottage; the length of time spent at each is not determinative in terms of whether or not a person occupies the property. Provided they have the right to come and go at will; have possessions in the property and use the property from time to time then it is possible to argue that they are in occupation. HMRC will normally ask questions about length of time spent, registration with GP, direction of mail, information given to insurance company, electoral roll but no one element is conclusive.

(5) It does not matter if the donor moves out7 but it is fatal if the donee does. These arrangements should only be contemplated where the family arrangement is stable. Problems can arise if the donee dies: not only is there IHT on the share of the property in the donee’s estate but the sharing arrangement comes to an end triggering a reservation of benefit.

(6) Take care in relation to expenses. The donor must not receive a benefit (other than a negligible one) if a GWR is to be avoided.

Example Joe gives 75% of his house to his son, Sid, (who lives with him).If Sid then pays all the bills for the property (eg council tax, heating and lighting), Joe has reserved a benefit.

If Sid agrees to pay 75% of both the property and the household bills (so including 75% of the food bills) then again Joe reserved a benefit.

If Sid agrees to pay 75% of the property bills but the household bills are shared equally then possibly Joe has not reserved a benefit: the property bills are being split in accordance with the ownership ratio whilst each is paying his share of the living expenses the position might be different if Sid was merely an occasional occupier).

If Joe continues to pay all the bills, there cannot be a problem. In a sense, this is erring on the side of caution (Sid could be made responsible for some of the bills without jeopardising the IHT planning but as the earlier examples show it not clear just what he can safely pay) but if Joe can afford it is the most attractive solution. And it may be sensible IHT planning for Joe to deplete his estate in this fashion.

(7) A pre-owned assets tax charge could, in principle, apply to a donor who gives away an interest in land which he continues to occupy. Accordingly

7 Although the requirements of s 102B(4) would then cease to be met, if the donor does not

occupy there cannot be a reservation as a matter of fact. In any event, consider the exemption provided for in s 102B(3)(a): ie there is no GWR provided that the donor does not occupy the property.

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there is a specific exclusion for property which would be subject to a reservation of benefit but for s 102B(4).

4.2 Section 102B(3): ’Non-occupation’ and ‘Full consideration’

There is no reservation of benefit where there is a gift of a share in land and

the donor:

(a) does not occupy the land; or

(b) occupies the land to the exclusion of the donee for full consideration

in money or money's worth.

If a donor gives away an interest in land which is let but continues to enjoy the income, there is no reservation as a result of s102B(3)(a). Though there will be CGT issues if the property has been owned for some time.

A simple agreement does not protect the donors. To make the position secure, it would be necessary to settle the gifted share into a trust under which the donors retain a life interest.

Example Parents settle 90% of a let property on trusts for themselves for life then to their son. They are entitled to all the income from the property under the terms of the trust so are secure. Section 102B(3) protects the donor from any reservation of benefit while the trust holds let property.

Because the transfer is to a settlement, it will be immediately chargeable to IHT so the transfer is unattractive if the value exceeds the available NRB.

Under s102B(3)(b) there is no gift with reservation if the donor pays full consideration for occupation. although if it is desired to rely on this exception it will be difficult to establish what is full consideration for the use of an undivided share of land, since it is not a type of interest in property for occupation which is rented out commercially.8

5. Deathbed giving to beat the RNRB taper threshold

When the net value of an estate is more than the taper threshold, the RNRB (made up of the deceased’s own allowance plus anything transferred from a predeceased spouse or civil partner is withdrawn by £1 for every £2 that the value of the estate exceeds the taper threshold. The taper threshold is £2m until 2020/21 and will then be increased by reference to the Consumer Prices Index.

8 However, there is a parallel provision in FA 1986 Sch 20 para 6(1)(a) which provides that in the

case of actual occupation of land the gift with reservation rules do not apply if there is full consideration. This is not normally affordable. However, where donors can afford it, this is a useful tax saving device but it is important to ensure that the rent is a full market rent throughout the letting period.

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The threshold looks only at the value of the “estate”. Estate is defined in IHTA 1984, s5 as everything in the beneficial ownership of the deceased immediately before death (other than excluded property) after deducting liabilities. Exemptions and reliefs do not reduce the IHT value of the estate but so are lifetime gifts.

Example A wealthy individual leaves his entire estate worth £5m to his children. £4m attracts BPR but the relief is ignored so his estate exceeds the taper threshold to such an extent that no RNRB would be available. However, if on his death bed he gives away £4m, his death estate is reduced to £1m and a full RNRB would be available.

Points to watch

(1) CGT: Don’t give away an asset which will trigger a charge to CGT. Be aware of the CGT “uplift” on death. There may be cases where it is more beneficial to retain assets within the estate to benefit from the uplift.

(2) In the case of deathbed gifts, be sure that the gift can be completed. A declaration of trust is likely to be the most appropriate method. See III. below.

(3) Be careful of capacity issues.

• In particular remember that deputies and attorneys have limited powers to make lifetime gifts on behalf of P. It would be necessary to make an application to the Court of Protection for authorisation which will only be forthcoming if the court is satisfied that the proposed gift is in P’s best interests.

• Also remember that a post-death variation is a lifetime gift which can be treated as a gift by the deceased for IHT and/or CGT purposes but for no other purpose. Hence a deputy or attorney cannot vary on behalf of P without the court’s consent.

6. Stamp Duty Land Tax Issues

A well-intentioned gift of residential property may mean donee has to pay extra SDLT on a subsequent purchase.

6.1 Two SDLT provisions to consider

There are two major tax changes to SDLT (one made in in 2016 and one in

20179) to take into account.

9 The Welsh Government brought in a similar Land Transaction Tax this year, on 1 April 2018, and

the Scottish Government a Land and Buildings Transaction Tax with both an Additional Dwellings Supplement from April 2016 and a First Time Buyers Relief from 30 June 2018. These provisions are not covered in these notes.

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(1) The 3% higher rate for additional dwellings

Extra SDLT is payable on a purchase where (broadly) one of the buyers

has an interest in another residential property. Hence, donees may face

the additional charge as a result of receiving a relatively small interest in

an investment property.

(2) The relief for first time buyers

This has significant value. It can save qualifying buyers substantial amounts of SDLT at a time when funds are normally tight. Well intentioned gifts of property interests, even very small ones, may mean this relief is denied.

They were separate initiatives, the 3% charge took effect on 1 April 2016, with many problems in the legislation. The first time buyers’ relief was introduced on 22 November 2017 by that day’s Budget. There are inconsistencies in the way the provisions operate, with some gaps between them.

6.2 The 3% higher rate for additional dwellings

Finance Act 2016 inserted a new schedule 4ZA into Finance Act 2003. A charge of 3% above the normal rate is payable on the purchase of a major interest in an additional dwelling.

‘Major interest’ For the purposes of the higher rates a major interest does not include a leasehold interest if the lease was originally granted for a period of 7 years or less [para 2(4)].

‘Dwelling’ For the purposes of the higher rates a dwelling is defined [para 18] as a building or part of a building that is: “used or suitable for use as a single dwelling, or in the process of being constructed or adapted for use as a dwelling.” The gardens and grounds of the dwelling or land that is to be enjoyed with the dwelling (including buildings), for example, a detached garage, are taken to be part of the dwelling, but a transaction in such a building or land without the purchase of the actual dwelling will not be liable to the higher rates. (SDLTM 09740).

Conditions

The additional rates will apply to the purchase of a major interest in a single dwelling by an individual, if at the end of the day of purchase Conditions A to D are met [para 3(1)]:

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Condition A - the chargeable consideration is £40,000 or more; Condition B - the dwelling is not subject to a lease which has more than 21 years to run on the date of purchase; Condition C - the purchaser owns a major interest in another dwelling which has a market value of £40,000 or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling; and Condition D - the dwelling being purchased is not replacing the purchaser’s

only or main residence. Note a buyer who is replacing a main residence can also have an interest worth

at least £40,000 in an investment property. This is not the case for someone

with such an interest who is buying a first home; they would have to pay the

additional charge.

Note 1: The test of main residence is an objective question of fact, there is no equivalent of the CGT main residence election. Many are caught out by the HMRC interpretation of what is actually their main residence.

Note 2: Spouses are treated as one, they can only have one main residence between them and so owning two properties in separate names doesn’t work. This is one area where unmarried partners have an advantage.

Note 3: Dwellings situate anywhere in the world count, not just those in England and Wales.

Implications for donors

(1) A gift of an interest in a dwelling may be inadvisable if it results in the donees becoming liable to the additional rates of SDLT on the purchase of their first home.

Example Grandma gives a buy to let to her four grandchildren. The value

of the property is £200,000.Each grandchild will be liable to the

additional rates of SDLT when they purchase their first home.

Does Grandma have other assets that she can give or can the grandchildren agree to sell the property before the first buys a residence?

Note: The position is different where a share in a dwelling is inherited. Para 16 provides that an inherited interest is ignored for three years if:

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it is not more than 50% of the whole,

their spouse or civil partner doesn’t own the other half, and

the other half is not acquired during the 3 year period.

When is the property inherited? SDLTM 09795 says

“The date of the inheritance for these purposes is the date that the individual becomes entitled to the interest. An interest in an un-administered estate is not a major interest in land and so usually the date the individual acquired the interest is the date the interest is transferred or appropriated to them. Although, see Capital Gains Manual at CG30700 onwards for the situation where the residue of an estate has been ascertained and the personal representative holds the residue of the estate for the beneficiary absolutely.

In jurisdictions where property devolves directly on heirs, the date of inheritance will be the date of death.”

(2) Parents helping their children buy their first homes – “the Bank of Mum

and Dad” – now need to structure help with first homes carefully to avoid

the 3% higher rate.

Previously, they would often have taken an interest in the property to

protect their money. If, as is normally the case, they already own their own

property, the purchase would attract the 3% higher rate.

Now, a loan may be a preferable option, potentially with an equitable

charge protected by a restriction.

Some mortgage lenders insist on any extra funds being treated as a gift

rather than a loan. This is illogical since a loan does not affect the

lenders’ first charge, and reflects the proper nature of the funding.

Some clients may be happier making an outright gift if it is combined with

a pre-nup or post-nup agreement for any child now getting (or recently)

married. This can work well, if both sides have proper independent

advice, with full disclosure, in good time before the wedding.

Note: HMRC accept that the parents can on the same day that the

purchase is completed execute a deed which provides that they

have no interest in the property and that their son has full

beneficial interest in the property. See SDLTM 09785.

(3) Care is needed with trust interests

A person has an interest for the purposes of the additional rates if they

have an interest under a bare trust or if they have an interest in

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possession (IIP). An IIP is a simple entitlement to income; it does not

need to be a qualifying interest in possession which is aggregable for

IHT). A beneficiary with a revocable income right appointed out of a

relevant property trust has an IIP. Hence, being an income beneficiary

of a trust that happens to own a dwelling as an investment can result in

an additional 3% charge10.

Any planning advice needs to be taken as early as possible as the urgency of

a conveyancing transaction, and a client’s desire to move, can take attention

from tax issues and lead to regrets afterwards when it’s too late to put right.

There is the potential for negligence claims against solicitors for not advising,

or not picking up a potential higher rate charge.

6.3 First time buyers’ relief (FTBR)

Finance Act 2018 inserted a new schedule 6ZA into Finance Act 2003, and

provides this valuable relief subject to four conditions:-

(1) The purchased dwelling is a major interest in a single dwelling;

(2) The consideration is no more than £500,000, (the SDLT rate payable is 0% up to £300,000 and only 5% on the excess up to £500,000); and

(3) The purchaser (or each of them, if more than one) is a “first time buyer” who intends to occupy as their only or main residence; and

(4) The transaction is not linked to another, or is only linked in relation to a garden of the dwelling or an interest or right to land benefitting the dwelling or its garden.

FTBR cannot be claimed where the additional 3% rate is chargeable. This is

logical, but it does not follow that avoiding the additional rate means that the

buyer will be eligible for FTBR. There are significant differences, raising crucial

issues for planning:-

(i) “First time buyer” is defined to exclude anyone who has previously

acquired any equitable interest in a dwelling, either by purchase or by

gift or inheritance. It picks up any previous interests owned, whether or

not as a personal home, and whether bought or not. (The additional 3%

charge looks only at what is owned at midnight on completion day, giving

time to put matters right ahead of completion).

(ii) There is no £40,000 de minimis for FTBR, as there is for the additional

3%, so hold, or having held, a very small beneficial interest, say in a

family holiday home, worth only £5,000 or £10,000, would deny FTBR.

10 It will normally be possible to restructure trust interests ahead of completion day.

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(iii) Inherited property interests are caught, whatever their size, with no

equivalent of the 3 year rule (as in 7.4 (1) above).

Example

Grandma dies in 2012 and leaves her four grandchildren a 10%

share in his property, with 20% to each of her three children, when

he died. It was worth £100,000 and was kept for 2 years, and let

out for income, before being sold. Each of the grandchildren is

now denied FTBR (though they will not be liable for the additional

3%).

Despite Grandma’s best intentions the grandchildren have lost

out badly.

6. The new DOTAS Regulations

Part 7 of FA 2004 requires disclosure to HMRC of tax schemes which meet the conditions (known as ‘hallmarks’) set out in regulations relating to the various UK taxes. The Disclosure of Tax Avoidance Schemes (DOTAS) regulations are designed to give HMRC early information about tax avoidance schemes, giving it the opportunity to consider changes to the law to close loopholes or to challenge schemes that it believes do not work.

DOTAS regulations require the “promoter” (the person who designs or sells the tax avoidance scheme), to provide details to HMRC of the scheme and how it is intended to work within 5 days of its being marketed, made available for implementation or implemented (FA 2004, s307). Failure to notify is not a criminal offence but gives rise to penalties. Notifying does not, of itself, produce any direct consequence for the taxpayer beyond the issue of a customer reference number indicating use of the scheme. It simply gives HMRC early warning of tax avoidance schemes.

The primary legislation setting out the DOTAS regime applies to the taxes included in the definition of ‘tax’ in Finance Act 2004, s 318(1). In practice, however, the regime does not apply to a particular tax until HM Treasury makes regulations introducing one or more ‘hallmarks’ for that tax which make arrangements falling within the hallmark notifiable.

HM Treasury has made several separate sets of regulations, some of which apply to more than one tax and some only to one specific tax. These regulations have been amended over time. Hallmarks are not mutually exclusive, so more than one may apply to any single arrangement.

DOTAS was applied to IHT to a limited extent by the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011, SI 2011/170 as from 6 April 2011. The original IHT hallmark required notification if:

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“(a) as a result of any element of the arrangements property becomes relevant property; and

(b) a main benefit of the arrangements is that an advantage is obtained in relation to a relevant property entry charge.”

Grandfathering was available except from the disclosure requirements arrangements which are the same, or substantially the same, as arrangements made available for implementation before 6 April 2011.

In 2014 HMRC announced that it proposed to extend the DOTAS rules to IHT generally. The Consultation Document, ‘Strengthening the Tax Avoidance Disclosure Regimes’ (31 July 2014), and the Summary of Responses (December 2014) commented at 2.37 that:

“There have been few disclosures under [the IHT] hallmark. HMRC’s understanding is that this is in part because of the narrow scope of the existing hallmark and also because promoters claim that their schemes are ‘substantially the same’ as pre-April 2011 schemes and as such are outside of the current DOTAS requirements. The hallmark has therefore not been as effective as intended in providing information about schemes involving relevant property trusts and the extent of their use.”

After a lengthy consultation period (and two sets of draft regulations) the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017/1172 came into effect as from 1 April 2018. They replace the old regulations with new descriptions of IHT arrangements which have to be disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) regime in Part 7 of the Finance Act 2004.

There are no grandfathering provisions in the 2017 Regulation but there is an ‘established practice’ exemption designed to remove from the scope of the hallmark established IHT planning schemes whose workings are well understood and agreed by HMRC.

’Established practice’ is not defined in the legislation and, therefore, takes its ordinary meaning. The guidance says that it may be demonstrated by reference to published material (whether from HMRC, or text books or articles in journals) or by other written evidence of what had become a common practice by the relevant time (that is, when the arrangements were entered into). The arrangements actually carried out must be the same as those identified as established practice if the exemption is to apply.

Arrangements must be notified if it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that Condition 1 and Condition 2 are met.

Condition 1

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The main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain one or more of the following advantages in relation to inheritance tax (the “tax advantage”):

(a) the avoidance or reduction of a relevant property entry charge;

(b) the avoidance or reduction of: - a 10 year anniversary or exit charge (IHTA 1984, s64, s65), or - exit charges from employee/newspaper trusts (IHTA 1984, s72) or - charge on a gift made by a close company that is treated as having

been made by the participators (IHTA 1984, s94);

(c) the avoidance or reduction of a charge to inheritance tax arising from the application of s102, s102ZA, s102A or s102B of the Finance Act 1986 (gifts with reservation) in circumstances where there is also no pre-owned assets charge to income tax under Schedule 15 to the Finance Act 2004);

(d) a reduction in the value of a person’s estate without giving rise to a chargeable transfer or potentially exempt transfer.

Condition 2 The arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.

HMRC promised guidance “in good time before the hallmark comes into force on 1 April 2018”. It became available via a link in the March 2018 Trusts and Estates Newsletter on 29 March 2018.

The guidance contains a number of examples of transactions which do not require disclosure and a much shorter list of transactions which HMRC considers probably do.

Examples of Non-notifiable arrangements

(1) Lifetime gifts to spouses or civil partners and regular gifts out of income.

Guidance: Although Condition 1(d) is met, there is no contrived or abnormal arrangement.

(2) Lifetime transfers of value equal to the available nil rate band into trust, which may be repeated every seven years and lifetime transfer to a bare trust for a minor beneficiary.

Guidance: In neither case is Condition 1 met. The estate is reduced but there is a chargeable transfer in the first case and a PET in the second.

(3) Executing a will that leaves property to an exempt beneficiary such as a spouse or charity.

The guidance here says “Executing a will does not meet any of the elements of condition 1. Although a will may be executed to reduce or avoid the IHT charge on death by use of exemptions, the will does not reduce the person’s estate. Rather the will determines how the estate devolves on death and it is this

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devolution which secures any IHT exemption. As there is no reduction in the person’s estate without giving rise to a chargeable transfer, condition 1(d) is not met”.

(4) Executing a deed of variation or disclaiming an entitlement.

Guidance: Both variations and disclaimers are lifetime transfers by the original beneficiary by the donor but, because the property is treated as never being comprised in the donor’s estate, there is no reduction in the donor’s estate and condition 1(d) is not met with respect to the donor.

(5) Purchase of shares which will qualify for business property relief after they have been owned for two years.

Guidance: Condition 1 is not fulfilled. The purchase of shares does not reduce the value of a person’s estate. If it becomes available, BPR only has the effect of reducing the value transferred by a transfer of value, it does not remove the value of the shares from the estate.

Comment: Is the position different if the shares are then gifted?

No. The conditions will still not be fulfilled. The gift reduces the estate but there is a PET or chargeable transfer since relief merely reduces the value transferred so condition 1(d) is not met.

(6) Gift of land where the donor continues to use that land but pays full consideration for their use.

Guidance: Condition 1 is likely to be met but the arrangement would not, on its own, be regarded as contrived or abnormal, or involving contrived or abnormal steps. “Sale and leaseback arrangements are not unusual in either the commercial world or for individuals (equity release).”

(7) Gift of an undivided share of property which is subsequently used by both the donor and donee (the reservation of benefit ‘sharing’ exemption)

Guidance: Condition 1 is likely to be satisfied but condition 2 would normally not be.

However, there is a sting in the tail here. The guidance finishes: “The analysis might be different where the donor only retained a very small proportion of the property in comparison to their level of occupation.”

Hence arrangements where Mum gives an adult child 99% of the family home and they live together sharing living expenses would presumably be notifiable but 50:50 arrangements would not. It is unfortunate that there is no indication of what amounts to ‘a very small proportion’. Suppose the donor retains a 10% or 20% interest and continues to occupy the property – is this reportable?

(8) A non-UK domiciled individual who is not UK resident transfers funds from a sterling denominated UK bank account into a US dollar denominated UK bank account, so that the bank account is left out of account under section 157 IHTA 1984.

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Guidance: The transfer reduces the value of the estate that will be subject to IHT on death, as the dollar account will be ignored at death. But the account remains part of the estate, so there is no actual reduction in the value of that person’s estate and condition 1(d) is not met.

(9) A non-UK domiciled individual transfers non-UK situs property into a trust just before becoming deemed domiciled in the UK.

Guidance: Condition 1 is met. The transfer reduces the value of the person’s estate, without giving give rise to a chargeable transfer or PET (due to IHTA 1984, s3 (2): “no account shall be taken of the value of excluded property which ceases to form part of a person's estate as a result of a disposition”). An informed observer would probably conclude that obtaining the IHT advantage was a main reason for the arrangement. However, condition 2, is not met. A transfer into a discretionary trust, on its own, is not contrived or abnormal.

(10) Immediately before a ten-year anniversary a distribution is made from a relevant property settlement to reduce the charge on the subsequent ten-year anniversary.

Guidance: Condition 1(b) is met provided it is reasonable to expect an informed observer to conclude that the main purpose, or one of the main purposes, of making the distribution is to reduce the charge at the ten-year anniversary. However, condition 2 is not met as the arrangement does not contain any contrived or abnormal steps. The reason for making the distribution before the ten-year anniversary may be to save IHT, but the exercise of the trustees’ power to make a distribution is, on its own, neither contrived nor abnormal.

(11) Gift and Loan Trusts/Loan Trusts.

Guidance: These are arrangements where an individual lends money to trustees who invest it and hope to make a profit. An IHT saving arises only if the value of the investment rises; if it falls no saving is achieved. The lender can demand the money back at any time so the estate is not reduced and condition 1 (d) is not met.

(12) Loans to companies or other entities from which the lender cannot benefit.

Guidance: The granting of a loan which is repayable on demand, or on which

a commercial rate of interest is charged, does not reduce the value of the

lender’s estate, so condition 1(d) is not met.

Example of arrangements which are likely to be notifiable

HMRC say that because all the relevant circumstances of the particular arrangements,

have to be taken into account, the guidance has to be less definite here. However, it

makes the point that arrangements which include multiple steps in order to achieve

the intended tax advantage carry an increased likelihood that they may be notifiable.

It gives the following examples.

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(1) Arrangements giving shares which qualify for business property relief

into trust with a subsequent sale back to the transferor.

Guidance: in isolation, the transfer of shares qualifying for BPR into a trust, or

the sale of trust assets by the trustees, would not meet condition 1.

Where arrangements are entered into with the intention that all of these steps

take place, the arrangements have the effect of placing cash into a relevant

property trust, but without incurring a relevant property entry charge.

As one of the main purposes of these arrangements is to reduce or avoid a

relevant property entry charge it would be reasonable to expect an informed

observer to conclude that condition 1(a) is met.

This can be contrasted to a situation where, for example, family company

shares are transferred into trust for succession planning purposes, at which

time there is no intention of the trustees selling those shares. If the trustees

later took an independent decision to sell the shares it is unlikely that an

informed observer would conclude these separate steps form part of a single

overall arrangement, or to conclude that condition 1(a) was met.

It would not normally be possible to transfer cash into a relevant property trust

without incurring a relevant property entry charge, which is what has been

achieved. To achieve this outcome and to gain this tax advantage, contrived

steps are necessary, that is the transfer or shares qualifying for relief followed

by their sale back to the transferor rather than the simple transfer of cash which

would be the non-contrived way of achieving the same result. Without these

contrived steps the tax advantage would not arise. It would therefore be

reasonable to expect an informed observer to conclude, considering the

arrangements as a whole, that condition 2 was met.

Comment: Presumably, a settlement of shares ahead of a third party sale would be analysed in the same way.

What about the double dip (property eligible for BPR left by will to a discretionary trust, surviving spouse then buys it and hopes to survive 2 years and then leave it to children)?

We know that the making of a will does not require notification. It is difficult to see that the decision by the surviving spouse to buy property from the trustees comes within any of the elements of Condition 1.

(2) Creation of a reversionary lease

Guidance: the arrangements avoid or reduce a charge to inheritance tax arising from the application of the gift with reservation of benefit rules11. It continues “if, in addition, no pre-owned assets charge arises, it would be reasonable to expect an informed observer to conclude that this arrangement meets condition 1(c).”

11 But this is not always the case. It depends on the terms of the reversionary lease.

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Comment: Won’t there normally be a pre-owned assets charge?

The creation of a lease which only takes effect several years in the future and which in the meantime allows the owner of the property to continue in occupation at no cost is a contrived and/or abnormal step. The tax advantage would not be achieved without this contrived or abnormal step. It is therefore reasonable to expect an informed observer to conclude that this arrangement meets Condition 2 and is notifiable under this hallmark

(3) Use of Employee Benefit trusts to pass on property on death.

Guidance: A person owns an investment company with two part-time employees. The directors are that person and his two children. He is the sole shareholder and wishes to transfer the company to his children on his death. He creates an employee benefit trust and settles the shares on that trust. The trust excludes him and his children while he is alive and satisfies section 86 IHTA. His children can benefit after his death.

Condition 1(d) is satisfied because the arrangements result in a reduction in the value of the person’s estate which does not give rise to a chargeable transfer or PET and it is reasonable to expect an informed observer to conclude that obtaining this tax advantage was the main purpose, or one of the main purposes, of these arrangements

Condition 2 is satisfied because the use of an EBT in these circumstances is a contrived step. The purpose is to transfer the company shares to the children, but the tax advantage is obtained by using an EBT to achieve that outcome. The tax advantage could not be achieved without this contrived step.

These arrangements are reasonably common and would probably have been covered by the grandfathering provisions in the 2011 Regulations. However, instead of grandfathering the 2017 Regulation has the ‘established’ practice exception which is less likely to cover arrangements like this.

It is disappointing that there are not more examples dealing with notifiable arrangements. The 2014 Consultation document considered revocable IPDI trusts for a surviving spouse and the purchase (by way of loan) of an AIM portfolio that was gifted after 2 years. Why have these not been included?

Private client practitioners will have to give a little more thought to DOTAS than has previously been the case.

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III. POSSIBLE REASONS FOR INVALIDITY

1. Formalities

Gifts may be outright or settled. In the case of a settlement the donor can either transfer assets to trustees or declare himself a trustee. It is important to get the formalities right or the gift will be invalid.

Equity will not perfect an imperfect gift or compel the completion and execution of an incompletely constituted voluntary trust.

1.1 Transfer of assets

Whether a settlor wishes to transfer property outright to an individual donee or to trustees, the same formalities are required. They vary depending on the nature of the asset transferred. So, for example:

(a) land requires a deed or, in the case of registered land, a transfer; (b) shares require a share transfer; (c) a statutory assignment requires writing and notice to the creditor or other asset holder; (d) chattels generally require delivery; and (e) a disposition of an existing equitable interest must be in writing.

In the case of transfers to settlements, it is common to set them up in pilot form (eg with an initial trust fund of £10) and then for the substantial assets to be separately transferred to the trustees. However, it is possible to combine in a single document both the property transfer and the declaration of trusts. This is frequently done when life insurance policies are being settled. A typical clause for insertion in the settlement would be:

“The Settlor as beneficial owner assigns the Policy and all benefits and advantages of and all rights arising under and all money assured by or to become payable under or by virtue of it and any policy or policies substituted for it to the Trustees to hold the same upon the trusts and subject to the powers and provisions declared and contained below.”

1.2 Declaration of trust

Where a declaration of trust is used, no formalities are required (except in the case of land, LPA 1925, s53(1)(b)) and any clear expression of the settlor’s intention to create a settlement is sufficient. However, in the interests of certainty, it is desirable that a declaration of trust should be in writing or by deed.

A declaration of trust of land or any interest in it must be manifested and proved by writing and signed by the person making the declaration (LPA 1925, s53(1)(b)). Note that the declaration does not have to be made in writing; it merely has to be evidenced in writing.

For an example see APPENDIX 1.

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1.3 Reasons for using a declaration of trust

There are a number of situations in which a declaration of trust is useful. For example: (a) Shares may be subject to restrictions on transfer imposed by the

company’s articles of association. In such cases the restriction may be side-stepped by declaring a trust of the equitable interest in the shares leaving the legal title with the original shareholder.

(b) A declaration of trust can be used where a donor wishes to benefit a minor particularly where the asset in question is land.

(c) A declaration is also useful where a donor wants to make an immediate transfer but there are formalities (such as obtaining consent or a licence from a third party) which will delay the passing of legal title12.

(d) A declaration of trust is the only way to transfer the benefit of certain

assets. For example personal pension policies, the benefit of which cannot be assigned. These policies include lump sum death benefits which it is desirable to hold outside the IHT estate of the pension holder. Some, but not all, pension schemes allow this arrangement. Where they do not, the only way to achieve the desired result is for the pension holder to declare a trust of the death benefit while retaining all other rights.

2. The Legal Test of Capacity

2.1 What is capacity?

Many lifetime gifts are made by elderly donors so the question of the capacity required to make a gift is particularly important. In Kicks v Leigh [2014] EWHC 3926 (Ch) Stephen Morris QC sitting as a deputy judge reviewed the case law and held that the correct approach to a lifetime gift made after the coming into force of the Mental Capacity Act 2005 was to apply the principles in Re Beaney (Deceased) [1978] 1 WLR 770 rather than those set out in the Act.

In Re Beaney (Deceased)13 a mother gave her only asset of value (her house) to one of her daughters. The other children claimed that she lacked capacity to make the gift.

12 Particularly useful in the case of deathbed gifts perhaps where the donor wishes to reduce the

death estate below the taper threshold. 13 Considered and approved in Special Trustees for Great Ormond Street Hospital for Children

v Pauline Rushin, Caroline Michelle Billinge & others sub nom In the Estate of Lily Louisa Morris (Deceased) [2001] WTLR 1137. This was a shocking case of “carer abuse where a number of substantial gifts made by an elderly lady before her death were held to be invalid. See also Pesticcio v Huet [2003] All ER 237 and Williams v Williams and Another [2003] EWHC 742 (Ch) where the Re Beaney test was applied.

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The daughter claimed that it was only necessary for Mrs Beaney to understand that, (1) she was making a gift, (2) the subject matter of the gift was the house, and (3) the person to whom she was giving it was her daughter.

The other children claimed that it was also necessary for Mrs Beaney to understand that she was giving away her only asset of value, and was thus depriving her other two children of any real interest in her estate. In other words, the degree of understanding required in such a case is the same as that required for the making of a valid will.

Martin Nourse QC, sitting as a deputy judge agreed with the latter view:

“The degree or extent of understanding required in respect of any instrument is relative to the particular transaction which it is to effect. In the case of a will, the degree required is always high. In the case of a contract, a deed made for consideration or a gift inter vivos, whether by deed or otherwise, the degree required varies with the circumstances of the transaction. Thus, at one extreme, if the subject-matter and value of a gift are trivial in relation to the donor’s other assets a low degree of understanding will suffice. But, at the other, if its effect is to dispose of the donor’s only asset of value and thus for practical purposes to pre-empt the devolution of his estate under his will or on his intestacy, then the degree of understanding required is as high as that required for a will, and a donor must understand the claims of all potential donees and the extent of the property to be disposed of.”

In Sutton v Sutton [2009] EWHC 2576 (Ch) an elderly man had transferred the matrimonial home to his son. This was apparently a piece of unsuccessful tax planning suggested by other family members with a view to saving IHT (overlooking the fact that his continued residence in the house meant that there was a reservation of benefit).

After his death his widow and son asked the court to declare the transaction invalid on the basis of lack of capacity.

Christopher Nugee QC, sitting as a deputy High Court judge, applying the Re Beaney test, found that the deceased had lacked capacity at the time of the transaction, saying:

“In terms of the test in Re Beaney, it seems to me that Mr Sutton not only needed to be capable of understanding that he was giving away his house to his son, but that the effect of this would be to deprive himself and his wife (in the event of his predeceasing her) of any entitlement to the house or legal right to stay there.”

2.2 Burden of proof

In Gorjat v Gorjat [2010] EWHC 1537(Ch) Asplin J, as she then was, addressed the burden of proof in relation to mental capacity as follows:

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“139. Finally, at common law, the burden of proving lack of mental capacity lies on the person alleging it. To put the matter another way, every adult is presumed to have mental capacity to make the full range of lifetime decisions until the reverse is proved. …..This evidential burden may shift from a claimant to the defendant if a prima facie case of lack of capacity is established: Williams v Williams [2003] WTLR 1371 at 1383.”

In Kicks v Leigh [2014] EWHC 3926 (Ch), after reviewing the case law, Stephen Morris, sitting as a deputy High Court judge, confirmed that this was the correct approach.

“With the exception of Sutton v Sutton where (at §18) there was no reference to the possibility of the evidential burden shifting to the party asserting capacity, the authorities all seem to support the proposition that whilst the legal burden is on the party asserting incapacity, if that party adduces evidence to raise a sufficient doubt from which incapacity can be inferred, then the evidential burden shifts to the opposing party.”

2.3 Rule in Parker v Felgate applies to lifetime gifts

In Singellos v Singellos [2010] EWHC 2353 (Ch) the High Court held that a lifetime gift was valid, even though the donor had lost capacity between giving the instructions and executing the relevant documents.

Mrs Singellos had executed a will, and company documents executed in order to implement some lifetime Inheritance Tax planning (proposed by her accountant).

Her son challenged the validity of the will on the basis that his mother did not execute it and did know and approve of its contents. He also challenged the validity of company documents executed on 28 April 2010 making substantial lifetime gifts (comprising valuable UK properties worth approximately £4.5 million) designed to achieve an IHT saving on the basis that his mother’s signature was aided by his sister, and his mother lacked capacity at the time.

Deputy Judge Andrew Simmonds QC held that the will and company documents were valid.

In reaching his decision on the lifetime gift he applied the principle detailed in Parker v Felgate (1883) LR 8 PD 171 relating to wills. This decision, albeit only at first instance, represents an extension of the principle in Parker v Felgate, which has only previously been applied to wills.

The deputy judge applied Re Beaney, and found that the substantial lifetime gift required a high degree of understanding. He concluded that Mrs Singellos had the necessary degree of understanding on 15 April 2008 when she instructed her accountant to undertake the lifetime gift, but not on 28 April 2008, when she signed the final documents. It was however accepted that Mrs

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Singellos understood that she was signing documents on 28 April to give effect to instructions she had earlier given to her accountant.

He then decided that Parker v Felgate can apply to a lifetime gift, and that the absence of authority in this regard should not constrain him if the decision was right in principle. He drew extensively on the analysis of the Court of Appeal in Perrins v Holland [2010] EWCA Civ 840. The broad policy considerations are equally applicable to lifetime gifts, as to wills. As a result of Re Beaney, the tests for capacity to execute a will and make lifetime gifts of a whole estate are essentially the same. It is immaterial that lifetime gifts take effect immediately, unlike wills which are revocable until death, as it is the point of execution (and not when the disposition takes place) that is relevant when applying the test of capacity.

2.4 Void or voidable?

Where a person makes a gift which is later declared invalid as a result of lack of capacity there is some uncertainty as to whether the gift is void or voidable.

In Sutton v Sutton [2009] EWHC 2576 (Ch) the parties had asked for a declaration that the effect of lack of capacity was to render the transaction void as opposed to merely voidable. This was because they feared adverse tax consequences if the transaction was merely voidable.

Christopher Nugee QC, sitting as a deputy judge, said he doubted whether it would make any difference at all. From an inheritance tax point of view the property would be treated as if it had never left Mr Sutton's estate and would therefore be comprised in his estate at the date of his death.14 So far as CGT was concerned, he thought it would follow from the transfer being set aside that the son would have acquired nothing under the transfer (save for the bare legal title) so that there was unlikely to be any charge to CGT.

Nevertheless, he reviewed the authorities and concluded that the position was unclear.

He declined to decide whether the disposition was void or voidable on the basis that a declaration is a discretionary remedy15: and the justice of the case did not require him to grant it. The issue made no difference to the position of the parties as between themselves. He was being asked to make the declaration that the transfer was void to bolster the position of the parties vis-a-vis HMRC who were not parties to the action and would not have been bound by any declaration made.

14 See IHTA 1984 s150 in the case of voidable transfers. 15 See note 40.20.2 in vol 1 of Civil Procedure (the White Book) which refers to the judgment of

Neuberger J in Financial Services Authority v Rourke [2002] CP Rep 14. He is reported as saying that when considering whether to grant a declaration or not, the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose, and whether there are any other special reasons why or why not the court should or should not grant the declaration.

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In relation to the void/voidable issue he said:

“the overriding consideration in my judgment is that the true position in law is quite obscure, and one on which I have not heard true adversarial argument. … If I had reached a clear view of the law, I would have said so and I think I would then have made a declaration accordingly; but in circumstances where I am left in real doubt as to what the law is or ought to be, I do not think it either necessary or appropriate to resolve those doubts and make a declaration for the purpose of strengthening the arguments of the parties against HMRC.”

3. Undue Influence

Advisers should be alert to the possibility of a gift resulting from undue influence being exercised over the donor. It is not unknown for adult children to persuade their parents to give away substantial assets with a view to saving inheritance tax and/or nursing home fees.

Where a gift is made as a result of undue influence, it can be challenged no matter how long ago the transaction took place so long as the undue influence persists, but once the complainant is no longer under the defendant’s influence, a claim to set aside the transaction must be brought within a reasonable time16.

Gifts may be challenged during the lifetime of the donor17 or after his death by personal representatives on behalf of his estate18. Personal representatives can find themselves in a difficult position where questionable gifts have been made to family members. However, they are obliged to identify and collect assets of the estate.

3.1 Meaning of ‘undue’ influence

Mere persuasion is not undue influence. To be undue it must overpower the volition without convincing the judgement. In Daniel v Drew [2005] EWCA Civ 507 Ward J said that:

“in all cases of undue influence the critical question is whether or not the persuasion or the advice, in other words the influence, has invaded the free volition of the donor to accept or reject the persuasion or advice or withstand the influence. The donor may be led but she must not be driven and her will must be the offspring of her own volition, not a record of someone else’s. There is no undue influence unless the donor if she were free and informed could say ‘This is not my wish but I must do it’”.

16 Humphreys v Humphreys [2004] EWHC 2201 (Ch); V Hackett v CPS and D Hackett [2011]

EWHC 1170 (Admin).This is important for advisers who should take the possibility of undue influence claims into account when deciding how long to retain files for.

17 All the cases in the previous footnote were challenges brought during the lifetime of the donor. 18 See for example Hammond v Osborn [2002] EWCA Civ 885 and Special Trustees for Great

Ormond Street Hospital for Children v Rushin [2001] WTLR 1137.

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3.2 Proof of undue influence

Whether a transaction was brought about by the exercise of undue influence is a question of fact19, and in general the person who alleges undue influence must prove affirmatively that the impugned transaction was entered into not of the donor’s own will but as a result of actual undue influence exerted against him20. The complainant must show that the other party to the transaction, or someone who induced the transaction for his own benefit, had the capacity to influence the complainant; that the influence was exercised; that the exercise was undue; and that its exercise brought about the transaction.

It is not necessary, however, to show domination. The evidence required depends on the nature of the alleged undue influence, the personality of the parties, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.

3.3 The presumption of undue influence

In certain cases undue influence is presumed. Where it is presumed, life is infinitely easier for those trying to set aside the transaction. The presumption will arise if the complainant can show two things:

(i) The donor placed trust and confidence in the defendant in relation to the management of his financial affairs. In the case of certain relationships, such as solicitor and client, trustee and beneficiary, parent and child21, the law presumes, irrebuttably, that one party had influence over the other. In these cases the complainant need not prove the donor actually reposed trust and confidence in the other party; it is sufficient to prove the existence of the relationship.

(ii) The transaction calls for explanation. In Royal Bank of Scotland v

Etridge (No 2) [2001] UKHL 4422 Lord Nicholls said that the term “manifest disadvantage” which had previously been used in relation to this requirement had given rise to misunderstanding in cases where wives had guaranteed loans to their husbands and should be discarded.

Where the presumption arises, the effect is that, unless and until it is rebutted (for example by showing that the complainant took independent legal advice), it is presumed that the donee has preferred his own interests, and has not behaved fairly towards the donor.

19 Langton v Langton [1995] 3 FCR 521, [1995] 2 FLR 890; UCB Corporate Services Ltd v

Williams [2002] EWCA Civ 555; Wright v Cherrytree Finance Ltd [2001] EWCA Civ 449. 20 Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44; Randall v Randall [2004] EWHC

2258 (Ch). 21 The presumption does not arise in the case of an adult child and his or her elderly parent, nor

as between husband and wife, though the relationship may be a factor in establishing the necessary trust and confidence.

22 See also Jennings v Cairns [2003] EWCA Civ 1935.

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The involvement of a legal adviser does not, necessarily, defeat a claim of

undue influence23. What is required is that the donor is put into a position where

he could make a free and informed choice.

V Hackett v CPS and D Hackett [2011] EWHC 1170 (Admin) is a particularly exciting example. Mrs Hackett, who was profoundly deaf, unable to read or write and with only rudimentary sign language, had purchased an investment property with money saved by her late husband. She granted her son a general powers of attorney. He took her to see a solicitor and the property was transferred to him. The solicitor had relied on the son to interpret for his mother.

Unsurprisingly Silber J decided that the legal advice was insufficient to rebut the presumption. The solicitor acted for both the claimant and her son in arranging the transfer. This totally undermined the idea that the claimant with all her difficulties received independent advice which was essential if this claimant was to be emancipated.

4. Gifts made on behalf of P

4.1 Limited statutory powers to make gifts

Attorneys have only the limited powers set out in MCA 2005, s12 to make gifts and these powers cannot be extended by the LPA. If the attorney wants to go beyond s12, the Court must authorise the gift.

Deputies have the powers conferred by their appointment. Typically this states that they have the same powers as attorneys in relation to making gifts.

Section 12 Scope of lasting powers of attorney: gifts.

(1) Where a lasting power of attorney confers authority to make decisions about P's property and affairs, it does not authorise a donee (or, if more than one, any of them) to dispose of the donor's property by making gifts except to the extent permitted by subsection (2).

(2) The donee may make gifts:

(a) on customary occasions to persons (including himself) who are related to or connected with the donor, or

(b) to any charity to whom the donor made or might have been expected to make gifts,

if the value of each such gift is not unreasonable having regard to all the circumstances and, in particular, the size of the donor's estate.

23 See for example Randall v Randall [2004] EWHC 2258 (Ch); Vale v Armstrong [2004] EWHC

1160 (Ch).

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(3) “Customary occasion” means—.

(a) the occasion or anniversary of a birth, a marriage or the formation of a civil partnership, or

(b) any other occasion on which presents are customarily given within families or among friends or associates.

(4) Subsection (2) is subject to any conditions or restrictions in the instrument.

It is important to remember that it is not impossible to make gifts outside s12. In such cases the court’s authority must be obtained. Section 23(4) of the MCA states that, 'The court may authorise the making of gifts which are not within section 12(2) (permitted gifts).'

4.2 Meeting needs or making gifts?

Re JG and Others [2017] EWCOP 10

This case has a number of interesting points of which this is just one.

MCA 2005, Sch 1, para 11(2) requires the Public Guardian to refuse to register an LPA unless the court directs if it contains a provision which would:

(1) be ineffective as part of an LPA;

(2) prevent the instrument from operating as a valid LPA.

There are no provisions in the MCA 2005 authorising attorneys to meet the needs of family members or dependants, (unlike the old EPA legislation which specifically authorised gifts made to meet the reasonable needs of persons for whom the incapacitated person would have been expected to provide). As a result, the OPG’s view was that an attorney is only able to meet the needs of persons P had a legal obligation to maintain, ie, a spouse, civil partner or child under 18.

The OPG regularly insisted of severance of provisions in LPAs authorising attorneys to provide for the needs of other family members, for example:

Contribute to father’s care costs (Drew).

Provide for handicapped (adult) son (O’Brien).

Provide for grandchildren in cases of extreme need (Gee).

However, the decision in Re JG and Others [2017] EWCOP 10 has substantially changed the approach of the OPG.

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Eldergill J had to consider a number of cases in which the OPG wanted to sever provisions which it regarded as objectionable. He made the point that the Act is an enabling Act and obstacles should not be put in the way of carrying out P’s intentions, if at all possible.

He considered that, whereas an EPA attorney had only the specific powers conferred by the Act, an LPA attorney is able to deal with the property and financial affairs of P in his or her best interests subject only to specific limitations on the power to make gifts.

He said at [145]:

“An attorney must decide whether making a payment from the donor's estate would constitute a gift for the purposes of section 12. If it constitutes a gift then such a payment must both be in the donor's best interests and either authorised by the court or of sufficiently low value as not to require such authorisation.

If the payment is not a gift for the purposes of section 12 but the meeting of a need, and there is no condition or restriction in the instrument which prevents such payments, then the attorney must apply the principles in section 1 and the best interests considerations in section 4. The attorney must consider matters such as the donor's past and present wishes and feelings, their beliefs and values, any written statements made by them including statements in the LPA itself and all other relevant considerations such as the donor's own needs and the nature of their relationship with the potential recipient, and decide whether such a payment is in the donor's best interests.”

He accepted that some people might consider that all payments made from a donor's estate other than those for consideration, are by definition 'gifts' and therefore caught by section 12 . However, this was not the case for two reasons:

(1) Such an interpretation would be wholly impractical and undesirable. Where a couple who have been married for say 60 years appoint each other as attorneys, and one of them is then incapacitated by dementia, the spouse exercising the attorney role would need to apply for a court order in order to continue regular and historic contributions from the donor's pension and assets to their partner and the running expenses of the household. Likewise, where a younger couple with children make LPAs and one of them then suffers a severe brain injury in an accident, the attorney spouse would need a court order in order to continue to make payments to meet the children's needs or payments on their behalf. The legal consequence of the onset of incapacity in such cases would be a court application in all cases and a Court of Protection order authorising some division of the couple's assets, income and

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expenditure not dissimilar to that required in cases of divorce or separation. It would be a nightmare.24

(2) During seven years as a full-time judge of the Court of Protection he was not aware of any such applications being made. This was probably because, in practice, couples, parents and children execute LPAs in order to be able to continue as far as possible their normal and historic family lives without court intervention or official regulation. They have a common-sense understanding of the limits of what kind of expenditure is permissible, which is reinforced by natural affection and a concern for the welfare of the person suffering incapacity.

He said (at paragraph 152) that it was not possible to define precisely the boundary between a gift and a payment to meet a person's needs because each person's situation, circumstances and resources are unique. However, marriage and equivalent relationships typically create a relationship of interdependence and mutual support, and dependence is commonly created by the presence either of children or a family member with a significant disability. Such relationships commonly generate needs met by other loved ones within the circle. In very general terms, gifts lack the regularity of weekly, monthly and other periodic payments to meet the needs of family members and dependants, and often are not supported by a history of frequent similar periodic payments predating the onset of incapacity.

4.3 Current OPG guidance “Gifts: Deputies and EPA/LPA Attorneys”

This was published in February 2018 and has been updated on a number of occasions, most recently in January 2015. It largely repeats the statutory rules and the views of Eldergill J as expressed in JG and others. However, it gives useful guidance as to the meaning of ‘reasonable’ in MCA 2005, s12 and makes other sensible points:

5. Court’s powers to authorise gifts

The court can authorise the making of gifts by an attorney that are not within s12(2) provided there are no restrictions in the power itself and the court is satisfied that the gift(s) would be in the best interests of the donor (MCA 2005, s23(4)). A best interests assessment has to take into account the matters set out in MCA 2005, s4(6):

(a) the person's past and present wishes and feelings (and, in particular, any relevant written statement made by him when he had capacity),

(b) the beliefs and values that would be likely to influence his decision if he had capacity, and

(c) the other factors that he would be likely to consider if he were able to do so.

24 Actually, while the decision is entirely helpful, the reasoning is not entirely correct because even the OPG recognised that reasonable needs can be met where there is a duty to maintain, as between spouses or parents and minor children.

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Moral: It is well worth leaving a statement of wishes of P. It will be taken into account. But so will patterns of behaviour of P, for example a habitual pattern of giving.

In addition under s4 (7) the person making the decision must take into account the views of the following people, if it is practicable and appropriate to consult them:

(a) anyone named by the person as someone to be consulted on the matter in question or on matters of that kind,

(b) anyone engaged in caring for the person or interested in his welfare, (c) any donee of a lasting power of attorney granted by the person, and (d) any deputy appointed for the person by the court,

as to what would be in the person's best interests and, in particular, as to the matters mentioned in subsection (6).

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APPENDIX 1

Declaration of bare trust for a minor

THIS DECLARATION OF TRUST is made the ..... day of ....... by [settlor] of [address] (‘the Settlor’)

WHEREAS

The Settlor wishes to make provision for [beneficiary] (‘the Beneficiary’) by declaring himself trustee of the property described in the schedule (‘the Trust Fund’)

NOW THIS DEED WITNESSES as follows:

1. Declaration of trust

The Settlor holds the Trust Fund and any income of it from the date of this deed on trust for the Beneficiary absolutely.

2. Administrative provisions

Until the Beneficiary attains the age of 18 years the powers and provisions contained below shall apply to the Trust Fund and the income of it.

[continue with required administrative powers and provisions: eg investment; delegation; receipts clause; extended powers of maintenance and advancement]

IN WITNESS etc;

SCHEDULE

The Trust Fund

[describe the property]

[Signature of settlor]

[Signature of witnesses]