BRODIES LOOKING FORWARD

All Change for InheritanceTax Nil Rate Bands

“Move Over Darling” – Capital Gains Tax Bombshell

Giving with One Handand Taking Back withthe Other

Lifting the “Real Burden” –Recent Cases on Variation and

Discharge of Title Conditions

Divorce – Scotland v England

01F I F T E E N AT H O L L B R O W S E

Use of nil rate band trusts going forwardThere are various reasons why nil rate band trusts may

be of use in the future.

Transferring nil rate bands is only available between spouses

or civil partners. A similar Inheritance Tax benefit can also

be obtained between co-habiting couples which can prevent

a double charge to Inheritance Tax. A trust will still be required

in this situation.

Where one or both members of a couple have been married

before and the previous spouse has died, it may be possible

to increase reliefs by using a nil rate band trust on the first

death of the current couple.

If the performance of investments is better than the increase

in the inflation adjustment in the nil rate band, then the overall

Inheritance Tax charge would be less if the funds were held in

a trust, than they would be if they were owned by the surviving

spouse outright.

Leaving funds in a trust for a beneficiary has the consequence

that the funds will not be part of the beneficiary's estate,

for various purposes including the assessment of assets for

care cost purposes or children's legal rights.

Leaving funds in a trust for a beneficiary who is not the

surviving spouse will still mean that funds can be used

to benefit that beneficiary but without it forming part

of his estate for Inheritance Tax purposes.

A trust provides an element of flexibility to cope with changing

family and tax circumstances in the future, neither of which can

be foretold. The value of funds in a trust set up by a will need

not be limited to the nil rate band and could extend to the whole

estate. In this way a testator can determine the ultimate

destination of the funds.

Trusts going forwardWhile trusts and wills for Inheritance Tax saving reasons may

be less common in the future, trusts do still have a wide range

of possible uses.

To find out whether a trust could meet your wishes, contact

your usual adviser.

CHANCELLOR DARLING SURPRISED US ALL WHEN

HE ANNOUNCED FAR REACHING CHANGES TO THE

AVAILABILITY OF THE INHERITANCE TAX NIL RATE

BAND IN HIS PRE-BUDGET REVIEW IN OCTOBER 2007.

ANDREW DALGLEISH REPORTS.

PREVIOUSLY, EACH INDIVIDUAL HAD AN EXEMPT

AMOUNT OR NIL RATE BAND WHICH EXEMPTED

£300,000 OF ASSETS FROM THE CHARGE TO

INHERITANCE TAX ON A DEATH. IF THIS RELIEF

WAS NOT USED THEN IT WAS SIMPLY LOST. IT

WOULD BE LOST IN PARTICULAR IF FUNDS WERE

PASSED TO A SURVIVING SPOUSE BECAUSE IT WOULD

ALREADY BE EXEMPT UNDER THE SPOUSE RELIEF.

Legislation is to be introduced to allow claims to any unused

Inheritance Tax nil rate band to be transferred to a person's

surviving spouse and used against the charge to tax on the death

of the surviving spouse. If the first spouse does not use up any

part of the nil rate band then it is available to the surviving

spouse. The nil rate band transferable is the nil rate band at

the date of death of the surviving spouse. The effect is to double

the nil rate band on the survivor's death.

In the past it has been possible to obtain the benefit of two nil

rate bands by setting up a discretionary trust on the first death,

to which assets worth up to the amount of the nil rate band were

contributed. The trust fund could then be used to benefit the

surviving spouse but without the funds being taxed as part of

the surviving spouse's estate on death.

The effect of the proposed change is to provide by statute

that the benefit of a nil rate band trust established on the first

death, is available, but without the trouble of having a trust

in existence. Two nil rate bands are now to be available on

the survivor's death, if not previously used. This appears to be

a significant simplification, unlike most budget changes.

What should be done with existing wills?Generally there is no need to take any action with existing wills

which contain provision for nil rate band discretionary trust.

They will do no harm. If it turns out the trusts are not wanted

then they can be dismantled after the first death. If the trust

funds are distributed to a surviving spouse within a two year

period then the nil rate band will not be used at all and the nil

rate band can still be transferred under the new proposals.

However, there may be reasons (explained below) why a nil rate

band trust under wills may be preferred and also reasons why

a nil rate band trust may be wanted in new wills in the future.

All Change for Inheritance Tax Nil Rate Bands

Another area affected significantly by the Chancellor’s

announcement is Capital Gains Tax, as Bob Page highlights:

• the end of both taper relief and indexation allowance fordisposals on or after 6 April 2008.

• the introduction of a Capital Gains Tax flat rate of 18%instead of previously effective rates varying from 5% to 40%.

• all assets held at 31 March 1982 will be deemed to have beenacquired on that date at their open market value.

• the abolition of the “halving relief” which applied to reducedeferred gains for assets held at 31 March 1982 and whichwere the subject of a claim for roll-over or hold-over relief fortransactions with these assets between March 1982 and 1988.

• the simplification of the share identification rules.

Of these changes, the most profound is the combination of

the ending of both taper relief and indexation allowance with

the new flat rate charge of 18%. This will apply to individuals,

trustees and personal representatives. Companies are not

affected by any of the proposed new changes.

As with all such changes there will be “winners” and “losers”.

The winners will be those people who have invested for

relatively short term gains into investments such as quoted

shares, second homes and buy-to-let properties. The losers

will be mainly small business owners who have experienced

substantial growth in their businesses and who were,

perhaps planning to sell their trading company or business.

Other losers will include those in company share option

schemes and investors in unquoted trading companies and

in the AIM market.

“MOVE OVER DARLING”– CAPITAL GAINS TAX BOMBSHELL

F I F T E E N AT H O L L B R O W S E02

The new proposed flat rate of 18% will see an immediate

increase of 80% in the Capital Gains Tax charge for those

investors with assets which previously qualified for maximum

business asset relief, which gave an effective rate of 10%.

In addition, the withdrawal of indexation allowance may

result in a much larger overall increase.

There has been much pressure on the government to mitigate

some of the new proposals and the reintroduction of a form

of partial retirement relief for gains up to £100,000 has been

mooted. However there has been no definite acknowledgement

of this relief. Some form of concession may also be afforded

to save-as-you-earn schemes but again no firm announcement

has been made.

All in all there is likely to be a lot of discussion and consultation

between tax professionals and their clients between now and

5 April next year to review what steps may be taken to minimise

the effect of these new Capital Gains Tax proposals.

GIVING WITHONE HANDAND TAKINGBACK WITHTHE OTHER?IT SEEMS FAIRLY COMMON

KNOWLEDGE THAT ONE WAY OF

MINIMISING YOUR INHERITANCE

TAX IS BY MAKING LIFETIME

GIFTS WHICH, IF YOU SURVIVE

FOR SEVEN YEARS, THEN FALL

OUT OF YOUR ESTATE FOR THE

PURPOSE OF CALCULATING

INHERITANCE TAX IN THE EVENT

OF YOUR DEATH. FRANCESCA

COOMBS INVESTIGATES.

This is a “Potentially Exempt Transfer”

or “PET”. However, we do come across

cases where an individual has purported

to make such a gift – perhaps of a

valuable painting or even a property

but they have not given the item away

completely. For example, Mrs McIver

gives away a painting by William

McTaggart to her only daughter but

continues to keep it in her house

where it remains on the wall (it would

leave a mark to remove it, it’s been

there forever).

The Revenue has a name for this: “gift

with reservation of benefit” or “GWR”.

As far as the Revenue are concerned

keeping the McTaggart on the wall will,

in the event of Mrs McTaggart’s death

mean that the value of that item must

be included in Mrs McIver’s estate and

if the value of the estate is over the nil

rate band (currently £300k) then tax

must be paid at 40% on the value of

the estate over that threshold.

But what if Mrs McIver had kept the

painting for a few years and passed

it on to her daughter when she moved

to a nursing home? At that point it

would become a PET and the seven year

clock would start to run. However,

whilst usually you can deduct the £3000

annual Inheritance Tax exemption

against the value of a PET, in this case

no annual exemption can be deducted.

In the view of the Revenue the painting

had been transferred to the daughter

some years before.

There are some exceptions to the rule

on GWRs notably gifts between spouses

or civil partners are exempt from the

GWR rules. There are also some “de

minimis” exceptions, i.e. where the use

or enjoyment of the gifted item by the

donor is very minimal. For example, the

recipient of a car gives occasional lifts

to the donor (fewer than three lifts a

month) – that is not a GWR. For gifts

of property, if the donor continues living

there, it is obviously a GWR. But what

about visits? Well, if the recipient lives

there and the donor visits for less than

one month in each year or makes brief

social visits that is alright. For holiday

homes, provided the donor visits a

property for not more than two weeks

in a year, then the gift would not be

a GWR. There is always the option

to the donor to make a commercial

arrangement by, for example paying

full rent for use of a property.

But how will the Revenue know about

these things? Well, gifts made within

seven years prior to death must be

declared on an Inheritance Tax return

after the death. Recently the Revenue

have decided that through incompetence

or dishonesty, families are just not

reporting everything they should and

so they have made announcements to

the press that they will be looking back

at records: bank statements, house

contents insurance and other financial

information to ensure that all gifts have

been accurately declared. Failure to

declare gifts can result in penalties and

additional tax liabilities. In certain

circumstances failure to declare assets

can result in criminal prosecution.

Whilst all this sounds terribly serious,

it can be easily dealt with. Simply

record the essentials of any gift: brief

description (cash, Toyota Corolla, etc),

approximate value, to whom it was

given and the date on which it was

handed over. After that perhaps ask

your solicitor to keep that record for

future reference. It will be a help to

your family when the time comes.

If you are thinking of making a gift,

you should discuss your plans with

your lawyer and remember that Capital

Gains Tax can also be an issue with

gifts of anything other than money.

You can give it away with one hand,

but be sure the Revenue do not take

it back with another!

05F I F T E E N AT H O L L B R O W S E

therefore not able to take into account the

physical effect of the longer route as the

servitude right was not a personal one,

but one attaching to the property. In cases

where the variation of discharge of the

title condition is adverse to some degree,

the Tribunal has agreed to the application

for variation of discharge on the basis of

compensation being payable – in the case

of J & L Leisure Limited – v – MichaelJohn Shaw, a proprietor of a ground

floor flat at the rear of a former hotel

was held to be significantly affected

by the applicant’s intention to sell the old

amusement arcade in front of the flat for

the construction of two storey housing.

Following a site visit, the claim for

compensation was reduced significantly

from the amount claimed initially to

£4,000 but then increased to £5,600.

In Donnelly and Reagan – v – Mullen &Others, the owner of a large double

penthouse was allowed to sub-divide it

into two smaller penthouses on the basis

that the benefited properties had only a

negligible benefit in restricting the number

of residents wishing to park or use the

rest of the property.

The existence or otherwise of planning

permission for the proposed development

is one of the ten factors which the Tribunal

needs to consider. Variation of a real

burden is possible even where there has

been some difficulty in obtaining planning

permission for the development, which

breaches the real burden. For example,

the demolition of a house replaced by two

houses having a significantly greater

building depth than other houses in the

neighbourhood was nonetheless accepted

as reasonable in the case of Thomas Dalyand Another – v – Thomas Bryce andAnother. In most of the recent cases,

a Variation rather than a Discharge has

been granted. An exception is Church ofScotland General Trustees – v – JamesCrawford McLaren and Another, where

an old feudal burden requiring a property

to be used as a church or as a lay training

centre was quite easily discharged by the

Tribunal. One of the significant change

of circumstances taken into account,

was that the demand for churches has

dwindled to the point where there was only

a requirement for one parish church in

Crieff where at one time, there were five.

This burden could well have been

discharged under the “sunset” rule

whereby a burdened proprietor can now

apply to the Lands Tribunal to have an old

title burden more than one hundred years

old discharged, leaving it up to any

legislation the Tribunal has to assess

reasonableness. It assists litigants by

identifying a list of ten factors which can

be expected to be significant. The final

factor is “any other factor which the

Lands Tribunal consider to be material”,

so the list is not limited. The approach

that the Tribunal now takes results

in decisions being made after analysis

and weighing of fact rather than on

comparison with previous cases.With very

few exceptions, the Tribunal will make

a site inspection to examine the perceived

benefit or otherwise of the real burden

which they have been asked to vary or

discharge and to assess the impact that

such variation or discharge will have

on any objector’s property. The Act

extends the class of person that may

apply – not merely the benefited

proprietor – but anyone having use

of the property (e.g. tenant, non

entitled spouse or mortgage company

in possession). As long as a person can

show title and interest in respect of

the title condition, they are entitled to

make representations to the Tribunal.

Under the old law, the Tribunal was

obliged to weigh up all applications,

whether or not they were opposed.

Section 97 of the 2003 Act states that

variation discharge or renewal shall be

granted as of right, if an application is

not opposed. The new law, therefore,

would appear to make an application

for variation or discharge easier provided

that the application is a reasonable

one. The following recent cases support

this view.

In Smith – v – Elrick and Gerard, a ten

year old real burden preventing more than

one additional house, was allowed to be

varied to allow conversion of an existing

barn into a separating dwellinghouse.

In George Wimpey East Scotland Limited– v – Fleming and Others, the developers

were allowed to vary the route of an

access road to allow further development

on neighbouring land as an entirely

reasonable request, opposing the owners

of an existing development who previously

had access to their houses along a

pleasant country road and would now have

to take access through a housing estate.

In Graham & Fletcher – v – Parker, a

developer was allowed to vary a servitude

right to allow construction of a new house

resulting in the objector having to use a

different, albeit a longer route, to take her

refuse bin out to the public street. The fact

that the objector was elderly was held

irrelevant by the Tribunal and was

LIFTING THE “REAL

BURDEN” – RECENT

CASES ON VARIATION

AND DISCHARGE OF

TITLE CONDITIONS

On 28 November 2004, the feudal systemin Scotland was abolished and the TitleConditions (Scotland) Act 2003 came intoeffect. This Act has revolutionised the lawon all real burdens. In particular, theLands Tribunal for Scotland was given anextended role to deal with the terminationof real burdens. Chris Hardie considersthe implications.

This article considers some of the most

recent cases, highlighting some features

which may be of interest if you are

contemplating development of your

property in apparent breach of adverse

real burden or where you are wishing

to oppose a development as a breach

of a real burden where you consider

that you are the benefited proprietor

entitled to enforce the real burden.

The case of East Dunbartonshire Council –v – Mrs C Smith was decided under the

old law. The Tribunal held that it did not

have power to declare the existence or

otherwise of a land obligation – the new

law confers a new power on the Tribunal

to determine the validity of a real burden.

An example of the revolutionary new law

is set out in the case of Sheltered HousingManagement Limited – v – MargaretForbes Jack. A two-thirds majority of flat

proprietors exercised their right under

Section 28 of the 2003 Act to appoint

different managers and also to execute

a new deed replacing the original Deed

of Conditions. The minority who wished to

preserve the title conditions in the original

Deed of Conditions applied to the Lands

Tribunal. Whilst the Lands Tribunal has

to consider whether the new Deed of

Conditions was unfair and also whether

it might not be in the best interests of all

the units, the Tribunal decided that the

proposed new deed created valid real

burdens, which were community burdens

and the application to preserve the status

quo failed. This result would have been

quite impossible under the old law.

The case of Ord – v – Mashford & Othersconsidered a real burden prohibiting

a building in front of a house at number

4 Manse Road, Biggar. It compared the

approach of the Tribunal under the old law

which was complex. Under the new

benefited proprietor to appeal to the

Lands Tribunal that the real burden

should be preserved.

By contrast, the cases where the Tribunal

have refused to discharge or vary a real

burden have been relatively few. Under the

old law the case of Stevens – v – Smith in

1996, although planning permission for

a house had been obtained on appeal,

the proposed development would have

a substantial impact on the amenity

of a large house in Brechin. A similar

conclusion was reached in Francis Faeley& Another – v – David Johnston Clark &Others decided under the new law in 2005.

This application to build a new house with

a granny flat was of such a scale and of

such a height, it would substantially affect

one of the objector’s properties which

had fine views over the Firth of Clyde and

Island of Cumbrae and the application

to vary the real burden was refused even

although planning permission and building

warrant had been approved.

A more unusual case was John McPherson& Another and William Fraser – v –William P Mackie and Others decided

under the new law in 2005. A firm of

housebuilders proposed to demolish a

house and use the site as access to

neighbouring land for construction of

a new development. The Tribunal held

that this had a substantial effect on one

particular house within the existing

development, caused by the creation of

a turning area and increased traffic,

resulting in the Tribunal refusing to grant

the discharge of the real burden sought

by the housebuilders.

An area of the new law where there is still

some difficulty relates to the new concept

under Sections 52 and 53 of 2003 Act

of a “Common Scheme”. In the case

of Smith – v – Prior & Others in 2006,

a large bungalow built in 1934, in the

Murrayfield area of Edinburgh, was

subject to a condition in a feu charter

that it was not competent to make any

alterations upon, or additions to, any

building on the ground and no buildings

of any other description (apart from the

house which was permitted) was to be

built upon the ground. Also, the ground

unbuilt upon was to be used exclusively

as gardens for planting or as pleasure

ground except where specially authorised

in writing by the Superior. Rather

surprisingly, it was accepted in this case

that three of the immediate neighbours

were, for the purposes of the application,

to be regarded as benefited proprietors

apparently because they had been advised

by their solicitors that there might be a

“Common Scheme”. The Tribunal

considered this in passing by stating that

where the only actual element of

regulation amongst the feuars was in

relation to boundary walls or fences this

does not necessarily involve a “Common

Scheme”. The Tribunal commented that

houses within the area of the former

Murrayfield Estate do not seem to fit any

of the examples of “related properties”.

However, as the parties had agreed that

the neighbouring proprietors were

benefited, the Tribunal was compelled to

consider the objectors as having such

interest. In the end the Tribunal held that

the purpose of the burden was to protect

the general amenity of the area and not to

protect the amenity of immediate

neighbours and allowed the application to

the extent of varying the condition to

permit another house to be built.

In the case of Daniel Gerard Anderson &Another – v – Elaine MacKinnon, a real

burden preventing the erection of a single

storey extension for which planning

permission and Building Warrant had

been obtained was accepted by the

Tribunal as being reasonable. At the outset

it was accepted that the neighbouring

proprietors were benefited under that

condition albeit that the Deed of

Conditions provided that consent from

the superior was needed without

mentioning any rights available to

neighbours. The important point to note

is that even where there might not have

been a Common Scheme under the old

law, the new law might well create one,

thereby giving neighbouring proprietors

entitlement to enforce real burdens where

none existed before.

In David Brown & Another – v – MarkRichardson & Another, the Tribunal held

with some hesitation that there was a

group of “related properties” in Duthie

Terrace, Aberdeen. This had the effect that

notwithstanding the abolition of the

superior’s interest, where it was held that

there was a Common Scheme, the benefit

of prohibition of further building could

transfer to any neighbour who could

satisfy the test of having interest and

therefore the entitlement to enforce the

burden. Hopefully future case law will

clarify the position.

Contrast that with the case of At Home,Nationwide Limited – v – CatherineMorrison & Others. This was a technical

case not involving any site visit.

An ancillary burden required any

proprietor in a sheltered housing

development to notify the superiors of any

intention to change the use or occupancy

of any flat and to obtain the superior’s

approval in writing. The Tribunal had to

hold that this ancillary burden was no

longer enforceable as the superior’s

interest had been abolished. The Tribunal

advised that this was an administrative

function which could easily be taken over

by the factor but had no jurisdiction to

order that this be done. Notwithstanding

this, another burden (which was not the

subject of the application) remained in

place restricting the use to occupation of

each flat by not more than two persons

aged over 60 years of age. The Tribunal

had to advise the parties concerned that if

such a change to allow the factor to give

approval instead of the superior could not

be agreed unanimously with all other

proprietors in the scheme then it might

still be possible to amend the real burdens

under Sections 28 or 33 of the 2003 Act,

(for example, see Sheltered HousingManagement Limited – v – MargaretForbes Jack. (above).

Finally, a word of caution about expenses.

Under the old law, the Tribunal was bound

to consider the merits of any application

whether opposed or not. This is not the

position now. In the case of West CoastProperty Developments Limited – v –Lawrence Clarke & Others in 2005,

the Tribunal wished to draw particular

attention to benefited proprietors who

submit and, at no time thereafter

withdraw written representations in

response to an application. If this results

in expense to the applicants, then this

might result in having to pay or contribute

to the applicant’s expense incurred in

meeting their opposition. Accordingly

before considering opposition to any

application for variation or discharge

of a title burden, you should seek legal

advice, since in the event of losing, not

only will you have to pay his solicitor’s

fees, but those of the applicant’s as well.

Making real burdens enforceable is

therefore more difficult, albeit more

transparent as burdened and benefited

properties have to be identified.

Conversely, developing one’s property

is now much easier for the applicant

who is able to get the necessary planning

consents and is skilful in arguing the

case that the application for development

is reasonable, despite adverse real

burdens, which would otherwise prevent

him for proceeding.

F I F T E E N AT H O L L B R O W S E08

England – There is no automatic 50/50 division. The courts have

discretion as to what is a fair award. They will usually look at

provision for the children (under 18) of the family, the income

and earning capacity of the parties, any property and financial

resources of both the parties now and in the foreseeable future,

the needs of the parties, their standard of living, the age and

duration of the marriage, disability, contributions, conduct and

loss of benefit. The English courts have much more discretion

in relation to the level of award to make.

FINALITY

Scotland – The financial aspects of a couple’s separation must

be decided at or before divorce, unless the court specifically

reserves the matter, but even then a time limit for it to be dealt

with will be given.

England – Divorce does not mean that the finances are dealt

with. Parties can make a financial claim at any time after

divorce unless and until financial claims have been dismissed

or the person making the claim remarries.

MAINTENANCE / ALIMENT

Scotland – Each spouse has a duty to aliment the other while

they remain married. After divorce, ongoing maintenance

may be awarded if capital is insufficient to satisfy the payee’s

needs and if the payee can show a continuing need for financial

support. Most claims are restricted to three years after

the divorce.

England – Each spouse has an obligation to maintain the other

prior to divorce. After divorce, maintenance is usually awarded

where there are young children, where the marriage has been

very long or the other spouse has limited earning capacity.

An ongoing financial award can also be used to compensate

the spouse in relation to their overall claim, as well as meeting

their ongoing needs.

MEANING…

In general terms, Scots law is probably better for the wealthier

spouse with the higher earning capacity. The spouse with the

lower earning capacity and assets would probably be better

off in England. If Sir Paul McCartney is reading this, perhaps

he should have considered making more use of his home in the

Mull of Kintyre with his present wife!

DIVORCEIt’s different up north! Contrary to popular belief

UK Divorce Law is not a unified system. This affects

not only financial settlements on divorce or

separation but the planning for pre-nuptial and

post-nuptial agreements. Sharon Murray examines

these differences.

The main differences between English

and Scots law are as follows:

THE GROUNDS OF DIVORCE

Scotland – Irretrievable breakdown of the marriage as

evidenced by two years’ separation (without consent), one year’s

separation (with consent), adultery or unreasonable behaviour.

England – Irretrievable breakdown of the marriage as evidenced

by two years separation (with consent), five years separation

(without consent), desertion (two years), adultery or

unreasonable behaviour. In England there is a two stage

process – decree nisi then decree absolute. This does not exist

in Scotland.

THE MATRIMONIAL PROPERTY TO BE DIVIDED ON DIVORCE

Scotland – Matrimonial property comprises all property

belonging to the parties to a marriage, or to either of them,

which has been acquired in the course of the marriage and prior

to separation. It excludes gifts from third parties and inherited

items. It includes rights accruing in a pension scheme or

endowment policy within that time. Any house and/or the

contents acquired for family use in anticipation of marriage

will also be included.

England – Matrimonial property comprises anything owned by

the parties, jointly or individually. This can include inherited

items, items brought into the marriage by one party alone and

items acquired post separation. The English courts have much

more discretion in relation to what is in the matrimonial pot

to be divided between the parties of a marriage.

THE DIVISION OF THE MATRIMONIAL PROPERTY

Scotland – Matrimonial property is to be shared fairly between

the parties which usually means equally i.e. 50/50. A court will

consider whether there are any special circumstances justifying

a greater than 50% share. There is no technical definition

of ‘special circumstances’ and it will depend on the individual

facts of the case. Equal division is the norm.

Scotland v England

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The contents of this update are of a general descriptive nature, do not constitute specific legal advice and may not be relied upon as such.

If any specific queries arise, we shall be delighted to assist.

Cover image courtesy of The Herald & Evening Times picture archive.