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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.