UK: Private Client Update - November 2012

This edition covers: Maximising legitimate reliefs Joint bank accounts when sharing may not be straightforward & Prenuptial Agreements life after Radmacher

Maximising legitimate reliefs

The morals or otherwise of tax mitigation has been one of the main news stories this year and has generated many column inches. It has become a social stigma and many people understandably are recoiling from the very notion of doing anything to mitigate their tax affairs. However, there are many standard inheritance tax planning steps that anyone can take without running the risk of winding up on tomorrow's front page. We set out below some of these main planning tips.

1.  Maximise business and agricultural property reliefs If you have property which may qualify for either business property relief or agricultural property relief, then it is important to ensure that all the necessary conditions are met. Sometimes, a small restructuring of a business or farm is all that is required in order to benefit from these reliefs. A small amount of time and effort spent now will avoid an unpleasant surprise in the future.

2.  Pensions and life insurance policies  Ensure that you have completed all nomination forms in respect of your pension death benefits so that the proceeds remain outside of the taxable estates of your families if you were to die before retirement. Most pension companies will be able to provide you with a standard nomination form to complete which will ensure that there is a lump sum which can pass free of inheritance tax. Check that life insurance policies have been assigned into trust. If not, most insurance companies provide a standard trust document which can be used or it is possible to have a bespoke discretionary trust to hold a number of policies. If your policies are written in trust, it could save 40% inheritance tax on the proceeds on your death.

3.  Lifetime giving  There are a number of inheritance tax reliefs in respect of lifetime giving which are simple to utilise. Everyone is able to make gifts totalling up to £3,000 (your annual exemption) each year without incurring any inheritance tax. A husband and wife can contribute £650,000 into a trust for their children or grandchildren every seven years by using their nil rate bands. If used every seven years, this enables a substantial sum to be passed to the next generation over a relatively short period (£1.3m in 14 years), all free of inheritance tax. Other lifetime reliefs include gifts made on the occasion of a wedding (up to £5,000 from a parent) and relief on regular gifts made out of surplus income. Lifetime giving is one of the most effective ways of mitigating inheritance tax and can be done on either a small scale or a large scale depending on your means.

4.  Will  Ensure that your will is up to date and uses all possible reliefs. As was noted recently, if you now give 10% of your chargeable estate to charity, the balance of your estate will pay inheritance tax at a rate of 36% instead of 40%. Otherwise, the use of standard exemptions such as the spouse or charitable exemption are still very beneficial.

Joint bank accounts when sharing may not be straightforward

Joint bank accounts are a common means of sharing access to funds for two or more individuals and the majority of people will have one, either with their spouse or with their parent or child. However, what many people are not so clear about is what will happen to these funds on their death and whether or not they will pass automatically to the surviving account holder. As two recent cases have shown, the sharing principle is not applied to all joint bank accounts. When someone dies holding one or more joint bank accounts, their executors have to consider whether one joint owner inherits the whole account by survivorship or whether the funds are now held on trust for the deceased's estate. This note briefly summarises the recent cases and sets out some points to consider in respect of joint bank accounts.

In Drakeford v Cotton, a joint account was set up and funded by a mother. Her daughter was the other account holder and assisted with her mother's care. On the mother's death, it was presumed that the account was held on resulting trust for the mother's estate and so devolved according to the Will. However, the daughter was able to prove to the Court that the mother had intended that she take all of the funds by survivorship and the presumption was disapplied.

In KO Pflum v HMRC, HMRC claimed that a joint bank account set up and funded by a London based banker for both his and his girlfriend's benefit consisted solely of the banker's funds and looked to tax him whenever the girlfriend withdrew funds and used them in the UK. The Court held that the account had been set up so that withdrawals could be made without restriction by either party and as a result the funds belonged to the party withdrawing them.

Both these cases show the importance of making clear one's intentions for a joint account when it is set up, especially if all or the majority of the funding comes from one account holder. Unless it can be shown that there is an intention for the funds to pass to the other person (there is a presumption that transfers from a husband or father to his wife or children are gifts, unless proven otherwise, but the same is not true in respect of transfers by a wife or mother), then there will be a presumption that they are held on resulting trust for the individual's estate. Therefore, make sure your intentions are recorded in good time.

Prenuptial Agreements life after Radmacher

The well known case of Granatino v Radmacher gave great weight to prenuptial agreements unless there are circumstances which dictate otherwise.

Independent legal advice and disclosure are key factors the Court should consider when deciding whether a party has entered into a marital agreement with a full appreciation of its implications. Since 2009 the Law Commission has been consulting on marital property agreements and a final report is due in January 2013.

Granatino v Radmacher made clear that independent legal advice and full disclosure were not preconditions to fairness, which underlies the English Court's overall approach to the treatment of marital agreements. The issue of non-disclosure of assets was considered in Kremen v Agrest, which concerned a postnuptial agreement between a wealthy Russian financier and his wife. In that case, material non-disclosure by the husband was highly influential in Mr Justice Mostyn's decision to disregard the agreement, as were the issues of a lack of independent advice and the presence of duress. These findings resulted in it being determined that the wife did not enter into the agreement with a full appreciation of its implications. The wife received an award of £12.5m out of total assets in the region of between £20m–£30m.

In contrast, in Z v Z, which concerned a French couple who entered into a French marriage contract in accordance with French law, the agreement was upheld by the English Court. This was despite a lack of independent legal advice and disclosure. Mr Justice Moor commented that this would have been a case for equal division of assets, were it not for the agreement. However, even though the wife did not know the full details of her husband's assets, Mr Justice Moor held that it was enough that 'she knew that he was doing well... and making ever greater amounts of money.' The Court held that, because of the existence of the agreement, the sharing principle should not apply but it generously assessed the wife's needs in formulating an award.

In the case of V v V, which concerned a premarital agreement between a Swedish wife and an Italian husband with assets of £1.3m in a short marriage, the Court found on appeal that although there had been no independent advice before they entered into the agreement, the parties were sufficiently intelligent to be 'aware of its obvious purpose, notwithstanding that [they] did not have advice concerning it, or its effect'. It was held that there was no material non-disclosure, as the wife was indifferent to the detailed value of the husband's assets. The Court recognised the importance of the principle of autonomy.

Whilst independent advice and disclosure are not preconditions to marital agreements being upheld, case law shows that since Granatino v Radmacher, the English Court has continued to take such factors and the factual matrix into account when deciding the weight to be attached to the agreement. It is likely that forthcoming reform to the current law on marital agreements will include provision for factors such as independent legal advice and disclosure to be conditions to enforceability. Wealthy individuals looking to protect wealth through marital agreements should therefore be aware that the absence or existence of key factors could, ultimately, have a significant impact on the treatment of the agreement.

News in brief

  • Trustees of discretionary trusts and other trusts subject to 10 yearly charges and exit charges will be pleased to hear that HMRC have launched a consultation to simplify this most complex area of inheritance tax. The consultation closed on 5 October 2012 and it is hoped will result in trustees no longer having to carry out such complicated calculations in the future.
  • One unexpected effect of the Retail Distribution Review, which comes into effect on 1 January 2013 and will change the way in which financial advisers can charge for their services, is that many insurers are planning to withdraw some of the main life insurance policies traditionally used for inheritance tax planning. Some policies will remain available but the advice is to act now before it is too late.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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