Archive: Sep 2018

  1. Common tragedy clause in a will / charitable legacies

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    The death of Richard Cousins, a 58-year-old widower who perished in a tragic sea plane accident on New Year’s Eve 2017 along with his two sons, his fiancé and her young daughter, has brought the subject of wills and charitable legacies to the forefront of media and public attention.

    Richard Cousins was head of the catering company, Compass and during his lifetime accumulated a multi-million-pound fortune. It has been reported that he had intended to leave most of his wealth in trust for his two sons, but given they sadly died with him, the ‘common tragedy clause’ in his will came into play.

    Under the terms of Mr Cousin’s will, given he and his beneficiaries died at the same time or within close proximity of his death, his chosen charity, Oxfam are to be the principal beneficiary of his estate. Without such clause, in the event that all his intended beneficiaries died, his wealth would have been distributed in accordance with the intestacy rules.

    It has been reported that Oxfam will receive a legacy of approximately £41m although the exact figure will not be known until the probate has been completed. Two brothers of Mr Cousins will each receive £1m.

    It is clear Mr Cousins received sound professional advice at the time he made his will and whilst such unfortunate tragedies are rare, it is nevertheless important for people to consider all eventualities when deciding what they want to happen when they die.

    A “common tragedy clause” is precisely that: it provides who should benefit from the estate if there is a common tragedy, i.e. should all the intended beneficiaries die with the testator or within short time of each other. Given that family holidays are quite common, while such an occurrence is still very rare, these tragedies happen. It would be usual for such a clause to name the ultimate beneficiary as a charity or a number of charities.

    It is astonishing just how many people still die without having made a will or leaving a will that is years out of date (evidenced by the growing number of challenges under the Inheritance (Provision for Family and Dependants) Act 1975).

    It is also rather sad that relatively few people leave charitable legacies in their wills. According to “Legacy Trends 2018” published by Smee & Ford, only 6.1% of the population leave a charitable gift in their will.

  2. Buy to Let continues to slow

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    In recent weeks there have been rumours, originating initially from The Sun , that the Treasury is contemplating a fresh increase in stamp duty land tax (SDLT) on buy-to-let (BTL) properties. The idea comes at a time when SDLT receipts are showing signs of flagging.

    In the first three months of 2018/19, SDLT receipts were down nearly 11% on the corresponding period in 2017/18. The latest (June 2018) rolling 12-month figure for SDLT income is £12.569bn against a peak of £13.04bn in January 2018. The Office for Budget Responsibility’s (OBR) projection for SDLT income in this financial year is £12.9bn, virtually unchanged on last year’s outturn. The Chancellor, Mr Hammond, could therefore find tweaking rates attractive, provided the overall result is increased revenue.

    Against this background there has been some attention given to figures released yesterday by UK Finance on mortgage lending. These showed that there were 5,400 new BTL home purchase mortgages completed in June, 19.4% fewer than in the same month a year earlier. By value this represented £0.8bn of lending, 11.1% down year-on-year. The press release accompanying the figures noted that “…though the full impact has yet to be felt, tax and regulatory changes continue to bear down on borrowing activity in the buy-to-let purchase market”.

    The trend of BTL lending has been heading downwards since the extra 3% SDLT on second properties took effect in April 2016. Many BTL purchases were brought forward to March 2016, when £4.3bn was lent to 29,700 borrowers. However, there has been no recovery from the immediately subsequent drop in sales, as the graph below shows.

  3. Capital Gains ruling on your main residence

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    In the recent case of McHugh v HMRC (2018 UKFTT 403 TC), the First Tier Tax (FTT) Tribunal were asked to consider the question of whether private residence relief from capital gains tax (CGT) should be given in respect of any part of a three-year period of ownership that preceded the taxpayer’s occupation of the property.

    As you most likely will be aware, gains made on sale of a taxpayer’s main residence are usually exempt from CGT by virtue of principal private residence (PPR) relief. If, however, the taxpayer has not occupied the property as his main residence for the entire period of ownership, part of the gain may be subject to tax, normally when you rent out your property for a number of years after it being your main home, before selling it. In such cases, the gain is apportioned between periods of occupation and periods of non-occupation to determine how much of the gain should be relieved and what proportion should be chargeable. In this respect, certain absences will qualify as ‘deemed’ periods of occupation despite the fact that the taxpayer may have lived elsewhere during that time. These deemed periods of occupation include, among others, the final 18 months of ownership.

    In addition, there is an extra-statutory concession (ESC D49) which allows relief where there is a delay in taking up occupation after acquisition of the property/land either because a house is to be built on the acquired land, or the purchaser was either unable to sell their old home immediately or they needed to carry out renovation or refurbishment works to the new property before they could move in. The concession allows relief for a period up to 12 months, although where there are good reasons for the period exceeding 12 months which are outside the individual’s control the period may be extended up to two years. If the build or renovation period exceeds 24 months, so that the taxpayer does not move into the property for more than 24 months after acquiring it, HMRC’s CGT Manual states that no part of the extra statutory concessionary period will be available to the taxpayer.

    In the McHugh case, the taxpayers had acquired the land in 2004 to build themselves a new house.  They occupied the new build as their principal private residence from the end of 2007 until they sold it in September 2010.  As the period between their acquisition and their occupation of the property was more than two years, Mr and Mrs McHugh did not meet the published terms of the concession and HMRC determined that the part of the gain corresponding to the three-year period of non-occupation was therefore chargeable to CGT.

    Mr and Mrs McHugh appealed to the First-tier Tribunal who ruled that HMRC’s interpretation of ESC D49 was ‘absurd and unfair’, and although the tax officer had followed an example set out in its CGT manual, this example was incorrect ‘and should not be applied or followed’. Instead, in cases where a build or renovation takes longer than the 12 or 24-month period, as appropriate, the concessionary period should be limited to a maximum of 24 months – not disallowed altogether. Accordingly, the taxpayer’s appeal was allowed and the chargeable period was reduced by 24 months.

    Whilst this is obviously good news for Mr and Mrs McHugh, it is a word of caution that although July showed a budget surplus for the Treasury, this is not normally the case and the Government and their departments, are ensuring they collect event penny of tax due, or that they think could be due!

  4. Do I Care ISA?

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    The care fee problem is massive, it is estimated that in 2020/21 there will be a £5.5 billion funding gap in the costs of social care. This is set to rise to £12 billion by 2030. Meeting the potential huge future costs of care is therefore a massive headache for the Government and the elderly. The Government were planning to release their proposals on dealing with this problem in the summer, but this has been delayed to the Autumn.

    It has been reported in the Sunday Telegraph that in its upcoming Social Care Green Paper the Government is planning to introduce a “Care ISA” as a means of dealing with the problem.

    An investor could make encashments from a Care ISA to meet his/her care costs, sounds the same as an ISA would be at present, however, any residual value of the ISA would be free of inheritance tax on death, which is a good benefit, this is a drawback for ISAs at present.

    Currently the value of ISAs on death counts as part of the deceased investor’s estate and could be subject to inheritance tax if the total estate:

    • passes to somebody other than the surviving spouse or a charity; and
    • exceeds £325,000 in value.

    Of course, ISAs that invest in AIM shares may qualify for 100% business property relief once they have been held for two years, although AIM shares are much higher risk.

    A surviving spouse currently benefits from an extra ISA allowance equal to the value of the deceased’s ISA on death, call an Additional Permitted Subscription (APS), but this does not help in anyway with care funding, or inheritance tax.

    The introduction of a Care ISA is just one of the possible solutions available to the Government. Another would be to grant tax freedom on funds withdrawn from pension funds that are used to meet the cost of an individual’s care or offering tax relief on insurance to cover the costs of care fees – if providers could be encouraged to re-enter the market.

    Would the introduction of the Care ISA be good way of encouraging people to make investments that would cover the costs of their care? I don’t think so, it’s a nice idea, but if you don’t have the money, offering a new account won’t make any difference. However, if it were a success, it would mean that the Government could reduce the need to raise taxes to meet the costs of care, now that would appeal to everyone.

    Unfortunately care costs are largely an unknown quantity and it may therefore be difficult for savers to estimate how much to set aside. Restrictions would also be needed to prevent people using the Care ISA as a form of last-minute inheritance tax planning and benefiting only the very wealthy.

    However, I can’t help but think ISAs are becoming unnecessarily complex, surely if someone has insufficient means of savings, offering them a new product won’t encourage someone to save, just because it’s called a Care ISA.

    However, all will be revealed when the Green Paper is published.