Upcoming changes to Scots succession law mean no need to think about wills or power of attorney

OK, that is a statement for the start of April.

Everyone needs to think about having a will and power of attorney. And also thinking about having the right will and power of attorney in place.

The cruel April Fool that can be played on people is that the default law will help them and pass their estate to the ‘right’ beneficiaries and on the ‘right’ basis. It often (in the vast majority of situations) won’t. If you leave it to the default rules then disappointment or a random outcome will follow. Not a great way to arrange things.

Without a power of attorney assets will be frozen and no-one (even a spouse, civil partner, partner, child) has automatic (or really any) power to discuss and give any instructions on health and welfare matters. Delay and stress is likely to follow while a (slow) court process is gone through to get a guardianship order. Another potential very cruel misnomer is that power of attorney only for the ‘old’. Power of attorney can be vital irrespective of age or stage and health and wealth. More on younger people and power of attorney here.

A power of attorney allows you to choose who makes decisions and enables those chosen attorneys to discuss matters and make decisions as soon as required without delay. To put it one way… third parties (bank, doctor etc) want to speak with an attorney rather than a spouse… even if your attorney is your spouse, if you see what we mean.

On wills, where there is no will, the default law can create some unexpected and undesirable outcomes. True fact… yikes! There are all sorts of other unhelpful scenarios to go through that highlight that the default laws of intestacy are invariably bad (and all a bit random). And, as we have blogged on, even with changes to intestacy law coming in during the course of April, intestacy is still very much to be avoided.

Remember also that having a will in place is entirely different from also having sorted out the necessary on a power of attorney.

Having no will also causes delay and extra cost around the processes needed to appoint an executor. And while those processes are in some ways not overly onerous, if courts are busy, you can immediately add two or more months to the process of accessing accounts and being able to deal with assets (e.g. sell a house or investments). It can cause significant issues and stresses (financial and otherwise) to have that delay in being able to use bank accounts and other assets which are stuck frozen in the estate.

Not having a will also means the issues of having the ‘wrong’ beneficiaries, not having proper protective management mechanisms in place to hold wealth and tax inefficiency all make an appearance. Some individuals, such as cohabitants, are particularly vulnerable where there is now will.

And beyond wills, one should also consider the assets not always thought about… death in service, pension death benefits and insurances. Are these dealt with correctly and tax efficiently? Or are there disappointing surprises yet to unfold?

Is there ever a situation when no will is better than a will? You will note that the heading to this blog is “You don’t need to think about a will or power of attorney.” Everyone needs to think about a will and succession planning. There will be some cases – due to the mix of types of assets, asset value and family situation – where no will might be better. I had a situation before where the advice (if that is what the advice indeed was) to have a will could not have been right. Not right as having a will has meant that part of the estate will actually go to an unintended beneficiary in the form of an estranged child. That happens though the automatic rights of children called ‘legal rights’.

In that estate the correct answer would have been to have no will and the spouse (the intended sole beneficiary) would have scooped the whole estate (albeit with some of the extra hassles where there is no will but in that case it would have been worth it). So, with all of these things, a bit of thought and proper advice is needed to get to the right answer (especially if the answer is something counterintuitive and tactical such as not having a will)… everyone needs to think about succession and wills and powers of attorney as they apply to their own particular situation.

For help and advice on Scottish private client matters, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is a caring and empathetic private client solicitor who is dedicated to providing the best outcomes for clients. He has the technical knowledge and professionalism to meet client needs.” “Alan is a very articulate individual who is clearly an expert in his field.”  Chambers High Net Worth 2023 directory

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022 directory

New succession law: intestacy is still pretty bad

The Trusts and Succession (Scotland) Act 2024 received Royal Assent yesterday. Three months from then, we will have a change to the intestate succession rules. The Act makes one quite significant change to the laws of intestacy. A positive and sensible change in our view. But a change that still leaves intestacy as an unattractive option in managing and governing succession to an estate.

What is the change to the intestacy rules? Where the deceased has no children, the surviving spouse or civil partner will inherit the estate.

The current rules of intestacy state that after certain provision for the spouse (the house up to a value of £473,000, a cash entitlement of £89,000 and furniture in the house up to £29,000 and then one-half of the deceased’s moveable estate) the remainder of the estate will pass to the deceased’s surviving siblings and parents.

The remainder not passing to the spouse/civil partner could be fairly disastrous in some situations. This is particularly the case where the deceased has a larger moveable estate – that could be from investments or a private business. It can be bad for a business if it is then effectively split between e.g. siblings/parents and a spouse. Siblings/parents and a spouse who might not get on with each other at all.

So, with the change in the Trusts and Succession Act, is the law of intestacy going to be fit for purpose in regulating succession to an estate? Do we still really need wills? We suggest the answers are ‘no’ and ‘yes’.

Why the laws of intestacy are still often bad?

For a start, you don’t really get to choose what happens. The law, rather than you, decides. Unless you fall into the rare group where intestacy does work better (we have talked about this rare situation before and something to do with careful advice), you are allowing your estate to be divided according to the family make-up, age and stage of family members, size/type of assets held and rules as at your date of death. That could all still be quite random and have quite unexpected and unfortunate outcomes.

Having no will adds to the timescales of dealing with an estate. One definite additional piece of process and time delay stems from the need to apply to the court to have an executor appointed. That should take around a month to happen but if there are delays at the court (or in the family), it could be longer. So, the estate will be running at least a month behind to start. And that can mean a month or so longer, at least, to have control of the assets in the estate.

It might give you the ‘wrong’ executor(s). The court does not have carte blanche to appoint the best or most appropriate individual(s) to be executor(s). There is an order of entitlement for the court to follow. That can create issues and risks. It can also bring together executors who are unlikely to work well as a team. If there is more than one person at the level of entitlement to be appointed as executor, all of them are entitled to be appointed. That can lead to an in-built tension in the estate’s decision-making.

A costly ‘caution’-ary tale. Where there is no will, executors (subject to a few exceptions) need to obtain a ‘bond of caution’. It is an insurance contract. For most intestate estates, it is an absolute requirement. This adds extra process. It also adds extra cost. A cost that in itself will usually eclipse (and in many, many cases by a long way) the cost of making a will. The bond of caution cost will be based on the value of the gross estate. In some larger estates, the bond of caution premium will be thousands of pounds. A completely unnecessary expense, some might say. So, even if the new law got the estate to the ‘right’ person in the form of the surviving spouse, they are literally paying a premium for it. 

It’s like giving lots of candy to a baby. Where there are children, the law prefers them to a spouse/civil partner where there is no will. This can create a whole host of problems. Not least, the children might now be wealthier than their surviving parent. The control dynamic in the family might be partly flipped. The laws of intestacy for the period until children are 16 puts in place a rather clunky management and inflexible system for a child’s inheritance. After 16, it is over to the children to do what they want without any management system in place. Sports car anyone? A will can put in place a proper and flexible management structure for younger beneficiaries. And one that can help protect family wealth for the family. It also ensures the management system for younger beneficiaries can be responsive to the assets in the estate (e.g. investments or business interests).

There is a lack of effective and protective management structure for vulnerable beneficiaries. Vulnerable beneficiaries can receive large and complex assets outright which might be difficult for them to manage or not be in their interest to receive directly.

It can be very bad for business. Allowing the laws of intestacy to govern what happens to your estate means a business you own might end up with some unexpected shareholders. Your business partners might find they have children or people who do not get on with each other (at all!) as their co-owners of the business. A will helps avoid this problem (as does the right corporate documentation).

Cohabitants are very vulnerable. If you are unmarried/not in a civil partnership, the intestacy rules create significant uncertainty. It can involve a court to sort out what happens. It also can involve the surviving cohabitant essentially having to raise a court action against the deceased’s surviving parents/siblings… does not make for a great Christmas dinner! The clear message is: if you are cohabiting, make a will.

The laws of intestacy can ‘infect’ other sources of wealth. Some ‘assets’ such as pension death benefits and death in service through work exist outwith one’s estate. But if the paperwork for those benefits has not been completed/kept up-to-date and there is no will, the rules on intestacy can impact what happens to those benefits. This can compound an already not fantastic situation… all due to the lack of a will.

Intestacy can be tax inefficient. Particularly where the law places a spouse/civil partner behind children, siblings and parents, the starting position is that the spouse/civil partner inheritance tax exemption will be lost. Generally, the laws of intestacy can be more difficult to take post-death steps to make the estate as tax efficient as possible.

Back to you don’t get to choose: loved ones and charitable causes. The laws of intestacy decide who benefits. If you want particular people to inherit, a will is the best thing to have. Looking at it somewhat more negatively, a will (and sometimes related planning) is the way you can control your estate including preventing/restricting certain people inheriting. And if you wish to make provision for charity, again, a will is the way to do that.

The law of intestacy: it is what it is. You get whatever the rules are at that given time based on the family make-up and value of the estate. You give up control of your the inheritance of your estate to (arguably out-of-date) legal rules and the roll of dice on the size of your estate and who has survived you. The Trusts and Succession (Scotland) Act 2024 improves matters but only to a certain extent. Intestacy is still not a good idea. Make a will and related steps to make sure you control what happens to your estate in the best possible way.

Taking control of your estate: the next step

To take control of succession through a will and related planning, get in touch: Alan Eccles: alaneccles@bkf.co.uk / 0141 221 6020.

“Alan is a caring and empathetic private client solicitor who is dedicated to providing the best outcomes for clients. He has the technical knowledge and professionalism to meet client needs.” “Alan is a very articulate individual who is clearly an expert in his field.”  Chambers High Net Worth 2023 directory

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022 directory

Spooky but with treat not trick: deeds of variation

What’s more ghoulish than private client law. Death this, calamity that!

Sometimes private client law can work in spooky ways. One that allows the will of a dead person to be changed. Yes, you heard that right. And in doing so to save tax, support charity or hold an inheritance in a better and more appropriate way to suit a beneficiary and their family.

The trickery we speak of is a a deed of variation. But it is not really trickery and is something that is (or at least should be) considered regularly in estates. In some ways the ‘trickery’ is that the deed of variation legislation treats what is decided to happen post-death as legally having happened at date of death and as if that was in the deceased’s will. The rules also give some unique inheritance tax opportunities. A real treat and no trick.

What is a deed of variation?

A deed of variation is a document. The document must contain certain key requirements prescribed in the tax legislation. It must be completed within two years of a death.

But it is much more than just a document. It feels magical!

A deed of variation allows a beneficiary to re-write history (to cast a spell, if you will). You can be transported to the past to change the future (like a time-machine). To re-write a will as far that beneficiary’s entitlement is concerned. The re-writing allows the beneficiary to create a more appropriate way to hold their inheritance taking account of their own circumstances. It also allows the re-writing to be more tax efficient than under the will.

Not only are there immediate tax efficiencies, but a deed of variation can also set the platform for future tax advantages. The effect of a deed of variation is that the re-written history replaces the position as at date of death. That can provide some unique and valuable opportunities.

What are the benefits of a deed of variation?

The time-machine characteristic brings great opportunities and flexibility. Here are a few of them:-

• A deed of variation allows a beneficiary to re-direct an inheritance to another person or persons.

• It allows legacies to charity to be made post-death. Not only does this help good causes, but could also lead to less tax for the family beneficiaries.

• Varying a will can create a protective environment. Some situations (either because of the asset or individual(s) involved) mean it is better not to have an individual(s) owning an asset personally. It could be better held in trust with the asset protection and control qualities it offers.

• Due to the time-machine, re-directing an inheritance to another person or trust is treated as coming from the estate of the deceased. Not the person doing the re-directing. It means no need to survive seven years for the re-directed (gifted) value to be out of your estate for inheritance tax purposes. Indeed, no need to survive for any period of time. Most spookily, the person re-directing might even be dead when the re-direction is done (do ask me for more on that)!

• A variation to a trust can be of an unlimited amount. Trusts set up during a person’s lifetime are limited to £325,000 (unless reliefs apply). A trust set up with a deed of variation is not restricted by that and can hold any amount.

• The normal inheritance tax rule is that you cannot continue to benefit from something you have gifted. Not so with a deed of variation. A variation of an inheritance to a trust has the extra bonus of being outwith your estate AND that value can still be accessed and enjoyed by you.

• A deed of variation can minimise or avoid certain potential capital gains tax liabilities.

• As well as re-writing a will, a deed of variation can be used where there is no will. It can play a part in resolving difficult claims where a cohabitant dies without a will.

Deeds of variation are great, but not a reason to avoid reviewing a will!

The re-direction of an inheritance has been with us forever really. The inheritance tax benefits have been with us for decades. But the benefits could be taken away.

There have been at least two serous reviews of the ability to use a deed of variation. So, it is better to keep a will under review than rely on your beneficiaries being able to use a deed of variation to ‘sort’ any issues. Also a deed of variation reflects a beneficiary’s own circumstances, which you might not know (or they change). Your will is the opportunity to set out what is important to you. Indeed, your will can be an opportunity to avoid a beneficiary seeking to re-write certain things!

An up-to-date will can avoid beneficiary’s being spooked when they see the will and avoid them then needing to consider re-writing portions of it.

For help on estate planning and succession law, get in touch with Alan Eccles – alaneccles@bkf.co.uk / 07359001038.

“Alan is a caring and empathetic private client solicitor who is dedicated to providing the best outcomes for clients. He has the technical knowledge and professionalism to meet client needs.”

“Alan is a very articulate individual who is clearly an expert in his field.”

Chambers High Net Worth 2023 directory

What a load of politics: IHT change in the air

There appear to be kites in the air. Flags being hoisted up the mast. And other horrible phrases. The weekend media was in a minor frenzy… “abolition of inheritance tax“!

In the dim and distant past we had a thing called the Office of Tax Simplification. The OTS was itself recently ‘simplified’. Media spin… “bureaucrat bonfire“!

Whenever the OTS issued a review of inheritance tax, my conclusion has consistently been that it will be a government need to pursue a particular (economic) policy agenda that will result in changes (of whatever sort) to inheritance tax. The political/economic mix matters a lot; technical tax reform less so. Who knows whether or not we have the political/economic (the former being the important and overriding factor) element in the present circumstances to drive change. History has given us some examples of this.

“History never repeats itself, but it does often rhyme.” (maybe Mark Twain)

The history of major changes to inheritance tax indicate there needs to be a few ingredients before reform happens. The ingredients in question seem to be: (1) the tax is too complicated; (2) the tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The final ingredient (the politics) is the decisive one. It is the politics “wot won it” in terms of the inheritance tax reform before.

Horrible Histories? What has happened before?

1894 saw the introduction of the modern notion of an inheritance tax: estate duty.

The late 1940s however saw significant reform and tax rates increasing (hitting 80%). The vital mix for change was present (1) the tax in its existing form had become complex and unwieldy with overlapping regimes in place; (2) the tax was considered to be ‘unfair’ as modest estates were likely to attract a higher marginal rate (marginal rate ‘oddities’ prevalent at the moment across taxes) than larger estates; and (3) the United Kingdom was funding post-war reconstruction (perceived economic necessity and the political direction of travel).

Fast-forward to the March 1974 Budget. While top rate inheritance tax (estate duty) went up to 85% in 1969, the 1974 restructure was even more dramatic. The rates came ‘down’ slightly to 75%. But, and this was a significant ‘but’, the tax was greatly widened. As well as capturing what happened on death, the tax now captured gifts made during life. The tax was now re-branded as capital transfer tax to reflect its wider scope as a more general wealth transfer tax. Again, the critical elements were there: (1) estate duty was viewed as needing streamlined and made ‘comprehensive’; (2) estate duty was said to give some in society ‘unfair advantages’; and (3) there was the Three-Day Week, an oil crisis, inflationary pressures and industrial unease.

In 1986 inheritance tax was the new name on the block. The ingredients for change seemed to re-appear for Nigel Lawson’s Budget: (1) capital transfer tax was viewed as two taxes meshed into one; (2) it was unfair and an “unwarranted impost” that deterred passing on assets; and (3) the mid-1980s UK economy was in something of a sweet-spot and liberalising the economy was en vogue. The new inheritance tax removed the tax on lifetime gifts to individuals. It also ultimately led to the current system of nil rate band and 40% rate (in 1988), 100% Business and Agricultural Property Relief (in 1992) as well as being able to ‘use’ a nil rate band every seven years.

Let’s looks at the roaring (for there is a lot of noise nowadays) 2020s. Inheritance tax has had some changes since 1986, but no fundamental re-think. In 2019 and 2020 the OTS (ed: RIP)and the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness (“APPG”), amongst others, reported on reform. The OTS recommended reform in a number of areas to make the tax less complicated. So, we have ingredient one.

The APPG’s review concluded that inheritance tax is “distortionary” and “unfair” as well as there being wealth inequality that tax was not responding to address and understand. The second ingredient had been identified.

What about the third usual suspect ingredient? Well, that is not difficult to find. On the one hand, we have had some tumultuous economic times… from funding a pandemic to inflation, a cost of living crisis and war. Government will now be anything but flush. The Chancellor with his other kites is noting no real room for slashing taxes (even with an election looming).

With that looming election, we will also be moving into new territory and blank paper for political promises. Remember the Conservative Party manifesto pledge from the last election not to increase the rates of income tax, national insurance or VAT. George H W Bush’s pledge of “Read my lips: no new taxes” and what happened next is one to send shivers down the back of any government. So, an election and fresh manifestos means there is new scope for change.

How might inheritance tax change?

We don’t know. We are not the government. And that is the point.

Will we have tinkering or something more fundamental? Inheritance tax is not a big tax-taker. But it is political emotive. And that matters.

Maybe something a bit 1974 could happen. Abolition seems unlikely. But if it was abolition – watch out for the replacement. We might even see some elements of OTS and APPG thinking. The APPG was in favour of bringing back lifetime transfer taxes. It also favours removing the very valuable reliefs for trading businesses and farms (but what is the economic impact of big changes on these? Behavioural economics issues here too). There were recommendations to remove the use of a nil rate band every seven years as well as abolishing the important, but for many obscure, capital gains tax (a non-inheritance tax point but intimately connected) ‘uplift on death’. That assets are revalued to date of death value and all gains are ‘washed out’.

It also interests us (maybe not others, but we accept that) to look at Australia. It does not have inheritance tax. We have calls for abolition; down under there are calls for reinstatement! And those calls seem to come with the exact same magic ingredients we noted above. See… it is all a load of politics.

Whatever happens have a plan

You never know what tax changes could happen. Depending on one’s own position reform can be viewed as good or bad. Whatever happens on the tax front (or any other front – other things can change – financial, family, legal rules etc), think about what the overall plan is for individual and family wealth. Have a plan and objectives to see through, and then adapt those to take account of things that change – including the tax landscape – but always with that overall plan remaining the focus.

For help and advice on Scottish private client and estate planning law issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

“Alan is a caring and empathetic private client solicitor who is dedicated to providing the best outcomes for clients. He has the technical knowledge and professionalism to meet client needs.” “Alan is a very articulate individual who is clearly an expert in his field.” Chambers High Net Worth 2023

Who do you think you are? Charities, mergers and legacies

It may be worthwhile examining a charity’s ‘family tree’ in order to secure future legacy income.

Has your charity ever been part of a merger, restructure or the recipient of the transfer of all assets from another charity? If so, the charity should be identifying key information about that. It may be that a merger or other restructuring moment happened many years ago. Charities should revisit their ‘family tree’ to find out if there has been some from of previous merger activity. 

The record of charity mergers

Why should this be done? To ready the charity to be able to submit information to OSCR for the ‘record of charity mergers’. This new process will give protection for legacies in wills destined for a charity that has been the subject of a merger or similar. 

Lost legacies

If the charity does not take this action, a legacy might fall. Whether or not it falls will depend on the random and uncontrollable issue of how the will has been drafted. The default law in this area can seem quite harsh and result in charitable legacies being ‘lost’. Lost in the sense they cannot pass to the defunct charity and will not transfer to the successor charity. The legacy will fall to the residuary beneficiaries or even fall to distributed according to the rules of intestacy. 

To help avoid disappointment (from beyond) and to protect legacy income, charities should put this issue on the ‘to do’ list for this year. It would also seem to be a topic that auditors/independent examiners and other advisers could usefully put on the agenda when next discussing financial matters with charities with which they work.

Closing legacy charities?

Once the record of charity mergers comes onstream, charities who have retained an ‘old’ charity to help capture any stray legacies may wish to decide to close off the old charity for good. That will help bring a bit of streamlining with not having an essentially dormant charity continue in existence.

The power of legacies: opening the conversation

These helpful new rules also underline the importance of legacies as an income stream. For charities with existing legacy programmes, this will help secure legacies that are ‘already out there’. For charities that do not have a legacy campaign, they should perhaps consider how they might engage in the legacy conversation. And it is, we think, just that: the opening of a conversation. It is conversation topic that all charities can have. It is not, bluntly, the preserve of charities that might be viewed as having a connection to the issue of death. Charities should consider how they might benefit from human desire to support good causes and a desire that appears to continue to be strong in terms of overall legacy income year on year and anticipated for the future.

 

For help and advice on Scottish charity law issues including legacies, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is highly experienced in advising third sector organisations on governance and constitutional issues, including charity establishment and modernisation… He blends excellent technical advice with both pragmatism and plain communication.” Chambers and Partners 2023

“Alan advises on a range of issues and has particular experience in charities work. A source notes: “Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022

That’s interesting… paying IHT by instalments

Paying inheritance tax by instalments 

A short blog. But it could be a valuable one. It is on the topic of interest rates on unpaid inheritance tax. 

By ‘unpaid’, we mean inheritance tax that is being paid by way of an instalment option. Asset types fall into non-instalment option and instalment option in terms when any inheritance tax must be paid. 

A significant member of the instalment option class is property (land and buildings). It means if there is a house in an estate or trust, there is no need to pay upfront all of the inheritance tax due on the house. One can decide to pay by instalments over a period of up to ten years. If the house is sold, the tax then becomes payable. It does however avoid the need for a rushed or firesale realisation of a less liquid asset to pay inheritance tax.

Business assets is another instalment option asset type. This is perhaps the less common instalment option asset in practice due to the application of e.g. business property relief. 

The Bank of HMRC

In some cases, instalment option payment is chosen because the money is just not there. The estate or trust has an asset (e.g. a house) but not the cash to the pay the tax.

In other cases, there may have been a deliberate decision that instalment payment is a better way of funding the estate to keep the asset in tact. The view taken that it is better to continue to hold the asset and effectively borrow from HMRC.

The desire to keep the asset, the simplicity (e.g. not obtaining an external loan) and, at some points in time, the cost effectiveness of paying HMRC interest meant instalment option payment was attractive.

Now it gets interesting 

The headline is that as of today HMRC charges 7% (now 7.75%!) on outstanding inheritance tax.

In recent times the HMRC interest rate has been steadily increasing. 

For context, in the period 29 September 2009 to 4 July 2022, the rate was never more than 3.5%. Indeed, for the vast, vast majority of that time it was a decent amount less than 3.5%.

News about inflation in the shops or rates on mortgages has been grabbing attention. For those managing estates and trusts, the strategy for paying inheritance tax might be different now or at least require more consideration. External borrowing might feature more (or will it with Spring 2024 Budget announcement on ‘grants on credit’).

We are not in a period of HMRC offering ‘cheap money’ on instalment option tax. It also means informing clients of the interest rate is important to avoid later surprises and any grumpiness. The interest could tot up into a noticeable amount in some cases.

And for those who have paid too much inheritance tax, HMRC will pay you… 3.5% (now 4.25%)!

For help and advice on succession matters, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022

Power of attorney: capacity, consents and controls

A very recent Scottish court case on power of attorney has underlined a few fundamental (but not necessarily all entirely obvious or well-known ) points on three themes we will call capacity, consents and controls.

The very brief facts of the case

In 2014 a person granted a power of attorney in favour of two out three of their children.

In 2021, a new power of attorney was prepared and signed appointing all three of the children as attorneys. Contemporaneously, a revocation of the 2014 power of attorney was prepared and signed. Ahead of signing, an assessment of capacity had been carried out by the GP.

The 2021 power of attorney was then submitted for registration, but only one of the three attorneys had consented to the registration of the document with the Office of the Public Guardian.

There were further considerations of the granter’s health condition. This resulted in the GP writing to state that, on the basis of further information, they would retract their position that the granter did have capacity to grant the new power of attorney and revocation.

Capacity

The case underlines the fundamental importance of capacity. It also highlights that assessing capacity can be complex. In some cases, a more detailed assessment will be needed and involving psychiatric specialists. It may also be, as in this case, that even though there is one report at the time of granting a power of attorney, subsequent consideration of the situation leads to the position, on the balance of probabilities, that at the time of granting the power of attorney, the granter did not in fact have capacity.

There is also the issue of what is capacity for the purposes of granting a power of attorney. The Adults with Incapacity (Scotland) Act 2000 sets out a definition of capacity. One feature of it is the ability to retain information. That point arose in this case. As the sheriff summarised of one piece of evidence in the case, and which seems a useful high level summary of the role of retaining information in the capacity test, “The Adult was unable to retain relevant information long enough to make a capable decision about her welfare. The Adult did not have capacity to change her Power of Attorney.”

Accordingly, capacity is not a momentary thing. A snapshot moment of being capable, engaged in conversation etc, is not sufficient. It may mean that a “phew, the granter could understand today and sign the power of attorney” is not steady ground. It means for some cases, apart from additional medical evidence and support, it would be best to visit the granter again to understand the extent of their capacity. It is recognised in these situations family dynamics and pressures can make this difficult for the professional.

When others are involved in contributing to an assessment of capacity it is also important that everyone understands the extent of capacity required to grant a power of attorney means. Capacity here does not, for example, mean the ability to carry out the actions specified in the power of attorney. Rather it would seem to really be about understanding the nature of allowing someone to have the powers under the document and that the proposed attorneys are trusted and viewed as reliable by the person granting the power of attorney. In some cases an awareness of reduced or failing capacity shows insight and therefore capacity to make the decision to empower others under the power of attorney.

Consents

The case narrates in some detail the process for the electronic registration of powers of attorney. As the name suggests, that is an electronic way to upload powers of attorney into the Public Guardian registration system. This came in over a decade ago and offered a system other than submitting a paper based registration application. Electronic registration is, to us, on the whole a slicker way of doing things.

Naturally when thinking about ‘making’ a power of attorney we think about the role of the person granting the document. While one can essentially appoint any one they wish to be the attorney, when it comes to the point of registration, the Public Guardian can only register the document “if satisfied that a person appointed to act is prepared to act“. So, the attorneys must consent for the power of attorney to be registered.

In the electronic system, there is a box early in the online process to confirm the attorneys do indeed consent. While a form is provided, no particular way of recording that consent is required. But the person submitting the document for registration needs to be satisfied there is in fact that consent in place. Without the consent, the statutory conditions for registration will not be met. The import of that is the power of attorney cannot be used after capacity is lost. The granting of the power of attorney itself does not require attorney consent.

This case provides a reminder of the role of attorney consent and its part in the registration process. Beyond the pure registration process, it shows that attorney consent needs to be factored into the preparation and granting of the power of attorney and the advice that goes along with that. As in this case, the issue of moving from one power of attorney arrangement to a new one (where the proposed attorneys might not see eye-to-eye) throws up a number of considerations which we will now look at under the theme of controls.

Controls

An important note at the start. This is about controls rather than control (no ‘s’ as Steve Wright might say). These are the controls that the person granting the power of attorney might want. Methods of ensuring their wishes and feelings are respected and followed as appropriate in the context of the use of a power of attorney.

The court found in this case that the granter of the power of attorney did not have capacity. The result: no valid power of attorney was granted. That is before we get on to the issue of consent of attorneys and so the story ends, as such.

But let’s say the individual had been capable.

They have an existing power of attorney with two out of three children as attorneys. The end result they desire is to have all three children as attorneys. Putting them on as equal a footing as possible. Creating the correct and appropriate controls for decision-making.

If the two existing attorneys are not going to ‘play ball’ and consent to acting under the new power of attorney appointing all three, a different course of action is needed. The existing attorneys effectively had a veto on the new power of attorney (that is quite interesting and stark to remember). As a side note, if all three cannot work together, that creates other issues both legal and practical around such a proposed power of attorney.

A possible different course of action is to not revoke the power of attorney appointing the two and not doing a new a power of attorney to appoint the three.

Rather, it might be better to keep the existing the power of attorney and grant a new power of attorney appointing the one child who is not already an attorney. That second power of attorney could refer to the other power of attorney and record in writing for completeness the underlying legal expectation that attorneys and others dealing with the individual’s affairs under incapacity law need to have careful regard to the individual’s known wishes and feelings. In this case, that they wished all three children to be attorneys.

This approach has practical imperfections: there are two powers of attorney ‘flying about’ as one might say colloquially. But short of an inventive application to the court (section 3 of the 2000 Act being the mother of potentially inventive court applications), this would seem to be the way for the individual themself to have the three attorneys they wish in a situation where those three attorneys will not all consent to all three being appointed.

One other strategy to consider in these situations is to take the financial matters out of the hands of attorneys (and thus potentially warring children) and use a trust. That will depend on the value and nature of the assets involved, but can be a way to change the legal decision-making forum. It avoids the risks associated with children arguing and minimises risks associated with possible serial, ping-pong, revocation and counter-revocation of powers of attorney.

Essentially, the court case highlights that in difficult family dynamics a possibly counter-intuitive or non-linear approach is needed to create a pathway to get to to where the individual (substantially) wants.

These types of cases are never easy.

For help and advice on Scottish private client matters including power of attorney issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022

You don’t need to think about having a will or power of attorney

OK, that is a statement for the start of April.

Everyone needs to think about having a will and power of attorney. And also thinking about having the right will and power of attorney in place.

The cruel April Fool that can be played on people is that the default law will help them and pass their estate to the ‘right’ beneficiaries and on the ‘right’ basis. It often (in the vast majority of situations) won’t. If you leave it to the default rules then disappointment or a random outcome will follow. Not a great way to arrange things.

Without a power of attorney assets will be frozen and no-one (even a spouse, civil partner, partner, child) has automatic (or really any) power to discuss and give any instructions on health and welfare matters. Delay and stress is likely to follow while a (slow) court process is gone through to get a guardianship order. As well as delay, in some cases it opens up the debate as to who should be able to make decisions for you (think Britney Spears!).

A power of attorney allows you to choose who makes decisions and enables those chosen attorneys to discuss matters and make decisions as soon as required without delay. To put it one way… third parties (bank, doctor etc) want to speak with an attorney rather than a spouse… even if your attorney is your spouse, if you see what we mean.

On wills, where there is no will, the default law can prefer as the main beneficiary of your estate the brother you hate to the spouse you love. True fact… yikes! There are all sorts of other unhelpful scenarios to go through that highlight that the default laws of intestacy are invariably bad (and all a bit random). And, as we have blogged on ,even with changes to intestacy law making their way through the Scottish Parliament, intestacy is not a good place to be… at all.

Having no will also causes delay and extra cost around the processes needed to appoint an executor. And while those processes are in some ways not overly onerous, if courts are busy, you can immediately add two or more months to the process of accessing accounts and being able to deal with assets (e.g. sell a house or investments). It can cause significant issues and stresses (financial and otherwise) to have that delay in being able to use bank accounts and other assets which are stuck frozen in the estate.

Not having a will also means the issues of having the ‘wrong’ beneficiaries, not having proper protective management mechanisms in place to hold wealth and tax inefficiency all make an appearance.

And beyond wills, one should also consider the assets not always thought about… death in service, pension death benefits and insurances. Are these dealt with correctly and tax efficiently? Or are there disappointing surprises yet to unfold?

Is there ever a situation when no will is better than a will? You will note that the heading to this blog is “You don’t need to think about a will or power of attorney.” Everyone needs to think about a will and succession planning. There will be some cases – due to the mix of types of assets, asset value and family situation – where no will might be better. I had a situation last year where the advice (if that is what the advice indeed was) to have a will could not have been right. Not right as having a will has meant that part of the estate will actually go to an unintended beneficiary in the form of an estranged child. That happens though the automatic rights of children called ‘legal rights’.

In that estate the correct answer would have been to have no will and the spouse (the intended sole beneficiary) would have scooped the whole estate (albeit with some of the extra hassles where there is no will but in that case it would have been worth it). So, with all of these things, a bit of thought and proper advice is needed to get to the right answer (especially if the answer is something counterintuitive and tactical such as not having a will)… everyone needs to think about succession and wills and powers of attorney as they apply to their own particular situation.

For help and advice on Scottish private client matters, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022

The Euros

For many, sporting attention turns to qualification for the UEFA European Football Championship. The Euros. For the international/ constitutional lawyer (not me!), Group A offers Brexit (Scotland), EFTA (Norway), the EU (Spain and Cyprus) and, on a European level, all teams are in the Council of Europe (including Georgia). The global arena is also important for succession and estate planning matters.

There are, for us, four critical points to consider when dealing with succession across borders. Domicile, land and buildings, will validity and the EU Succession Regulation.

Domicile

Very broadly, it is the country to which you are most legally connected. Many legal points flow from domicile (or similar other concepts used in somecountries). It will affect the validity of wills and decide which law governs succession to, at least, your moveable estate. Moveable estate being essentially all assets apart from land and buildings. We will return to land and buildings in a moment. Domicile can also have an important role in the application of any forced heirship systems that determine that certain parts of an estate must go to certain family members irrespective of the terms of a will. One to watch.

For more on domicile (via Rod Stewart) click here.

Land and buildings

We just mentioned the role of domicile in succession to moveable assets. For many, many countries the law of the jurisdiction in which any land and buildings is physically situated will govern succession to such land and buildings. (We do English but those that like Latin call that the lex situs.) This role of that country’s law in personal estate planning with that foreign asset needs to be considered.

It means one might need a will in that other country. There might be forced heirship that applies to land to factor into thoughts and planning. The process and administration to transfer title following death requires attention. Getting good and reliable local advice that connects with your Scottish estate planning is the critical step to get this right.

Where do I sign up? Validity of wills

Domicile, habitual residence, the assets involved and physical location at the time of making a will can all affect how a will is validly signed.

Even after Brexit… the EU Succession Regulation

We have talked about this before in more detail (click here) but a reminder now about the role of the EU Succession Regulation. This can be very useful. It can affect will drafting in Scotland. It can affect the form of any will in the other relevant country. If there are to be two wills, they need to coordinate with each other.

Again, joined up Scottish and foreign advice is needed to navigate this. The way the regulation works can be a very useful. It can be critical to smooth succession and ensuring the ‘right’ people inherit your estate.

A ‘bonus’ European update: charities and UK tax

Unlike the other great European sporting event we have just had, the Six Nations, no bonus points in the Euro qualifiers. But a bonus update here. Although, it is one that restricts the notion of ‘charity’ and ‘charitable’ under UK tax law.

The definitions of a charity and a Community Amateur Sports Club (CASC) for tax purposes have changed. This alters over a decade of these definitions being based on EU case law.

The new rules will change things so that only charities that come within the jurisdiction of the High Court in England, Wales or Northern Ireland, or the Court of Session in Scotland will qualify for UK charitable tax reliefs .

For CASCs, it will change the location condition so that the CASC must be based in the UK and provide facilities for eligible sports in the UK.

If an individual or corporate makes a donation to a non-UK charity from 15 March 2023, UK tax reliefs (such as gift aid) are only available if the charity has ‘asserted their UK charitable status’ prior to 15 March 2023 under transitional provisions. After April 2024, taxpayers will not be eligible for UK tax relief on donations to EU or EEA charities and these entities themselves will be unable to claim gift aid.

New applications for charity tax recognition from 15 March 2023 must meet the new definition. The new rules can affect some legal drafting in documentation for charities.

For help on international succession and charities issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

Alan is the Scottish author for the textbook, International Succession.

“Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022

“Alan is highly experienced in advising third sector organisations on governance and constitutional issues, including charity establishment and modernisation… He blends excellent technical advice with both pragmatism and plain communication.” Chambers and Partners 2023

Accumulation of income by charitable trusts: a rule really worth keeping?

The Trusts and Succession (Scotland) Bill and the abolition of the ‘accumulation of income’ rules

Section 41 of the Trusts and Succession (Scotland) Bill provides, for trusts established after any new law comes into force, that the ‘accumulation of income’ rules will be abolished. While other variants are available, the rule means that after 21 years of a trust being in existence trustees can no longer ‘accumulate’ income. This is known as the accumulation period.  

What is ‘accumulation’ and what is a trust permitted to do with its income?

What does it mean to accumulate income? Well, the Scottish Law Commission in its Discussion Paper on Accumulation of Income and Lifetime of Private Trusts (DP142) (para 2.4) gives this overview:-

“Income from trust assets must either be distributed, retained as income or accumulated. If it is accumulated it becomes additional capital of the trust, in turn (usually) generating future income.”

After the end of the accumulation period, trustees need to distribute (pay out) all of the annual income to at least one beneficiary or retain it. Accumulating income with capital is by this point off the table.  

Distributing the income to beneficiaries is clear cut. It is paid out of the trust.

Retaining the income can be a bit more interesting in practice. One might see trust accounts recording income held over time as an unexpended revenue balance. The unexpended revenue balance then effectively becomes a form of accumulation as the income might actually be invested. The accounting records however show that there is the unexpended revenue balance – i.e. that it has been ‘retained’. Through the unexpended revenue balance, the income is accounted for as being retained, but in terms of the actual assets of the trust that income sits, in reality, within the invested capital.

If income is indeed ‘retained’ in the form the income was generated, then the income would literally just sit there… doing nothing. But it would not be accumulated and therefore, on the face it, no contravention of the rule against accumulation after the end of the accumulation period.

But the abolition of the ‘accumulation of income’ rules is not to apply to charities  

Section 41(5) of the Bill however does not extend the abolition of the accumulation of income rules to charitable trusts. The explanatory notes to the Bill say:-

“the repeals do not apply to charitable trusts, in implementation of recommendation 93(2) [in the Scottish Law Commission Report on Trusts]. Such trusts will remain subject to the current law. In practice, those setting up charitable trusts almost invariably want the income to be made available for charitable purposes in the near future and are not interested in directing its accumulation for long periods. The current restrictions will therefore continue to apply.”

The background to recommendation 93(2) is found in the Commission’s Report (at para 18.43):-

“The repeal of the existing rules restricting accumulation and successive liferents met with universal support, subject to one qualification [which] pointed out that public and charitable trusts were in a different position, in that there was a risk that a truster might direct long term accumulations for the fulfilment of grandiose charitable purposes [this was the view of the (English) Law Commission ahead of the aftermentioned 2009 Act] which would not materialise for many years. That would create undesirable uncertainty. [It was] pointed out that the reforms in the Perpetuities and Accumulations Act 2009 in England and Wales made special provision for charitable trusts. We consider that this point is well made, and we accordingly propose that public and charitable trusts should be excluded from the abolition of the rules restricting accumulation and successive liferents. We do not think that this will cause any difficulty; in practice trusters who set up public or charitable trusts almost invariably wish the benefits to be provided immediately. The restriction of successive liferents has, of course, no application to the purposes of a public or charitable trust per se. Proposal 5(a) set out just above, that Scots law should not adopt the rule against perpetuities or anything similar, met with universal support. On that basis question 5(b) did not arise.”

I think that Commission’s statement that “in practice trusters who set up public or charitable trusts almost invariably wish the benefits to be provided immediately” is inaccurate. Creating something that is not going to be spent immediately is usually the reason someone would set up a charitable trust (especially a grant-giving charity). If funds were to be spent “immediately”, then such an individual could find an operational charity or other project and simply given the money directly to it. A trust would often have been chosen as the appropriate home for the funds in order to provide a longer-term platform for the funds.

And if “the benefits to be provided immediately” is looking solely at the issue of income generated being used immediately, it gives a focus to only part (the income) of the charity’s funds. A focus that will be likely to make only marginal effects (if indeed any real effect) on the deployment of money to further charitable activities (especially if we look at all charitable trusts together).

A rule about the use of income may not fit with the investment strategies of modern charities. Charities are ‘purer’ investors in the sense that the tax consequences of the generation of income and realisation of capital should not trouble them. Charities can seek to produce their annual needs (an ‘income’) from a mix of investment income and capital growth. Indeed, they might be investing for capital growth over income in the knowledge that capital can be accessed to provide their annual needs.

Why might a charity not pay out all of its annual income?

Where a charitable trust is generating income, there might be reasons (consistent with the charity’s purposes) why income should not be distributed and might be accumulated:-    

• there might not be sufficient projects that meet eligibility criteria to support in a given year

• there might be desire to re-invest income to help support future funding

• build towards a particular larger project

• there may be a longer term desire or need to build the capital base of the charity for longer term plans

Bijurality: charity law v trust law

Charity trustees have a duty to act in the interests of the charity (section 66 of the Charities and Trustee Investment (Scotland) Act 2005).  We accept that is stated to be “without prejudice to any other duty imposed by enactment or otherwise on a charity trustee in relation to the exercise of functions” of a charity trustee.

There could be situations where charity trustee duties say it is better not to pay out and also accumulate whereas trust law rules say that is not permitted. That is an unhelpful position for charity trustees.

The permitted retention of income: accumulation by another name and the mischief is not addressed

The rule prohibits accumulation. It allows, it seems, retention of the income at the complete discretion of trustees.  

So, if the ‘bad’ person setting up a trust (and they have been thought of as bad, even ‘evil’ (see Law Reform Committee, Fourth Report, The Rule against Perpetuities (1956))) wanted to squirrel away funds for a charitable ‘grandiose’ or otherwise project, they are allowed* to do that. As long as they do not accumulate the income. [*standing the rules and processes we mention below that could be used to ensure trustees act properly.]

If the mischief is that the funds are not put to useful application, the prohibition on accumulation misses the point. If this is the problem, then not only should there be a rule against accumulation after a certain point, there should be a positive requirement to pay out and distribute the income.  On one view (which we do not tend towards), the Trusts and Succession (Scotland) Bill needs to incorporate a new rule about charitable trusts paying out income. Indeed some might argue (something considered in other countries) that the not only must income be paid out, but a charity must spend and run down its capital over a set period. Again, we remain to be convinced about such rules. Charity trustees using their discretions within a proper regulatory framework seems a more appropriate approach.

Someone who really wanted to avoid the rules would also consider investing for capital growth rather than income yield.   

The job OSCR does not want or need: policing the accumulation of income rules

We suspect there is currently widespread breaches of the accumulation of income rules.  That would, on the face of it, be charity trustee misconduct. Does it really make sense for charity regulator, OSCR to add this to their list of things to check? We think not. But to not add it to the list, we are saying it is OK to breach a statutory rule.   

Addressing the mischief by other means

If someone does indeed squirrel the money away and does not use it properly, does the law say we just have to sit idle and watch this happen?

We would say no. Trust and charity law would have enough measures to address such a situation. Indeed, the proposed new OSCR powers on positive directions to charities would provide a further way of dealing with such a situation. But even without that, OSCR has stepped in to deal with charities not using funds (see the Wick Academy Development Trust OSCR Inquiry (it does not detract from the point here that WADF was not a trust)).

A pause to reflect

So, (1) the ban on accumulation of income does not ensure charitable funds actually get used and (2) there are other means to compel trustees to do the right things.    

When is income not income?

In some charities that receive legacies and donations, there might also be an ongoing accumulation period applying. The accumulation of income rules apply to income generated on trust assets. New legacies and donations might ‘feel’ like income but they are not – they are newly introduced capital. It is only after 21 years that the income on that newly introduced capital is affected by the accumulation of income rules. Admittedly legacies and donations being received by charities that are trusts are less common to happen. Charities set up as trusts tend to be giving funds to other charities rather than receiving new money.   

But again, it shows that the accumulation of income rules do little to speed up the overall application of charitable funds. If that is indeed the aim of the rules.

We’ve been here before

The Commission’s Discussion Paper on Accumulation of Income etc notes (in a footnote to para 2.32) previous caution being about restrictions on the accumulation of income and charities. The Commission referred to observations during consideration of the Trusts (Scotland) Act 1966 that “on the merits, he [Lord Guest, a Law Lord] was apprehensive that its effect would be to require charitable trusts to disburse all their income, even in years where they found it unnecessary to do so.”

But England does it

Alignment of charities rules with English and Welsh requirements features in the call for evidence on the Charities (Regulation and Administration) (Scotland) Bill. For us, alignment with a neighbouring jurisdiction is relevant and not relevant at same time. Alignment is helpful… unless there is reason not to be aligned.

As touched upon above, the English Perpetuities and Accumulations Act 2009 also removes English charitable trusts from the wider freeing of trusts from accumulation of income rules. We think the same points about the Scottish rules would apply to the English rules. Yes, accumulation of income is prohibited in English charitable trusts, but does that address the mischiefs of grandiose projects locking away funds or charitable money being used with insufficient immediacy? We are unconvinced.       

This will not be a growing problem… and when any law change could apply

It is unlikely that there will be many more charitable trusts created after the date on which any law change could happen. Most new charities, including ones that in the past would have been set up as trusts, are now set up as SCIOs and so not affected by the restriction on accumulation of income (look here for more on SCIOs).

It means that if the abolition of the accumulation rules was to apply to charities, it needs to have this effect for charitable trusts already in existence and not just for any new ones.  

What next?

For us, probably three things can happen:-

• Do nothing and section 41(5) of the Bill remains as is. The accumulation of income rules will continue for charities. Trustees will continue to do as they always have and nothing will change. It will not lead to any more immediate application of funds to charitable endeavours.  Widespread breaches of the rules will continue. And maybe no-one will care.   

• Section 41(5) is removed and section 41 crafted in a manner that will cover existing charitable trusts. Charitable trustees will be able to accumulate income but will continue to be subject to other rules and duties to ensure they are managing and applying charitable funds correctly. That does feel attractive. Especially if retaining the rule perhaps adds little or does much about breaches. Is that the type of rule the Scottish Parliament should be positively resolving to retain?

• Introduce a positive rule about spending income. We are not attracted to this. There might be good reason why trustees do not wish to pay out all the annual income of a charity.

• Anything else? Well, there could be, but they get complicated. Ideas such as new formulations about paying out funds over certain rolling year period or rules on the spending of trust capital.  

For more about trusts or charities and to follow the parliamentary process of the Bill, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan is highly experienced in advising third sector organisations on governance and constitutional issues, including charity establishment and modernisation… He blends excellent technical advice with both pragmatism and plain communication.” Chambers and Partners 2023

“Alan advises on a range of issues and has particular experience in charities work. A source notes: “Alan is a professional, dedicated and passionate private client lawyer.” Another interviewee enthuses: “Alan has excellent experience and technical knowledge, and he is very generous with his time.” Chambers High Net Worth 2022