Distinctively Scottish: haggis… and the law

(pic: as seen at the Kelvingrove Art Gallery and Museum)

It is 25 January. Burns Night. So, naturally, people will be tucking into haggis, neeps and tatties. What could be more Scottish? Well, the law can be quite distinctively Scottish too… it also brought the world (and the law of negligence) the other culinary delight – the snail in a bottle!

Here is a little jaunt through a few personal and charity law points to be aware of as being different from the rules used in other parts of the UK.

Scotland has its own rules on succession and inheritance.

The intestacy rules in Scotland differ from elsewhere. This includes the rights of surviving spouses/civil partners and children.

Forced heirship, in the form of ‘legal rights’ applies in Scotland. This can affect how an estate is distributed… a will is only the start of the story.

The valid signing of a Scottish will is different. If a Scottish domiciled individual signed a will set for signing under English law, it might cause problems. On domicile, please do go read the case about Liverpool resident George Bowie – a “Glasgow man” and avid reader of Glasgow based news – on what it means, for a will, to be Scottish.

When there is no will and there is an intestacy, cohabitants have the right to apply to the court to receive a payment or assets from the estate.

There are distinct rules for the appointment of guardians to young children.

And on the the topic of ‘young’… age 16 is the age of legal capacity rather than 18. That matters for various things, including bare trusts.

How executors act, make decisions and are generally governed can be different when dealing with executors under a Scottish will.

On governed, remember, Scotland has its own court procedures and system and ground of actions and remedies too.

In succession disputes, you might end up in court about cohabitant rights, but ‘disappointed’ individuals will need to find a ground of challenge such as incapacity rather than something around ‘fairness’ like ‘1975 Act’ claims. It also brings us back to legal rights – see above!

Trust law is another Scottish topic, although those wondering why we haven’t mentioned the ‘mixed’ nature of the Scottish legal system will be pondering the true the place of the trust in a system with a Civilian tradition.

With trusts, among the differences include permissible trust periods. Other points like this crop up when dealing with ‘kilted’ life policy trusts.

Tomayto… tomahto. Liferent… life interest. Continuing power of attorney… lasting power of attorney. We could go on.

Oh… and property law procedure and law is quite different. We won’t even dare mention intermediate rights such as equity.

A lot of tax operates at a UK level. Inheritance tax does. Capital Gains Tax does. But not everything does. There are Scottish taxpayers for income tax purposes. Property taxation is not Stamp Duty Land Tax. Rates relief for charities is focussed on charities registered in Scotland.

Powers of attorney get you the same result, but work differently in terms of preparation and drafting. As noted above, the nomenclature is different. The underlying law is different. And we have our own Public Guardian.

The inner workings of the survivorship destination is a ‘fun’ example of how the systems can work diametrically.

What is charity? Well, it can mean something different in Scotland. And it can matter in terms of the regulation of the organisation and the taxation of it. Scotland gets the OSCR for the best-named charity regulator.

Probably by this point, you are saying “enough already!”. So, OK, we will end it here. Well… before we go… we don’t obtain probate!

For help navigating Scottish legal issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

Alan is the author of “Scotland” in the textbook, International Succession.

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

Make a Will: go from to-do to ta-dah!

There are lots of reasons to make a will. There are some here, should you wish to have a look. The conclusion really has to be a will is a good thing to have. It helps you protect your loved ones and support chosen causes.

To make a will, and to do so in a straightforward way, send an email to me… just click here: alaneccles@bkf.co.uk

Making a will is an important thing to do. But it need not take too long to get it sorted. With a fixed fee. And no form filling for you.

Keeping you safe, a will can be made during lockdowns from your home.

What have people said about the experience of getting a will done this way?

“Wow, that was really easy! We’re already done.”

“That was painless.”

“Just a wee note to say that I met up with Alan midweek and he fixed me to sign a will within 24 hours. That’s one slick operation.”

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

A review of the year in blogs

TV at this time of year is full of ‘run down’ shows. Here’s another one. We bring you the blogs from 2020 which have had the most reads… and give a shout out to a couple of honourable mentions.

Private client law

The most popular blogs were:-

From a time when lockdown seemed almost novel. A blog that featured thoughts that you hoped would be time-limited, but sadly deserve a fresh read.

Cases about challenges to wills on the basis that the deceased treated a particular child ‘unfairly’ can make the headlines. Here is our reaction to a Canadian case through the prism of the Scottish rules on disinheritance… ‘legal rights’.

Writing a will is a good thing. It helps you take control over what happens to your estate. It is quicker and more reliable than waiting for changes to the intestacy laws to ever happen. We reported on the treacle-like pace of Scottish intestacy law reform… and arrived at a clear and positive conclusion from that process… make a will.

Structuring an estate to get it below £2m can help unlock additional inheritance tax benefits and we covered that in this blog.

#FreeBritney. The Spears family brought global attention to powers of attorney and management of legal affairs via Californian law’s ‘conservatorship’. The clear message in Scotland is, where possible, make a power of attorney. 

Deeds of variation offer an invaluable opportunity to place an inheritance on the right footing. A brilliant estate planning tool not to be overlooked. A summary of deeds of variation and their uses and advantages is in this piece.

Charities and third sector

These blogs got people reading about charity law:-

As is a feature at the moment, something that was supposed to tide us over the worst of the summer, will run into 2021. The ‘relaxed’ member meeting (AGMs etc) rules for various legal entities (including charitable companies, CICs and SCIOs) will continue until March 2021. Here is a review of the rules (a blog updated twice now due to changes to the expiry of the rules).

And on that theme, a May blog on covid-related governance and legal considerations for charities remains a current read.

The value of legacies has been apparent for charity finances in 2020. A positive forecast on future legacy giving means this will continue to be an important income stream for charities. One for charities to make sure they are giving due attention in their planning. This blog covered short and longer term points on gifts in wills.

The Supreme Court handed down significant charity law decisions in 2020. The first was on the duties of members of charitable companies. An important judgment with wider implications as reported in this note.

Best wishes for 2021

We hope you like these updates. As long people continue to read and the law continues to develop, we will continue to keep the blogs coming. And you can follow on twitter too… @WillsCharityLaw

For help and advice on succession and estate planning law or charity legal issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

Alan is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

“He is an experienced lawyer who is very well known among sources for advising clients on charity law matters.” Chambers High Net Worth 2020

Alan is “highly experienced in advising third sector organisations” … “efficient and has a very in-depth knowledge of the Scottish charity scene.” Chambers & Partners 2020

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

Wealth Tax: a wardrobe monster?

The classic John Smith’s advert featuring Peter Kay reminded us that we shouldn’t worry about the wardrobe monsters – instead be worried about the burglars. We will return to this.

The Wealth Tax Commission has issued its report today. A quite monumental piece of work in many ways with copious amounts of background research and papers. A wealth (geddit?) of material that could be utilised for some time when considering tax policies and ideas. Whatever happens, it is a serious contribution to the general tax ‘conversation’.

What has the Wealth Tax Commission proposed?

Well, to start, the Commission is not recommending anything, as such. It has analysed different methods of a wealth tax working (particularly one-off versus annual). It also aimed to provide food for thought for government on mechanisms as well as matters of principle on how a government might address the need to raise a significant or (per the Commission) “exceptional” amount of tax. The Commission did note possible changes to other taxes that might be required to raise the same “exceptional” amount of tax as a potential wealth tax. Overall the Commission tends towards a one-off wealth tax rather than an annual version. The Commission concludes that if an annual wealth tax was preferred by government that a better approach would be a wholesale restructuring across the board for tax.

The Commission concludes that a well-designed one-off wealth tax would (to raise £260bn in revenue) be at a rate of 5% over £500,000 per individual or (to raise £80bn) at a rate of 5% over £2 million per individual, payable at 1% per year over five years.

If an one-off wealth tax was adopted, it could be something branded as a ‘Covid Recovery Tax’. Its one-off nature would be underscored by the tax being assessed on the day of announcement. This is partly designed to minimise scope to avoid the tax.

The Commission has recognised, and considered acceptable, the practical and logistical issues of seeking to value all wealth (homes, land, pensions, businesses, investments, trusts…) at a single point in order to assess the tax.

As an aside, the Commission’s consideration of an all-encompassing approach to tax across all assets interests us. Tax sometimes drives the legal structures people adopt. But it is more important to consider the overall characteristics and benefits a structure gives. Often, it is the very fact it provides structure that matters.

The tax reform ‘recipe’: politics

The Commission is not recommending that a wealth tax is the way forward for tax and revenue-raising. Who knows if a wealth tax would happen. Other countries have tried it and some have then ditched it or watered it down. The movement away from a wealth tax coming either from unpopularity or the logistics of running the tax. It will, as the Commission says, be down to politicians to consider and then decide to bring in any form of wealth tax.

BUT, the Commission’s work puts tax in focus again. We have had the Office of Tax Simplification consider inheritance tax and more recently, and perhaps more sharply, capital gains tax. The covid situation means the government has been spending huge amounts and will need, at some point, to attempt to recoup some of that expenditure. There is (nervous) anticipation for Spring Budget 2021. So, as we blogged on before, what has historically mattered on capital tax is the simultaneous presence of key ingredients: a tax reform/revolution cake recipe. The Great British Tax Off, if you will. We have previously said that the recipe appears to be: (1) tax is too complicated; (2) tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The latter factor being the determining factor underpinning change.

Wealth Tax as a wardrobe monster

Maybe there will be a wealth tax. We suspect there will not be. (If there is, we could just delete this blog and the prediction never happened!!) A wealth tax feels like a wardrobe monster. It is scary. It is in our mind. It gives us nightmares. It makes you peer with one eye from under the duvet. But it does not exist.

Meanwhile, the burglars are out there. The burglars here are other taxes that do exist and are sitting there ready (potentially with reforms and updates) to tax your wealth. Maybe there will be a wealth tax, but for now, planning to protect you, your family and business from the current tax regimes would seem to be the way to help you sleep better at night.

As Peter Kay ended the chat with daughter, Britney in the advert, “sweet dreams“.

For help and advice on succession planning and related issues get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

Disinheritance: that’s not fair!

The British Columbia Supreme Court has decided that a father’s will should be varied to reflect his ‘moral obligation’ to his adult daughter when there was an unequal division of the estate between her and her brother.

Could that happen in Scotland? Can you disinherit a child under Scots law? What are the rights of a child or spouse/civil partner in an estate? What happens if you get less from an estate than hoped? All that, and may be more in this blog.

What happened in Canada?

The deceased left a will splitting the estate 50% to his son and dividing the other 50% equally among his daughter and her children. The daughter was disappointed by this division and sought under the law of British Columbia to ask the court to vary the will and the division of the estate. The variation was sought on the basis that the father had failed to discharge his moral obligations to his daughter. The relevant legislation allows a court to consider whether or not a deceased has made “proper maintenance and support for a spouse or child” and if they have not, the court may set out a division of the estate which it thinks is “adequate, just and equitable in the circumstances”.

The court weighted up a number of factors including provision made for the son outside of the estate, the relative financial positions of the son and daughter and also that the daughter is disabled. The son argued that making provision for the grandchildren was right and given the daughter’s apparent inability to manage money, this ensured the grandchildren would receive an inheritance.

The court decided that the father had not fulfilled his primary moral duty to support his children. It was irrelevant that the deceased had benefited both sides of the family equally. The court ordered, based on this moral duty and the children’s respective health and financial circumstances, that the estate should in fact be divided as follows: one-half to the daughter; one-third to the son and one-twelfth to each of the grandchildren.

Could this happen in Scotland?

The short is ‘no’. It is not possible in Scotland to ask the court to alter an estate on the basis that it was an unfair division. Yes, if there are allegations that, for example, the deceased did not have capacity or there was undue influence, a court challenge can be raised to strike down the will. But that is on the basis the will is invalid rather than it containing an unfair division. Of course, the reason to seek to challenge a will’s validity could be due to perceived unfairness.

So, spouses/civil partners and children are left ‘high and dry’ in Scotland?

The short is answer is ‘no’. Unlike jurisdictions such as British Columbia or England, Scotland has, like France, a system of ‘forced heirship’. Scottish forced heirship is known as ‘legal rights’. Legal rights creates automatic, fixed entitlements for spouses/civil partners and children. Legal rights apply irrespective of the terms of the will. Systems like England and British Columbia have court based discretionary processes to offer some protection from disinheritance.

What are the legal rights entitlements?

If a deceased is survived by a spouse/civil partner and children, the spouse/civil partner is entitled to one-third of the net moveable estate and the children, as a group, are similarly entitled to a one-third share.

If a deceased is survived by only a spouse/civil partner, then the spouse/civil partner is entitled to one-half of the net moveable estate.

If a deceased is survived by only children, then the surviving child/children is entitled to one-half of the net moveable estate.

It is also worth noting that a legal rights entitlement is one of cash. The positive is that avoids a force break-up or sharing of assets, but it might create a pressure to fund the cash requirement.

Those entitled can also take their time to decide what to do. If someone entitled legal rights felt they were receiving too little from the estate, they might simply prefer to cause a little nuisance. They can wait 20 years to make a decision(!) and all that time the estate needs to be ready to settle the entitlement should it be asserted.

The moveable estate is essentially all assets excluding land and buildings. Care should be taken with land that is held in a company as it will be treated as moveable. Partnership agreements should also be reviewed to confirm how land held in a partnership is to be treated for legal rights purposes. In some cases it will be important to not accidentally and unthinkingly enlarge the amounts that someone is entitled to under legal rights by restructuring land and buildings into a company.

But I want to prefer one child over another!

While a will would allow someone to say their entire estate is to pass to one particular child, that is still subject to legal rights entitlements. So, to pass more of an estate to one child, it may be necessary to take action during life to restructure their estate or alter how the preferred child inherits (part of) the estate. Because legal rights is based on the value of the moveable estate held in the deceased’s name immediately before death, moving assets out of their name or otherwise reducing the value of the net moveable estate will be key to minimising or avoiding a child’s legal rights entitlement. The use of pensions, trusts, policies and contracts can all be part of the planning to control legal rights. The impact (and advantages) associated with some tax rules also need considered with legal rights planning.

Those with assets such as large investment portfolios, cash or private business holdings should take particular care with legal rights.

I don’t like legal rights: I’ll emigrate to avoid it!

A potentially bold option. But as we have seen with Canada and noted in passing about England, most countries have some system to protect those you are (in whole or part) disinherited. Systems like British Columbia or England have the uncertainty of a discretionary court approach: everything is up for grabs and in the air. Scotland and others have more rigid entitlements, but at least you can try and plan around the rules in the knowledge that there is no British Columbia-esque legislation to unpick an estate.

As an aside, I am part of the writing team for the book, International Succession and it is notable that each chapter on each country covered in the book looks in detail at rules on disinheritance.

Protecting beneficiaries

One for another blog perhaps, but worth reflecting on the point raised that the Canadian case’s deceased apparently wanted to ensure some inheritance passed to his daughter’s children and also to recognise her issues with financial management. If protecting family wealth and holding it safely for (but away from the own hands of) a beneficiary is desired, then a mix of lifetime planning and the right will is required in Scotland. There can also be legal and even emotional value in preparing a letter of wishes to accompany a will and other steps in that situation. A letter of wishes can provide guidance on your aims and also help with any explanation of those aims.

Voluntary variation: deeds of variation

We have previously talked about the valuable ability to vary an entitlement in an estate following a death. This can have various succession and tax advantages. You can read a blog on that here.

For help and advice on succession issues including legal rights or being a disappointed beneficiary, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Chancellor’s summer update… but wait for autumn?

The Chancellor set out measures to be viewed as a stimulus to economic activity (particularly segments closed by lockdown) and a self-styled “plan for jobs”. What did he say? And will the fiscal story of Covid-19 have a second, significant chapter in the autumn Budget?

For a start, ‘kickstarter’… on youth employment

At a £2bn cost, the Chancellor laid out the ‘Kickstart Scheme’ aimed at youth employment. Businesses will receive a payment to help employ 16-24 year olds who are at risk of long-term unemployment. The scheme will fund six-month work placements for young people who are on Universal Credit and will cover 100% of the relevant National Minimum Wage for 25 hours a week, plus the associated employer National Insurance contributions and employer minimum automatic enrolment contributions.

Let them eat…

Marie Antionette suggested cake. Rishi Sunak is encouraging dining out. Monday to Wednesday can be quiet for the hospitality industry at the best of times. The Chancellor will provide a 50% discount (up to £10 per person) on food and non-alcoholic drinks at participating restaurants on those days during August. Restaurants must sign up for the scheme and are promised they will be paid the discounted amount within five days of a claim.   

VAT cut on hospitality… but you will not drink to it

From next Wednesday (15 July) until 12 January 2021, a VAT cut from 20% to 5% hospitality and visitor attractions will apply. Again, designed to encourage spending in areas that have been particularly closed-off during lockdown. This is likely to work as a boost for businesses and hoped to encourage people to re-start getting out and consuming. While aimed at hospitality and tourism, other sectors could benefit that provide the particular supplies covered by the scheme.          

The cut is broadly on food, accommodation and attractions. It does not affect alcohol. As with the logistics of social-distancing measures, the hospitality trade and tourism sector will need to get to grips with the logistics and administration associated with the change.

Golden “nice to have you back”? Furlough return ‘bonus’

Heralded, by the Chancellor, as a ‘bonus’ of £1,000 to be paid to a business for each employee returning from furlough. To be eligible the employee will need to return from the Coronavirus Job Retention Scheme, be employed through October to the end of January 2021 and be paid an average of £520 per month during that period. The Chancellor’s statement also ended any speculation the wider furlough scheme would continue beyond October.

An Englishman’s home is his castle… with less stamp duty to pay now

From 8 July to 31 March 2021, there will be no stamp duty land tax to pay on the first £500,000 of a house purchase in England, Wales and Northern Ireland. A direct move to stimulate housing market activity.

Scottish funding choices

The stamp duty land tax move is one of a handful of measures that do not apply to Scotland. However, where particular schemes do not cover Scotland, the Scottish Government will have funding allocated. We will wait to see what the Scottish Government does generally and whether it would cut Land and Buildings Transaction Tax in a similar way to SDLT. [UPDATE: Scottish Government has announced that “as soon as possible” but not immediately the LBTT starting level will increase from £145,000 to £250,000 on house purchases.] 

A two-parter… the autumn Budget

The summer statement was the “plan for jobs”. A spending round that the Chancellor hopes will boost beleaguered industries, spark consumer confidence and protect and even create jobs. But the autumn Budget could well be the real show. The summer economic update was quite targeted, and many sectors were not directly covered. There is also the issue of government raising funding to cover the pandemic economic packages and which taxation tools it might use. For some, the period to the autumn Budget will be the time to review their affairs… and you can read more about that here.

Get in touch… Alan Eccles – alaneccles@bkf.co.uk / 07470808717

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

School’s out for summer… but law goes on

Corporate governance with social-distancing

The Corporate Insolvency and Governance Act 2020 includes new rules on conducting formal business and meetings by a range of legal entities. The entities included are companies (including those with charitable status), Scottish Charitable Incorporated Organisations and a range of mutual societies. The rules do not apply to trusts, unincorporated associations or a variety of bodies set up by statute.

The new rules will help get vital decision-making completed during these times. While the new provisions relax certain aspects of corporate governance, robust decision-making and good governance remain important. Shareholder/member engagement has not fallen away. After all, it is called in part the “Governance Act”.

Click here for a summary of the new rules and we also touched on wider governance points for holding meetings and making decisions at the moment.

Variation is the spice of life

It’s a classic, but one not to be overlooked. Deeds of variation offer all sorts of benefits (some quite unique) and not just the ‘reading back’ for inheritance tax purposes. Tax, asset protection, philanthropy and gifting objectives can all be achieved with the variation of an estate.

Here’s an overview of what’s great about deeds of variation… and space and time-machine chat!

What should trusts and charities do with land they own?

In June the Scottish Land Commission set out what it expects of trusts and charities that own land in Scotland. The Commission’s protocols will apply irrespective of where the trust or charity is based – English and other trusts/charities will be affected if they own land in Scotland.

Trustees should consider how they will introduce the protocols into their land management strategies and how the protocols will sit with the duties of trustees/charity trustees.

Read more here on what the protocols set out and mean for trust and charity land owners.

Residence Nil Rate Band: clutch victory from the jaws of defeat

OK, everyone is agreed that the Residence Nil Rate Band is horrible. (Well, maybe not everyone as the OTS said it was too early to suggest reform.) Even if horrible, it is a tax free amount. You want to capture that inheritance tax bonus.

The way the Residence Nil Rate Band is computed means being above the taper threshold is really not good, if you can help it. On the positive, the way the taper threshold is calculated means action can be taken (even ‘late in the day’) to recover the situation.

Read more on saving the Residence Nil Rate Band.

Pic credit for this round-up: @EthicsInBricks Worth a fun and through-provoking follow on twitter.

Private client and charities queries and assistance needed? Get in touch, we are here to help you. Alan Eccles – alaneccles@bkf.co.uk 07470808717

Nice things people have said:-

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth

“Alan Eccles is recognised as one of the leading advisers in the Scottish charities sector.” Legal 500

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

PET rescue: saving the Residence Nil Rate Band

April 2020 had “who wants to be a millionaire?” in focus with the televising of Quiz. Inheritance Tax, from 6 April, started to ask the same question as the Residence Nil Rate Band increased to hit the golden £1,000,000. Cue glitter!

Before celebrating just yet, you should be aware that the Residence Nil Rate Band has lots of quirks to it. It is much more than the initial headline grabbing “no more tax on family homes”. And with those quirks come chances to be hovering over the £1m (bet you just said that like Chris Tarrant) prize, for your final answer to take a huge chunk of it away. And unlike the gameshow, it is possible to lose everything. But there is a way to avoid that painful feeling of clinching defeat from the jaws of victory. A PET might just come to the rescue.

The prize

The maximum £1m tax free amount is made up of a mixture of:-

• a personal Nil Rate Band (£325,000)
• a predeceasing spouse/civil partner’s own Nil Rate Band that was ‘unused’ on their death becoming your Transferable Nil Rate Band (£325,000)
• a personal Residence Nil Rate Band (£175,000)
• a predeceasing spouse/civil partner’s own Residence Nil Rate Band that was ‘unused’ on their death becoming your Transferable Residence Nil Rate Band (£175,000)

So, £325k + £325k + £175k + £175k = £1m

How to not be a (nil rate band) millionaire

But there is a potential sting in this £1m tax relief prize. Helpfully, there is a solution to salve the pain.

For estates over £2m the Residence Nil Rate Band starts to ‘taper’ (i.e. reduce). It reduces by £1 for every £2 over the £2m.

The way in which the Residence Nil Rate Band is calculated matters to how this valuable tax free amount can be lost. And it is the method of calculating that means not only could lose your own Residence Nil Rate Band but you can also lose the benefit of the ‘unused’ Residence Nil Rate Band from a predeceasing spouse/civil partner’s estate. There is a lot (£350,000 of tax free amount) at stake.

How to lose this £350,000?

Well, let’s say you own a residence at date of death which will be inherited by children and you survived a spouse/civil partner who passed their interest in the house to you. A not uncommon situation.

These facts mean you, in principle, qualify for Residence Nil Rate Band (£175,000) and since your spouse/civil partner did not use their Residence Nil Rate Band (as it passed to you tax free), your Residence Nil Rate Band is boosted (by £175,000). £175k + £175k = £350k.

But, if your estate is over £2m the amount of the Residence Nil Rate Band is reduced, bit by bit. If your estate was £2.3m, the total Residence Nil Rate Band is reduced by half to £175,000. If your estate is £2.7m, the entire £350,000 is wiped out… and that includes the Residence Nil Rate Band ‘unused’ by your spouse/civil partner.

PET rescue… recovering the £350,000

All can be saved though. Usually when thinking about the value of an estate in inheritance tax terms, we are thinking about the estate that is subject to tax. Not so for the Residence Nil Rate Band.

The £2m threshold is based on a cruder personal balance sheet looking at purely assets less liabilities. Within that will be assets on which there is no tax (e.g. a trading business or farm). More positively, the £2m does not add back in gifts made within seven years (which can add to an inheritance tax bill).

It is unusual for inheritance tax not to add these Potentially Exempt Transfers (aka PETs) to the estate you actually hold in your name at the time of death. PETs not being included creates a solution to the £2m taper threshold.

If your estate is above £2m, then to save the Residence Nil Rate Band, making a PET should be actively considered. So long as the gift means the estate ends up below £2m, the full £350,000 Residence Nil Rate Band can be secured again.

As the PET is not added back into the estate (for the taper calculation), it does not matter when that gift is made. It could be the day before death or a year or whenever… it does not matter. The only thing that matters is that as at date of death, your personal balance sheet is below £2m. Of course, a steadier route to £2m as part of considered estate and financial planning rather than a single ‘lurching’ gift will be usually preferred.

Making a gift, the PET, can be a very valuable action. A PET could rescue the full £350,000 which means £140,000 less inheritance tax is paid by the estate. That would seem worth it.

Before making a PET (for any reason), there will be points to check. A capital gains tax liability can arise even when a gift is made. The real-life effect of a gift should also be considered… how does it affect the donor, the recipient and others in the real world beyond tax.

Residence Nil Rate Band has other quirks!

This is not the only tricky aspect of the Residence Nil Rate Band. There are many ins and outs with a tax relief which had such a simple policy slogan of no more tax on family homes.

An addendum… do you ‘trust’ your final answer?

In recent times, we have become involved in a number of cases which throw up other ways to lose the residence nil rate band. These relate to situations where a home has been transferred to trust.

While nothing feels like it has changed (sitting in the same sofa watching quiz shows), the tax treatment can change dramatically when the house title is held in the name of a trust.

As a rule of thumb, where a couple have assets (the combination of assets in their personal name and in trust) that exceed £650,000, very careful consideration needs to be given to continuing to hold the home via a trust. If this might apply to you, get in touch as action may need to be taken.

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

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Deeds of variation and IHT: rocketships and time-machines

NASA was making spaceflight history at the end of May with the first flight with humans aboard to the International Space Station operated by the private sector. As you will see I need to get a new model spaceship!

The SpaceX flight was due to lift off on 27 May but as the conditions were not right, launch was postponed until 30 May. Sometimes, the second opportunity can mean a chance to get a better outcome. As with postponed rocket launches, inheritance tax offers individuals, families and charities a second opportunity to optimise their position. A second opportunity to do things more tax efficiently and in a way that best suits a beneficiary following a death. A deed of variation is the way to take advantage of this inheritance tax second opportunity. An opportunity with some unique benefits derived from a time-shifting quirk of how a deed of variation works.

What is a deed of variation? (spoiler: it’s a time-machine!)

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 is a time-machine!

A deed of variation allows a beneficiary to re-write history. To re-write a will as far their 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!

Want to know more about deeds of variation? AND hear more about space and deeds of variation?

Yes, we can tell you more about a unique mix of inheritance tax and space travel. As well as that we can help individuals, families and charities access the quite unique benefits of the estate planning time-machine that is a deed of variation.

For help on this, get in touch with Alan Eccles – alaneccles@bkf.co.uk / 07470808717.

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

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Smoothing the path… wills, powers of attorney, charities and businesses

Sometimes the law really is here to help make things happen more efficiently and effectively. In lockdown, it might be difficult to do things. And while there has been the boom in online video platforms, how can you do formal legal business with them?

Helpfully, the law in Scotland coupled to Law Society of Scotland guidance has enabled people to continue to put in place important documents. Wills and powers of attorney can be made with the assistance of video technology.

Similarly, for some (SCIOs, companies, credit unions, registered societies) but not all (including trusts, unincorporated associations and statutory) charities there is legislation being progressed at Westminster which will help streamline formal meetings during lockdown. It will allow the use of technology in holding and voting at those meetings where otherwise the organisation would have been prevented from doing so. Should be handy for charities with large memberships and older constitutions. The legislation will be temporary and should encourage organisations to review their longer term arrangements and governing documents. Private companies will also be able to benefit from this legislation.

Read more on making lockdown wills and powers and attorney

Read more on covid-19 charity AGM etc arrangements

Watched kettles… and succession law reform… never boil. But inheritance tax reform could be bubbling up.

The latest update on the reform of Scottish intestacy indicates it will be a (good) while until we have new rules. The last consultation has failed to identify a consistency of views on what the law should look like to reflect “generally expected outcomes” on certain aspects of inheritance. With reform some time away and what it will entail unclear, the best (easiest and most certain) way to plan for succession that suits your wishes and provides best for your loved ones and interests is to get advice and make a will.

Meanwhile, in inheritance tax, we looked this month at some moments in history when inheritance tax significantly changed. Moments when three ingredients for change persisted: (1) complexity of the tax system; (2) ‘fairness’ of the tax; and (3) macro-economics and politics. Are the ingredients present at the moment? Perhaps so. With the spectre of change, individuals and families should think about estate planning steps to take now.

Read more on the lack of intestacy reform and the benefits of succession planning

Read more on the ingredients for change to inheritance tax

Doing your duty… executors and charity trustees

We have also tried to bring together some thoughts for charities and executors working through the legal issues associated with lockdown. A situation where the ‘normal’ rules and duties apply but are amplified or need to be addressed with particular care… or ingenuity and innovation.

Read more on charities and third sector organisations getting through lockdown governance matters

Read more about key issues for executors during lockdown and beyond

Charity fundraising and creating a legacy

The current situation has highlighted different income streams that create the funds that charities need to thrive. Some streams are negatively affected by shock events, some unexpectedly go viral and others are more resilient and consistent. With that we consider two key fundraising topics. Current and future issues in legacy giving is the first. The other is on important points arising from a record-breaking (Captain Tom-esque success!) Australian fundraising campaign launched during the recent bushfire season.

Read more on the importance of legacies: now and in the future

Read about key fundraising issues arising from the Celeste Barber bushfires appeal

Private client and charities queries and assistance needed? Get in touch, we are here to help you. Alan Eccles – alaneccles@bkf.co.uk 07470808717

Nice things people have said:-

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth

“Alan Eccles is recognised as one of the leading advisers in the Scottish charities sector.” Legal 500

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards