Private client review for July 2021

13 August 2021

In this article, the July monthly update review for Tax Journal, Edward Reed and Charlotte Kynaston look at a number of private client developments.

Potential changes to the UK's tax year end date

The Office of Tax Simplification (OTS) is currently exploring a potential change to the end of the UK tax year for individuals, which would see the tax year ending on either 31 March or 31 December. In its scoping document, the OTS has said that it will consider the following factors:

  • the financial implications for the exchequer, the tax gap and compliance generally, particularly in relation to income tax, PAYE, NICs, capital gains tax and inheritance tax;
  • the financial and administrative implications for taxpayers, employers and businesses;
  • interactions with other government departments and devolved administrations;
  • implications for areas connected to individuals such as partnerships and trusts; and
  • the practical implications for HMRC and its existing infrastructure and systems.

The OTS review will focus primarily on the implications of moving the tax year end date to 31 March. This would make considerable sense, since it would align the tax year with the financial year end date for government accounting, as well as for UK corporation tax. It would also be the less disruptive of the two dates under consideration, since the transitional tax year would only need to be shortened by five days to run from 6 April to the following 31 March.

However, the OTS will also consider the issues, costs and benefits if the tax year were instead moved to align with the end of the calendar year on 31 December, bringing the UK tax year into line with many major international tax regimes, such as the US, France and Germany. The OTS scoping document highlights that Ireland successfully moved both its accounting and tax year end dates from 5 April to 31 December in 2002, so 31 December does appear to be under serious consideration. This may concern tax practitioners, who would have to navigate complicated transitional arrangements whilst simultaneously losing three months in which to advise clients in advance of the new tax year. Clearly, it would also move the sometimes challenging 'year end' work to Christmas time from its current rough coincidence with Easter. Experience of dealing with colleagues in jurisdictions where this is already the norm suggests this would be an unwelcome life altering event!

The report is expected to be published this summer.

Will overturned despite medical assessment confirming capacity

In the recent High Court case of Hughes v Pritchard [2021] EWHC 1580 (Ch), the final will of an Anglesey farmer was overturned on the basis of a lack of testamentary capacity. On the face of it, this would not be worthy of comment were it not that it illustrates the challenges professionals increasingly face with clients' capacity. The will failed to be upheld despite a contemporaneous medical assessment by the testator's GP and a later psychiatrist's report, both confirming that the testator did have capacity at the time the will was executed. What more could have been done?

The facts centred on the will of the late Evan Hughes, who died in March 2017 aged 84. He executed his final will on 7 July 2016 while suffering from moderately severe dementia and grieving for his son Elfed, who had tragically taken his own life some months earlier. The 2016 will left some 58 acres of farmland to Evan's other son Gareth – land which had been left to Elfed in each of Evan's previous wills. After Evan's death, Elfed's sister, widow and son contested the validity of the 2016 will on the grounds of a lack of testamentary capacity.

This case highlights some of the potential risks and pitfalls involved when taking instructions from elderly clients. The attending solicitor in this case carefully followed correct procedure: she took detailed notes throughout her multiple meetings with Evan and his son; she followed the 'golden rule' by obtaining a capacity assessment from Evan's GP; the GP confirmed in writing that he had no issues with Evan's capacity to change his will. The solicitor also arranged for the GP to be present when the draft will was read to Evan, and to act as one of the witnesses to the will.

During the proceedings, the parties jointly instructed a consultant 'old age psychiatrist' to produce an expert report, based on records and witness statements from both the GP and the solicitor. The expert agreed with the GP that Mr Hughes most likely had capacity at the time of writing and executing his 2016 will.

However, the trial judge took a different view and determined that Evan had in fact lacked the requisite testamentary capacity in 2016: accordingly, his earlier (2005) will was in fact his last will and was to be admitted to probate.

Why is the judgment not as alarming for private client professionals as it may first seem? The court's findings in this case turned on the fact that the GP was not fully aware of the precise nature of the changes to Evan's 2016 will: he incorrectly believed that the sole change was to substitute Mr Elfed Hughes (the deceased son) with his widow and surviving children, rather than to amend the will to leave the land to Gareth Hughes instead. The GP also noted in contemporaneous records from May 2016 that Evan himself appeared to believe that the sole change to his will would be to leave Elfed's share to his widow and children. This was sufficient for the judge to make his finding on the lack of testamentary capacity.

This case serves as a useful reminder of the importance of following correct procedures when taking instructions from elderly clients. Critically, it demonstrates that the sole fact of involving a doctor may not be enough: any assessing medical professionals need to be properly briefed regarding both the terms of the will and the impact that any changes would have on the distribution of a testator's assets as compared to their original will, to enable them to make an accurate capacity assessment. After all, there is more to testamentary capacity than remembering the prime minister's name or being able to count backwards in sevens; the test is a medico-legal one involving the impact of the medical state on the state of mind as it relates to one's will. On the facts, it might have been argued that Mr Hughes did after all have capacity but had simply failed to appreciate the tenor of the changes, which is a slightly different but no less important point. Either perspective puts those accompanying clients on this journey on enquiry and gives some reinforcement (sadly) to those medical institutions whose policy discourages or forbids their staff from being involved at any level.

Deductibility of loans beyond the limitation period

We have recently encountered HMRC refusing to the deduction of debts from the value of an estate for inheritance tax purposes where the limitation period for the debt had expired. The main rules are that liabilities can only be deducted from an estate if they:

  • are imposed by law or incurred for money or money's worth; and
  • are repaid on or after death from the estate or excluded property owned by the deceased, or there is a commercial reason that they are not repaid (where the liabilities were incurred after 17 July 2013).

HMRC's approach is that loans cannot be deducted, even if they were incurred for money's worth and are repaid, if the limitation period has expired so they are no longer enforceable debts. Under the Limitation Act 1890, the limitation period for most debts expires six years after the repayment date (or 12 years if the debt was made by deed).

However, it is a straightforward process to extend the limitation period while the debtor is still alive. If the debtor acknowledges the debt or repays part of the debt at any time, the limitation period starts to run again from the date of the acknowledgement or part payment. Accordingly, HMRC's stance should not be accepted lying down.

Jersey court allows a distribution deliberately intended to incur tax

The Royal Court of Jersey recently confirmed in the case of IQEQ (Jersey) Ltd re the May Trust [2021] JRC 137, that a trustee could make a distribution which the beneficiary intended to use to (unnecessarily) incur UK tax.

The trust was established for the benefit of a family and for charity, but since 2014 the trustee had distributed over £8m to charity and less than £100,000 to the family. The trustee was now seeking the court's blessing to distribute nearly half the trust fund, £75m, to a UK resident beneficiary to enable him to make a charitable donation.

This in itself might have warranted an application for a blessing of a 'momentous' decision, but the unusual point was that the beneficiary intended to structure the charitable donation to ensure an effective rate of 25% tax to HMRC, compared to the nil tax that would have been payable had the trustee made the donation directly.

The family had carefully considered their plan for their family wealth and had requested this distribution as part of their wider plan for charitable and philanthropic giving. They considered it important as part of their principles to pay tax, notwithstanding that it was legally unnecessary and notwithstanding decades of caselaw which confirm that there is no moral obligation to pay tax, only a legal one.

The court concluded that this could be for the benefit of the beneficiary and approved the distribution. This was on the basis that 'benefit' has a wide meaning and is not limited to financial benefit; trustees can consider social benefits and perceived moral obligations of the beneficiary. It was reasonable for the trustee to make the distribution, given 'the social justice aspiration of the Family'.

The English case law on this is narrower, and the Jersey Courts expressly decided to depart from the English case of X and another v A and others [2006] 1 WLR 741, which quoted the older case of Re Clore's Settlement Trusts [1966] 1 WLR 955, itself built on the Lords' ruling about the meaning of 'benefit' in Pilkington v IRC [1964] AC 612. In X v A, the trustees sought the court's approval for a proposed distribution to charity for the benefit of an individual beneficiary, to relieve her of a moral obligation to give to charity. The court refused as the beneficiary would not have had the funds to make the charitable donation personally, so the trustees were not 'relieving' her of a financial burden she would otherwise have had: a telling observation in para 41 of the judgment reflects that the arguments put forward for the distribution 'place a greater weight on the personal views of the beneficiary than is justified by the authorities'. The Jersey courts confirmed that this approach would not apply in Jersey, because they have a wider view of 'benefit' to a beneficiary.

This Jersey case is a notable example of a recent trend of wealthy individuals having broader aims than tax mitigation. Many individuals and families now have a focus on ESG issues. In some cases, whether out of a feeling of personal commitment or a concern to guard against reputational damage, this will include a commitment to pay what they perceive as a 'reasonable' amount of tax. It demonstrates the need for advisers to seek to understand their clients' aims, rather than assume that an unbending strategy of tax mitigation will be appropriate for all clients.

De-enveloping from company

On 14 May 2021, HMRC introduced an example (example 5 in HMRC's Stamp Duty Land Tax Manual at SDLTM09420) which confirms their view that a common mechanism involving the issue of shares in return for the contribution of funds to de-envelope a property will in fact be chargeable under the SDLT anti-avoidance provisions in (in particular) FA 2003 s 75A. The example notes that the transfer to a shareholder of a company property accompanied by an assumption of the third party debt by the shareholder will be chargeable under principles going back to at least 1891 (s 57). The example confirms HMRC's view that the subscription for shares as the method of introduction of the funds needed to reimburse the third party lender, to avoid this charge, will amount to a scheme transaction, which will be taxable under the SDLT mini-GAAR.

This article was first published by Tax Journal.