Issue 10 - July 2008

5
STONE BUILDINGS NEWS
Issue 10
Lincoln’s Inn
The probate lawyer’s duty
to give tax planning advice
contemplated (an alternative distribution) has a
range of possible tax consequences (whereas the
unvaried estate has only one).
The ordinary tax advice duty owed by a solicitor
It is clear from Hurlingham Estates that the duty
can be limited in the following manner:
receiving tax advice from a third party.
Practically, the probate lawyer should consider:
1
Could a tax burden arise from the substance
of the transaction I am instructed to carry out
or have suggested?
retained in a transaction not primarily directed at 1 Make clear to the client there is a lacuna in your If so, has the client taken tax advice?
2 If not, am I competent to advise on the tax
legal knowledge relating to tax law;
tax matters is described in the leading case of
issues arising from the transaction?
1
2 Make clear to the client this is not a lacuna to
Hurlingham Estates Ltd v Wilde & Partners and
be expected of a solicitor having conduct of the 3 If not, is there support available from
can be summarised thus:
elsewhere within my firm?
transaction contemplated;
The solicitor owes his client a duty to advise on how 3 Make clear the client’s interests might require
4 If the answers to questions 2, 3, and 4 are
the transaction in respect of which he is instructed
‘no’, does the client understand:
them to instruct another solicitor who does not
should be structured and, where the client has a
need to limit his services and duties;
(i) the extent of my tax knowledge;
structure in mind, (i) to advise of any liability to
(ii) he needs fuller tax advice than I can provide;
4
If
the
client
agrees
to
such
a
limitation,
record
tax as a result of that structure, and (ii) to advise
(iii) other solicitors have better tax knowledge;
its
terms
in
the
attendance
note;
of any alteration to the form of the transaction
(iv) his interest might be best served by instructing
that would result in the avoidance or reduction of
5 After the meeting write to the client recording
a more competent solicitor?
that liability.
the terms of the agreement and inviting him to
5 If the answers to question 2, 3, and 4 are
consider his position and its implications;
It is a duty to recognise, advise of, and suggest
‘no’, are the matters at 5(i)-(iv) recorded in the
methods of minimising the tax implications flowing 6 Ask him to confirm in writing he understands
attendance note of the meeting, and have they
the limitations on your retainer and agrees
from the transactions the solicitor is instructed to
been recorded in a letter to client?
to them.
effect or are necessary to the ends he is instructed
6 If the answer to any of questions 2, 3, or 4 are
to achieve.
The solicitor is not under such a burden when he is
‘yes’, has the tax advisor considered whether
certain that advice as to the tax consequences of
the form of the transaction could be changed
The estate’s inheritance tax liability does not
the transaction contemplated and as to how the
to avoid or minimise the tax liability?
fall within this definition, because it arises not
form of the transaction may be altered to improve
by virtue of any transaction the solicitor is
7 If the tax advisor has suggested an alternative
the tax position is to come from another source.3
instructed to effect, but by the transfer of value
structure for the transaction, does it bring
deemed to take place immediately prior to death.2 This cannot be assumed, but must be reasonably
with it any risks or pros/cons from
apparent with regard to all the circumstances which
The transaction from which tax consequences
(a non-tax) perspective?
4
may flow has already occurred when the solicitor are known or should reasonably be known. In such
circumstances best practice is to follow the advice
is instructed.
at paragraphs 4, 5 and 6 above, with respect to
1 [1997] 1 Lloyd’s Rep 525.
recording the understanding as to the division of
The situation is different if the executors or
2 Inheritance Tax Act 1984, section 4(1).
advice. It is unlikely in the context of administering 3 Ibid, at 530.
beneficiaries themselves raise the possibility of
4 This will include the type of client.
varying the estate. In that instance the transaction an estate though, to be faced with a client who is
Mark Baxter
Karen Walden-Smith
Protecting the disabled:
the effect of the Disability
Discrimination Act upon
possession actions
The recent decision of the Court of Appeal in
Lewisham BC v Malcolm (Disability Rights
Commission Intervening) [2008] 2 WLR 369 is
the high-water mark for protection of a disabled
tenant. On 27 and 28 April 2008 the House of
Lords heard the appeal of Lewisham against all
four points determined by the Court of Appeal
(Arden, Longmore and Toulson LJJs) in refusing
the claim for possession against Mr Malcolm.
Save for the decision of the Court of Appeal in
Manchester City Council v Romano [2005] 1 WLR
2775 and the decision David Steel J in North Devon
Homes Ltd v Brazier [2003] HLR 59 there had not
been a great deal of judicial scrutiny of the
provisions protecting a disabled person with
respect to his property rights before Malcolm and
the decision has given rise to a flurry of cases to
be defended on the basis of a tenant’s alleged
disability. In S v Floyd (2008) NPC 34 Mummery LJ
(sitting with Lawrence Collins LJ and Munby J) has
distinguished Malcolm and moved away from the
wide-reaching effects of that decision by
determining that it was not unlawful under the
Disability Discrimination Act 1995 (“DDA”) to evict
a disabled person from premises by lawful process
and that it was not arguable in the circumstances
of the case that the DDA provided a defence to the
claim for possession. A finding that the reason for
the proceedings related to S's disability was
possession by Lewisham would have been
straightforward without the DDA.
impossible as, on his own account, S suspended
payment of rent because of F's attempts to increase
Contrary to the findings of the judge at first
the rent.
instance, the Court of Appeal found that the
actions of Lewisham, both in serving a notice to
The relevant provisions of the DDA protecting a
quit and in seeking possession, were unlawful as
disabled person from discrimination in the
property sphere are set out in sections 22 and 24. being contrary to section 22 of the DDA by reason
of Mr Malcolm’s schizophrenia. The Court of Appeal
Section 22 provides “it is unlawful for a person to
found that the subletting of the flat prior to his
discriminate against a disabled person occupying
those premises (c) by evicting the disabled person completion of the purchase was “related” to his
disability even though it was not shown that his
or subjecting him to any other detriment.”Section
disability caused him to enter into the subletting.
24 provides “(1) for the purposes of section 22,
Arden LJ held that, following Mummery LJ in Clark
a person (“A”) discriminates against a disabled
v Novocold “… the disability need neither be the
person if – (a) for a reason which relates to the
sole cause of any action nor a matter without which
disabled person’s disability, he treats him less
the action would not have occurred … to ascertain
favourably than he treats or would treat others
to whom that reason does not or would not apply; whether there exists an appropriate relationship
between the reason (subletting) and the disability
and (b) he cannot show that the treatment in
(schizophrenia) the court must enquire whether the
question is justified.”Section 1 of the DDA
reason (Mr Malcolm’s subletting) for the treatment
provides that“…a person has a disability for the
(taking possession proceedings) engaged some
purposes of this Act if he has a physical or mental
impairment which has a substantial and long term aspect of his disability. If so, the reason was related
to his disability.” She accepted, on the basis of the
adverse effect on his ability to carry out normal
medical evidence, that Mr Malcolm’s ability to
day-to-day activities.”
understand the consequences of what he did was
The facts of Malcolm are as follows. Mr Malcolm
impaired and that was sufficient without finding a
entered into a secure tenancy agreement with
causal link between the treatment and the
Lewisham in January 2002. His tenancy agreement disability in the sense of showing that a
provided that he was not entitled to sublet without schizophrenic episode actually caused the
consent and that if he did then his tenancy would subletting. This finding, together with the finding
cease to be secure and he could not again become that there can be discrimination “even though the
a secure tenant. Further, section 93 of the Housing landlord has no knowledge of the disabled person’s
Act 1985 provides that that security of tenure is
disability or of the facts which make him disabled”,
permanently lost by unapproved subletting. As a
has extraordinarily wide implications in removing
secure tenant, Mr Malcolm was entitled to exercise the landlord (whether private or public) rights.
his right to buy his flat and he exercised that right The House of Lords decision in due course is
in March 2002. On 22 June 2004, prior to the
awaited with interest and will clarify just how far
completion of the purchase, he sublet the flat and the DDA reaches in protecting a disabled tenant
thereby lost his security of tenure. A claim for
from eviction.
19 MAY 2008 - LONDON
Emma Chamberlain
Capital Tax Issues
Organised by CIOT
20 MAY 2008 - NORWICH
Emma Chamberlain
Capital Tax Issues
Organised by CIOT
5
www. sblaw.com
21 MAY 2008 - LONDON
David Rees
“The new Court of Protection”
The Law Society’s Probate Section
Go to www.probatesection.org.uk for
more information
6 JUNE 2008 – THE HOLIDAY
INN, BLOOMSBURY
David Rees
“The new Court of Protection”
At the Solicitors for the Elderly
Annual Conference
Go to www.solicitorsfortheelderly.com
for more information
5
Personal Injury Trusts
and Disabled Trusts
The term “personal injury trust” does not
appear in the tax legislation. It is a concept
concerned with entitlement to state benefits.
Payments from a trust derived from a personal
injury award are disregarded for the purposes of
assessing the income or capital of a claimant to
means-tested benefits – see Income Support
(General) Regulations 1987 : SI 1987 No 1967
Sch 9 para 15 and Sch 10 Para 12. In addition
Paragraph 51(1)(a) of the Income Support
(General) Regulations 1987 which deal with
notional capital provide that settlements of
personal injury damages are not treated as
deliberate deprivation of capital.
Since the Budget of March 2006, the creation of a
lifetime settlement will in general trigger a charge
to inheritance tax unless the trust is a bare trust
or qualifies as “disabled person’s interest” as
defined in Section 89B of the Inheritance Tax Act
1984 (“IHTA”). For inheritance tax purposes the
Inland Revenue regard the personal injury victim
as the settlor of the settlement even if the funds
are provided by the tortfeasor or his insurers. Not
all persons who receive personal injury payments
will qualify as “disabled persons” for the purposes
of the IHTA. The definition of a disabled person is
set out in Section 89(4) to (6) IHTA. In simple
terms, this requires the person to be incapable by
reason of mental disorder of managing their
affairs or in receipt of attendance allowance or
18 JUNE 2008 – STAPLE INN
HALL, LONDON
Sir Alastair Norris chairs a
5 Stone Buildings Seminar. The
speakers are Mark Blackett-Ord,
Barbara Rich and Penelope Reed
“Contentious Probate”
(Tel: 0207 421 7870 for bookings)
26 JUNE 2008 - LONDON
Barbara Rich and David Rees
disability living allowance at the higher or middle
rate. If a person does not qualify under the
definition and settles his property this may trigger
a charge of 20% of the value of the fund in so far
as it exceeds the nil rate band amount.
The IHTA employs the old test in the Mental
Health Act 1983 rather than new and different
test employed in the Mental Capacity Act 2005.
The majority of persons in receipt of personal
injury awards will not be incapable of managing
their affairs by reason of a mental disorder. Not all
of them will be in receipt of attendance allowance
or disability living allowance at the highest or
middle rate.
protected from the risk of imprudent depletion.
However, since March 2006 tying the capital up
comes at a potential inheritance tax cost. One
option is to settle the available nil rate band
amount on discretionary trusts. This at least
provides some element of a safety net. However,
often personal injury awards run to many £
millions and the nil rate band does not go very
far. There is no easy solution to the dilemma faced
by such families.
Lawyers involved in personal injury settlements
need to consider the tax consequences of awards
being settled and to take appropriate advice. Such
advice ideally needs to be obtained before the
award is finalised since the terms imposed by a
From the point of view of entitlement to state
Court can cause tax difficulties if the Court is not
benefits, it seems to be accepted that a bare trust appraised of the tax issues. Often the Court wishes
will qualify as a personal injury trust attracting the to tie the capital up without realising that this
exemption conferred by para 12 of Schedule 10 of may come at a substantial cost from the point of
the Income Support (General) Regulations 1987 – inheritance tax, in a case where the personal
see Coldrick on Personal Injury Trusts p 8. It is
injury victim does not satisfy the definition of
therefore possible to settle personal injury awards disabled person under Section 89 of IHTA.
on bare trusts. This has no inheritance tax
consequence because the person is regarded as
beneficially entitled to the property and their
estate is not diminished by the settlement.
However, a bare trust trust does not confer any
element of asset protection since the beneficiary
can call for the property at any time and can wind
up the trust on the basis of Saunders v Vautier.
Difficult problems can arise with brain injured
clients. Often these clients do not lack mental
capacity in the true sense and yet suffer from
problems that make the possession of a large
capital sum dangerous. They are often and
impulsive. They are also vulnerable to bad
influences or predatory third parties. The families
of such persons usually want the award to be
Michael O’Sullivan
9 JULY 2008 - KENT
Chris Whitehouse
Emma Chamberlain
18 SEPTEMBER 2008 - LONDON
Conference run by Emma Chamberlain
and Chris Whitehouse through ICC with
Organised by Kent STEP
a number of speakers including Giles Clarke,
Peter Rayney, Professor Lesley King, covering a
whole host of capital tax areas including
onshore and offshore issues, the Finance Act
2008, recent cases, mistake/ rectification;
pensions and death planning. Put this date in
your diary now.
10 JULY 2008 – ESSEX
Chris Whitehouse
Emma Chamberlain
Organised by Essex STEP
Lasting Powers of Attorney
A CLT Conference
Go to www.clt.co.uk for more information
5
www. sblaw.com
Members’ News
With the elevation of our former members
Henderson J and Norris J to the bench, we are
the first set of chambers ever to have provided
two Chancery High Court judges in the space of
one year. Our head of chambers Henry Harrod
has been advising on the interplay of
agricultural property relief with tenancies under
the Agricultural Holdings Act 1986 in the
context of the changes to the tax on trusts
introduced by the Finance Act 2006. Shân
Warnock-Smith QC has been considering the
robustness of international trust structures in
the face of divorce orders, and chairing the
second Trusts and Estates Litigation Forum in
Provence and speaking at the STEP Caribbean
Conference in Panama on reserved powers trusts.
Chris Whitehouse and Emma Chamberlain have
produced a new book on Inheritance Tax
Planning (Sweet and Maxwell) which looks at
planning the transitional period for interest in
possession and A&M trusts, and Emma has also
been chairing the Succession Taxes Committee
considering changes on the taxation of foreign
domiciliaries. In February Mark Herbert QC
finished working on a long-running commercial
action with which he had been occupied for
several months, and until the end of the tax
year was involved in giving trust-and-tax advice
to trustees preparing for the new regime. He
recently led a case-study workshop about the
decision of Sir Andrew Park in Smithson v
Harrison for the Association of Pensions Lawyers.
Mark Blackett-Ord has been successful in a
proprietary estoppel case and a mutual wills
claim and is pleased by the public response to
the third edition of his book Partnership Law.
Martin Farber has largely been engaged in
Mastercigars v Withers and the proposed Surface
Workers v British Coal litigation. Since the
settlement of the Equitable Life class action in
February, Andrew Simmonds QC has been
advising on pensions-related disputes and
preparing for an appeal hearing (Allied Domecq)
in May. In Blackman v Man Penny Reed
succeeded in propounding a will in her clients’
favour in an estate worth £10m. Christopher
Tidmarsh QC has also been busy. Michael
O’Sullivan acted in the China William variation of
trust application – one of the trusts established
by the First Baron Vestey. Patrick Rolfe has been
resolving disputes concerning such diverse real
property matters as easements, restrictive
covenants, rights of pre-emption, mortgages,
sale agreements and service charges. Barbara
Rich has been handling a complex statutory will
application in the Court of Protection and she
gave a well-received talk on fraud and forgery in
English probate law at the C5 conference on
Fraud and Asset Protection in Geneva. Karen
Walden-Smith has been making a number of
applications perfecting legal title for banks and
other commercial lenders and she continues to
promote the property work of Chambers and is
the Secretary of the Property Bar Association.
Tracey Angus has been busy litigating various
contentious probate and trust claims.
Lincoln’s Inn, London WC2A 3XT
Tel: +44 (0)20 7242 6201 (8 Lines)
Fax: +44 (0)20 7831 8102
DX: 304 London/Chancery Lane
Email: [email protected]
www.5sblaw.com
Senior Clerk: Paul Jennings
Henry Legge appeared in the recent case of Stow
v HMRC, which considered the jurisdiction of the
High Court to make declarations in relation to
issues raised in tax appeals, and has also been
dealing with the repercussions of the budget for
non-domiciliaries, particularly in the context of
family proceedings. David Rees has regularly
appeared in the new Court of Protection and has
been lecturing around the country on the
practices and procedures of the new court. Since
the New Year Anna Clarke has appeared in the
High Court in a forged will claim; in the court of
Protection in two statutory will applications; in
the County Court in a family provision claim, and
before Chancery Masters in partnership and
probate cases. Leon Sartin has been dealing with
a mistake/Hasting-Bass claim in the High Court
and various trusts and tax matters leading up to
the end of the tax year. Sarah Haren and Tom
Entwistle have both been busy with partnership
disputes. Joseph Goldsmith has started to assist
Chris and Emma with Dymond’s Capital Taxes.
Caroline Kenny has advised on the Inheritance
tax, Capital Gains Tax, and pre-owned assets tax
implications of, amongst other things, a revertor
to settlor trust, the partitioning of a trust fund
and a house-sharing scheme. Mark Baxter has
been in the Court of Protection acting for a
former receiver resisting an application for
disclosure of the court file by her co-receiver
and successfully defending a claim under the
Consumer Credit Act for the repayment of credit
card charges.