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Privateaffairs Spring 2007
Farmhouses and inheritance tax
Pensions
New inheritance tax regime
Shareholders’ agreements
Voluntary first registration
www.mills-reeve.com
Welcome to the spring edition of Contents:
Private Affairs.
In selecting our topics we have taken into 3 Farmhouses and
account your responses to the questionnaire inheritance tax
sent with the previous edition. Thank you A summary of the decision
for your input – we hope that you will find in the recent McKenna case.
the results both interesting and informative!
Our guest article has been written by
Richard Meek of Punter Southall. Richard 4 Pensions
points out that, even though pensions "A Advice on pensions a year
day" was a year ago, it is important to plan after the introduction of the
for, or take advantage of, the new tax rules. new tax legislation.
There is also an article on the new
inheritance tax regime for trusts, which
follows an earlier piece in the autumn
2006 edition.
Other articles cover the most recent case
law relating to farmhouses and inheritance
6 New inheritance tax regime
tax, the advantages of shareholders' An outline of some tactics to
agreements in relation to private companies deal with the new IHT regime
and also the pros and cons of registering for trusts, following an article
land voluntarily. in the autumn 2006 edition.
We are also pleased to inform clients that,
during the course of the last year, we have
recruited a significant number of new 8 Shareholders’ agreements
lawyers in Birmingham, Cambridge and Advice on the merits of
Norwich. This will undoubtedly add to the shareholder agreements in
depth of our knowledge and the service we private companies.
provide. By way of introduction we enclose
details of our new hires and their particular
expertise.
10 Voluntary first registration
As always if you have any questions arising A look at the pros and cons of
from our newsletter, or any other private voluntary first registration.
client issue, we would be pleased to help.
Matthew Hansell Editorial team:
0121 456 8297 Virginia Edgecombe 01603 693293
matthew.hansell@mills-reeve.com Anna Heath 0121 456 8289
2
Farmhouses and
inheritance tax Virginia Edgecombe
01603 693293
virginia.edgecombe@mills-reeve.com
Readers will very likely be aware that the days are over when a farmer could feel confident that his
house would attract relief from inheritance tax. There have been a series of cases over the last few
years, each considering a slightly different point but indicating an approach overall by HM Revenue
& Customs (HMRC) of examining the fine detail of each individual claim. This article looks at the
McKenna case which came before the special commissioners in 2006.
Basic principles should be discounted as if the house was • if so, was it of “character appropriate”?
Legislation provides that, if a house is to subject to the agricultural occupancy
qualify for agricultural property relief (APR), condition and that, in the case in The special commissioners concluded that a
it must satisfy the following conditions: question, a discount of 15 per cent farmhouse is a dwelling for the farmer
should be applied. from which the farm is managed and the
• the taxpayer must either have occupied farmer is not the person in control of the
the house for agricultural purposes for However, the tribunal went further than agricultural operation but the person who
two years before the transfer (whether a this and gave its own interpretation of the farms it day to day. They found that the
lifetime gift or a gift on death) or have definition of a farmhouse as “the house of farming was conducted by the contractors
owned it for the seven years before the the person who lives in it in order to farm and agents and not Mr McKenna and that
transfer, during which period it was the land comprised in the farm and who he didn’t occupy the house to farm the
occupied by him or another for farms the land on a day-to-day basis”. This land and so APR was denied.
agricultural purposes; and definition was considered in the
• the farmhouse must be of character McKenna case. While the outcome of the McKenna case is
appropriate to the land. not entirely surprising on its facts, it is
The McKenna case important for landowners and farmers,
Also the relief only applies to the Mr McKenna worked in London and many of whom use contractors. It cannot
agricultural value of the house. bought the Rosteague estate in Cornwall be said with any certainty that APR will or
as a second home in 1945. The estate will not be available in these cases.
The Antrobus cases included 187 acres of which 110 were However, it is clear that each claim will be
farmland. The McKennas lived at scrutinized and considered on its own
The two Antrobus cases have been much
Rosteague House, which was originally merits and the impact of the recent cases
publicised. The first case considered the
built in the 13th century but which had should be considered in any review of the
meaning of “character appropriate” and
been added to substantially over the years. contracting arrangements.
the special commissioners found in favour
of the taxpayer. It had been the original farmhouse but in
1908 a further house was built for the
The second case was not such good news. farmer and so for a good number of years
The land tribunal considered what the it was not the centre of the farming
• Each claim for APR will be
agricultural value of the house might be. It operation. The actual day to day farming
was carried out by a series of contractors scrutinised and considered on
found that it should be reached by
assuming that the house is subject to a and the contracts were managed by the its own merits
covenant similar to an agricultural McKennas’ agent.
occupancy planning condition – therefore it • To qualify, the house must be
could only be occupied by a person The special commissioners considered a
number of questions including:
a dwelling for the farmer
carrying out the day-to-day farming of the
land. The tribunal found that, in the
absence of comparables, the market value • was Rosteague House a farmhouse; and • Who is the farmer?
3
Pensions –
a year on from A day
Richard Meek 0121 230 1900 richard.meek@psfm.com
The much publicised A Day, which saw the biggest changes to pension legislation in many
years, has passed. A year on, many individuals will have forgotten about it or assumed that
they have taken all the necessary steps to plan for, or take advantage of, the new rules.
However, experience shows that this is far from true – thinking there is nothing left to do could
be a very costly mistake.
In this article, Richard Meek, Principal of existing arrangements should be invalidate protection that has been
the Birmingham office of Punter Southall conducted to ensure they are still applied for.
Financial Management, provides a relevant in light of the new legislation
"checklist" of points that an individual and the introduction of new, more • Has your small self administered
should consider in light of the new flexible and lower charged pension scheme (SSAS) changed its rules?
legislation. arrangements to the marketplace. Many of the new opportunities
presented by A day, for example, more
• Do you still need old pension • Protection of your fund from the flexible drawdown, increased lump sum
arrangements? recovery charge death benefits from an SSAS or inclusion
Generally there is now little need to If there is any chance your pension fund of family members to a scheme require
keep old style personal pensions or will reach the new lifetime allowance scheme rules to be changed. This is a
“retirement annuity contracts”, which (£1.5 million rising to £1.8 million by process that can take time with the
typically have higher charges and more 2010), or you have already exceeded it, result that some scheme administrators
limited fund choice than new style you need to consider applying to protect are delaying plans that may be made
personal pensions or self invested any funds in excess of the allowance with the funds.
personal pension plans (SIPPs). The only from the recovery charge of 55 per cent
reason to keep them is if they offer when you come to take benefits. You • Death in service benefits
generous and relevant guaranteed can also reapply up until 2009 to correct Caution is advised here before increasing
annuity rates or if there are large previous applications. We have advised a benefits from a pension scheme if your
penalties on a transfer from “with number of individuals where the fund is already over the lifetime
profits” funds. Retirement annuity protection has initially been applied for allowance. If it is paid as a lump sum,
contracts can have an added downside on an incorrect basis, meaning that the the death in service benefits could be
in that the fund can't be paid out as a individual would have still faced the subject to the recovery charge,
lump sum to a trust on death, bypassing recovery charge or a reduced tax free significantly depleting what would
the estate of the survivor. This valuable cash entitlement. Furthermore, some otherwise have been a valuable benefit.
IHT planning mechanism is therefore not people do not seem to be aware that
available. It follows that a review of continued contributions post A Day can
4
• Don't rely on being able to pass on gearing effect of this tax relief on returns Richard Meek leads a team of 14 people in
to your children your pension fund is very hard to dismiss and, given Birmingham. Clients include partners in
after age 75 HMRC's moves against many other professional firms, directors of public and
HM Revenue & Customs (HMRC) seems forms of income tax mitigation, this private companies and retired individuals.
keen to frustrate using “alternatively allowance should not be ignored. We Punter Southall Financial Management is
secured pension” as a way of passing have many clients who have borrowed the independent financial advisory business
your wealth to the next generation by to make pension contributions of the Punter Southall Group, which
making the taxation unattractively penal. (particularly against tax efficient includes actuaries investments managers
So any planning strategy that relies on partnership capital) while they can to and consultants.
not taking your pension fund with a ensure they benefit from the 40 per cent
view to passing it on to your family on tax relief whilst it remains, as they Richard Meek
death may well prove to be a poorer use believe such generous tax advantaged Principal
of a pension fund than taking benefits allowances that only benefit the high Punter Southall Financial Management
and giving away any excess income or earning will not prevail for very long. 1 Colmore Row
capital during your lifetime. In light of Birmingham
this, a number of our clients have now • New investment opportunities B3 2BJ
taken the decision to draw their pension Despite the reversal of much of the
benefits even though they may have no proposed investment choice within
need for the cash. pension funds (particularly around
residential property) there are still new
• Review the pension fund investment options. Accessing specialist commercial • Thinking there is nothing
strategy property funds around the globe seems
In view of the issues raised in the to be of particular interest, also investing
left to do could be a costly
previous point, it may be preferable to in particular ways such as student mistake
have investments that grow outside of accommodation, hotels, and speculative
the pension fund so that the value can land development. It is also possible to
be passed to the next generation rather invest in shares of an unlisted company,
• Beware of the recovery
than run the risk of being forced to buy subject to certain restrictions as to the charge
an annuity at age 75. per cent of a business that one can own
– this has also proved popular.
• Use more generous contribution
• Don’t rely on being able
allowances while still available Summary to pass on your pension
A contribution of £215,000 per annum is While this is not an exhaustive list, it is fund after age 75
now allowed to a pension arrangement important to ensure that you have fully
where income justifies. For those used to considered the impact of A day on your
old personal pension, or post 1987 current financial plans and that (a) valuable • New investment
"maximum funding" limits, this is a big opportunities have not been lost and (b) opportunities
increase, particularly as higher earners you are not liable for potentially penal
would get 40 per cent tax relief. This rates of tax when you take the benefits.
means that a contribution of this amount
would only cost £129,000 net. The
5
New inheritance tax
(IHT) regime for trusts
– part two
This article follows an earlier article in the autumn 2006 edition and outlines some tactics to
deal with the changes introduced by the Finance Act 2006.
Angela Bridges 01603 693415 angela.bridges@mills-reeve.com
6
New trusts Existing accumulation and with effect from 6 April 2006 to include
Any new trust created on or after 22 maintenance (A&M) trusts trusts where minor children or step-
March 2006 comes under the “relevant children of the settlor may benefit. This
These are trusts where children/
property” regime, unless it is a disabled means that, even though gifts into trust
grandchildren will take an entitlement to
person’s trust, or a trust giving capital to are treated as immediately chargeable to
income or capital by the age of 25, but
beneficiaries at 18. IHT, there will be no CGT holdover relief if
for the meantime have no such
the trust is for the settlor, his spouse/civil
entitlement. If no action is taken, most
Under the relevant property regime, gifts partner, minor children or step-children.
A&M trusts will become subject to the
(whether to new trusts or additions to relevant property regime either on 6 April
pre-22 March 2006 trusts) trigger an 2008, or, if earlier, when a beneficiary It’s not all bad news
immediate charge to IHT at 20 per cent becomes entitled to an IIP. Transitional In many cases, the CGT saving by claiming
on the excess above the settlor’s available provisions allow some planning holdover relief on distributing assets from
nil rate band (presently £285,000). Going opportunities as follows: a trust will outweigh the IHT exit charge.
forward there will be periodic IHT charges
at a maximum rate of 6 per cent on the • Terminate the A&M trust before any IIP Since 1999 it has been more income tax
value of the trust assets over the IHT nil subsists and before 6 April 2008 by efficient to receive dividends through an
rate band on each ten year anniversary of appointing assets outright to the IIP trust rather than a discretionary trust.
the trust, and a similar IHT exit charge on beneficiaries – there will be no IHT After 22 March 2006 converting a
capital assets distributed from the trust at charge and CGT holdover relief should discretionary trust to an IIP trust will no
any time. be available. longer trigger an immediate IHT charge. In
the past, a settlor may have gifted stocks
A settlor could consider selling assets at • Convert before 6 April 2008, and before and shares to a discretionary trust (rather
an undervalue to trustees and leave the any IIP subsists, to trusts where than an IIP trust) so that holdover relief
price secured by a charge or promissory beneficiaries are absolutely entitled at could be claimed.
note in favour of the settlor. The 18 – the trusts remain outside the
chargeable transfer is reduced to the relevant property regime and there is no HM Revenue & Customs has confirmed
excess of the asset value above the sale IHT charge when the beneficiaries that if cash is added after 22 March 2006
price. If the excess is within the settlor’s nil become entitled at 18 and CGT and then spent immediately, eg, on a tax
rate band, there will be no IHT payable, holdover relief should be available. (If liability or another trust administration
but watch capital gains tax (CGT) on the the trusts are converted to outright expense, it will not turn the rest of the
sale price. entitlement between 18 and 25, the trust into a settlor-interested trust.
maximum rate of IHT charge is 4.2
Existing interest in possession per cent.)
(IIP) trusts
IIP trusts are trusts where beneficiaries Tax is not the only issue trustees need to
have the right to receive income as it consider, eg, they need to check whether
they have adequate power to convert the • Transitional
arises. IIP trusts in existence before 22
March 2006 continue to be treated under trust. Trustees need to bear in mind the provisions allow
the old rules, ie outside the relevant intentions of the settlor and the needs of planning
property regime. Transitional provisions the beneficiaries. The cost of the relevant
allow some planning opportunities to property regime after 6 April 2008 may be opportunities
prolong the period for which the trust is worthwhile to protect assets for the within the next
outside the relevant property regime by longer term.
11 months
creating “transitional serial interests”
(TSIs), for example: Traps for the unwary
If an IIP which existed before 22 March • Tax should not
• Terminate current IIP before 6 April 2006 is terminated (whether before or
2008 to create another IIP, known as a after 6 April 2008), the termination will
necessarily be the
TSI, in favour of a beneficiary with a be within the “gift with reservation” tail that wags the
longer life expectancy than the current rules. To avoid a reservation of benefit, dog
beneficiary. The termination will be a after termination the original beneficiary
potentially exempt transfer (PET) by the must not continue to benefit or have the
current beneficiary and there will be no possibility of being able to benefit from • The benefit of
IHT charge so long as he survives seven the trust.
years.
CGT holdover
Additions to pre-22 March 2006 IIP trusts relief on a
• Alternatively, put in place a surviving will be immediately chargeable transfers. distribution of
spouse’s or civil partner’s IIP to take The added property will be treated as
effect on death of the beneficiary who relevant property, so needs to be capital may
had an IIP on 22 March 2006. The identified separately on an ongoing basis. outweigh the IHT
spouse exemption will apply on the If the addition were a payment towards exit charge
death of the original beneficiary and the improvement of trust property, there
survivor’s IIP will be a TSI, whether the should be “before” and “after” valuations
death occurs before or after 6 April to calculate the proportion of relevant
2008. property in the trust.
The Finance Act 2006 extended the
definition of a “settlor-interested” trust
7
Shareholders’ agreements –
why bother?
Disagreements between shareholders in private companies share some important common
features. First, they are by definition personal, with limited scope for running away.
Secondly, they usually involve boundaries being crossed, albeit not always intentionally.
These factors inevitably raise the temperature when shareholders disagree. In family
companies, shareholder disputes can create or exacerbate family tensions – an explosive
combination, which can be very disruptive for both business and family life.
However, with a little pre-planning it is possible to reduce significantly the scope for
disagreement between shareholders by agreeing the ground rules and capturing them in a
well-constructed shareholders’ agreement.
The key feature of any shareholders’ The trick is to balance the legitimate The first is the question of who can
agreement, as the name suggests, is that interests of the shareholders and the become a shareholder. Are there special
there must be genuine agreement company, to ensure that due regard is characteristics that any new shareholder
between the shareholders. This is not given to the views of the owners, without must have? Must new shareholders be
always easy to achieve, but it is far better unduly stifling the company’s ability to run family members, for example, or be
that the parties discuss their relationship its business. approved by all of the existing
at the outset, when problems are in the shareholders? These are not questions to
future and hypothetical, rather than try to A good shareholders’ agreement should which there is a one-size-fits-all answer.
thrash out ground rules after the reflect the concerns and aspirations of the What protects the status quo also
hypothetical has become a real and parties, but there are some areas which potentially restricts the ability of a
present issue. normally feature to at least some extent in shareholder to realise full value for his
most shareholders’ agreements. investment.
8
Tim Winn 0121 456 8355 tim.winn@mills-reeve.com
The second is who should be a director consent might be appropriate for a new • With a little pre-planning,
and who should manage the company's company in which all of the shareholders
the scope for disagreement
business, which is not necessarily the same wish to be completely involved, in many
point. Being a director provides not only cases this could prove a hostage to between shareholders of a
status but guaranteed access to fortune. private company can be
information about the company’s current
performance. However, many of these The fourth question is whether a majority reduced significantly
benefits can also be achieved by giving shareholder should be able to compel the
passive shareholders the right to attend other shareholders to fall in with him if he • The trick is to balance the
directors’ meetings as an observer and a wants to sell. This is sometimes referred to
contractual right to management as a “drag along” provision. In an legitimate interests of the
information, without also incurring the agreement with a "drag along" right, one shareholders and the
obligations and risks associated with would normally expect to see a
directorship. corresponding provision whereby the
company
majority shareholders are restricted from
The third question is whether the selling their shares unless an equivalent
company’s management should be free to offer is made for the minority’s shares (a
decide how the company’s affairs are to “tag along” right).
be conducted. It would not be unusual for
certain matters to be reserved to the While it is impossible in this article to
decision of the shareholders or, as a cover all possibilities, I hope that these
compromise, a vote of the board of examples serve to demonstrate why
directors. Those matters might include the having a shareholders’ agreement might
strategic direction of the business and be a good idea. To wait until there is a
other major decisions such as a change of problem is not a prudent option…
premises or taking further bank
borrowings. An allied subsidiary question
is the extent of agreement or unanimity
required for approval. Whilst unanimous
9
Voluntary first
registration – what’s
the rush?
The Land Registry wants your land – registered, that is. It wants this so much that it has
pledged to have all land in England and Wales registered by 2012. With only half of the land in
England and Wales currently registered, this seems like a tall order given that the Land Registry
has just under five years to realise its ambition.
Michael Aubrey 01223 222397 michael.aubrey@mills-reeve.com
10
Advantages of voluntary for his loss. Some have called this • The Land Registry has
registration “Britain’s biggest ever land-grab”.
pledged to have all
The plan is not without merit. There are
many good reasons for voluntarily
The Land Registry is doing all it can to land registered by
encourage landowners to voluntarily
registering land: 2012
register their land. It is even suggesting to
landowners that if they bundle up and
• A registered title is a guaranteed title.
send in their deeds to the Land Registry it • A registered title is a
The guarantee comes courtesy of the
will deal with the registrations, thus
State and, according the Land Registry,
keeping costs to a minimum. This guaranteed title
it is the best form of legal protection
approach should be taken with a great
available.
deal of caution by any landowner, since • Early registration can
the Land Registry’s objectives may not be
• Unlike a bundle of unregistered title save on costs
the same as the landowner’s in such an
deeds, registered titles are kept
exercise. With a state title guarantee at
electronically. This means they are
stake, the Land Registry may seek to
unlikely to get lost, damaged, or
exclude certain areas from registration
• The decision to
inadvertently destroyed.
which may prove critical if there is any register voluntarily will
alternative use such as development in the depend on individual
• Registration simplifies future
future.
conveyancing. This can be an important circumstances
consideration given the imminent arrival
of Home Information Packs. Since there Potential disadvantages
are already several ‘triggers’ for There is a feeling amongst some,
compulsory first registration, it may save however, that despite all of these
time and costs to have the registration advantages there is no need to rush into
done in advance. this. There are certainly disadvantages to
voluntary land registration:
• For large estates, the process of
voluntary first registration can be an • It can be expensive. In addition to the
excellent opportunity to undertake a Land Registry fees, landowners will also
due diligence exercise on the estate. have to find the money to pay for land
This exercise will produce an accurate valuations, the preparation of an
picture of the extent of its holdings and appropriate plan and solicitors’ fees.
the nature of its legal title. Some
landowners find that they don’t • If the land holding is small and the
necessarily “own” everything they landowner resides on it or locally, the
thought they did. They may also use this fear of losing deeds or of squatters
exercise to identify beneficial rights that going unnoticed may not be relevant.
the estate may have which they were
unaware of, for example, the benefit of • The register at the Land Registry is open
covenants imposed when land was sold to public inspection. Therefore, once
in the past. Knowing this early on can your land is registered, any member of
give the owner time to take appropriate the public is able to identify and inspect
steps to protect their interests. the ownership of land.
• The costs of establishing good title in Summary
the future are expected to rise. Early The decision to register land voluntarily is
registration can save costs on future likely to be based on individual
valuations for other purposes, such as circumstances. For some, it may be helpful
estate planning. be seek the advice of a solicitor or
professional property consultant.
• Registration protects some overriding
interests, such as franchises or manorial All owners of unregistered land may wish
rights, which lose their protected status to bear in mind that, if the Land Registry
by 2012. has its way, it is likely that their land will
be registered at some point in the next
• Once land is registered, it is much more decade. For many, there may not be a
difficult for a squatter to claim need to rush things. For most landowners,
ownership to the land by way of however, planning ahead is likely to be
adverse possession. This can be crucial the first and wisest step on the long and
for large land holdings where the owner inevitable path to registration.
may not even be aware of
encroachments along boundaries,
particularly if routine inspections of the
estate are no longer a regular
occurrence. A squatter who is successful
in a claim for adverse possession is not
required to compensate the land owner
11
Enduring powers of attorney –
don’t miss the deadline
Catherine Bacon 01223 222548
catherine.bacon@mills-reeve.com
On 1 October 2007, enduring powers of attorney permanent loss of mental capacity. EPAs can also be
(EPAs) will be replaced by lasting powers of attorney used to delegate, temporarily or permanently, the
(LPAs). The guidelines for the operation of LPAs and the running of your financial affairs while you still have full
forms themselves have yet to be finalised but it is clear capacity. For example, if you are away for an extended
from the draft documents, which have been circulated, period or if you simply want to share the burden of
that the procedures for using and registering LPAs will running your affairs.
be more complex and more expensive than the
procedures currently in place for EPAs. In the last issue Whatever your age and circumstances, we urge you to
of Private Affairs, there was an article which explained, consider signing an EPA before the 1 October 2007
in some detail, the differences between EPAs and LPAs. deadline. If you have already signed an EPA, we
suggest that you check that you are happy with the
EPAs which are signed before 1 October 2007 will individual(s) named as attorney(s). It will not be possible
continue to be valid after that date and they will to change the identity of the attorney(s) after 1
operate under the existing system rather than the October without revoking the EPA and replacing it with
more complicated LPA system. an LPA.
In our experience, an EPA can be a valuable and cost If you would like any advice on EPAs, please get in
effective means of ensuring that one’s financial affairs touch with your usual Mills & Reeve contact.
are dealt with efficiently in the event of a temporary or
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The articles featured in this publication have been selected and prepared with a view to disseminating key information.
Space dictates that any article may not deal with individual concerns but the author would be pleased to respond to specific
queries. No liability can be accepted in relation to particular cases. Before taking action, you should seek specific legal advice.
Copyright in this publication belongs to Mills & Reeve. Extracts may be copied with our prior permission and provided that their
source is acknowledged.
April 2007
