BR Guide FINAL 20 Feb

15 14 THE IHT LANDSCAPE THE IHT LANDSCAPE Powers of Attorney, Conflicts of Interest and BR Investing When an individual loses mental capacity, their financial affairs may be dealt with under an LPA (Property and Financial Affairs). The LPA must be in place before the individual loses mental capacity. In these circumstances, significant limitations are imposed in relation to lifetime gifts. As the individual who has lost capacity cannot make their own decisions, the option of an Attorney/Deputy, to make an investment that could become exempt from IHT after two years, can often be the only solution. Nevertheless, care should be taken in these cases, and it is important to recognise the potential for conflicts of interest, especially where the fiduciary is a family member and heir. The Court of Protection case of Re MM of December 2016 relating to this issue is worth reviewing, as well as the opinion of Alexander Drapkin, barrister at 5 Stone Buildings. If advisers are considering using Powers of Attorney in conjunction with BR, it’s also worth looking at the Office of the Public Guardian’s additional wording required to give the attorney express powers to delegate investment decisions, published in September 2015. HMRC Judgment In August 2017, the First Tier Tax Tribunal released the First Tier Tax Tribunal Judgment in the case of The Estate of Maureen W. Vigne (deceased) v. HMRC (TC06068). The case was an appeal against HMRC’s decision that a DIY livery service was no more than letting of land and therefore amounted to an investment business, which disqualified it from receiving BR. However, the tribunal judge found that the statute simply requires that a business exists and that the business is not a company consisting wholly or mainly of making or holding investments. It was clear to the judge that a business was being carried on and that valuable services were being provided to users of the livery, such as daily health checks of horses and providing the horses with hay feed during the winter months when the grass might not provide a sufficient food source. These services prevented the business from being one of simply holding investments. Common sense was applied in that the activities being carried out on the land did, to anyone not aware of the distinction between property and other businesses for IHT purposes, look and feel like a business. So, the appeal was successful. This may have an effect on some activities involving the use of land or property where BR would previously have been challenged, as long as the provision of valuable services as part of the business can be demonstrated. Finance (No 2) Bill 2017 A number of proposals put forward in the March 2017 Finance Bill were aborted when the June 2017 General Election was called. However, the following, which may have IHT and therefore BR related consequences, were resurrected in the September 2017 Finance Bill, to take effect retrospectively from 6 April 2017. NON-DOM RULES Individuals who have been resident in the UK for at least 15 of the previous 20 tax years are now treated as UK domiciled for the purposes of all taxes in a tax year – inheritance tax as well as income tax and capital gains tax. This will bring UK estate planning into the scope of some who would not previously have been subject to UK IHT. Non-doms who left the UK before 6 April 2017 will not be subject to the new ‘15 out of 20’ test, provided they do not return. However, if they return they will be deemed domiciled in the UK in the tax year they resume residence if they have not been non-UK resident for at least six full tax years out of the previous 20 tax years. In addition, non-doms born in the UK and who have a UK domicile of origin are now liable for UK income tax and capital gains tax in the same way as UK domiciled persons in any tax year in which they are UK resident, provided they have been UK resident in at least one of the two immediately preceding tax years. The same also applies to IHT. These persons are referred to as formerly domiciled residents or returning UK doms. Any trust, settled by formerly domiciled residents and holding foreign assets, is now no longer regarded as an excluded property trust (for IHT purposes) for a tax year in which the formerly domiciled resident is UK resident. Excluded property status will be reinstated for any year the settlor is no longer UK resident. Moreover, look-through rules are now in place so that, where UK residential property is held for non-doms within an overseas company or structure, whether or not an offshore trust is involved, IHT is applicable. These actions represent another clear widening of the IHT net. The changes to the IHT rules ensure that non-doms cannot hold a UK property indirectly (for example, through an offshore company). This closes the loophole that a large number of non-doms use to avoid paying UK IHT. HER MAJESTY’S TREASURY