Legacies Roundup | October2019

It’s been a busy few months for Bates Wells’ Legacies team, with new instructions relating to fees wrongly charged by trustees of a charitable trust, and a dispute relating to monies owed to an estate under the “hotchpot” rule.

In our October 2019 edition of the Legacies Roundup we update on the recent Court of Appeal decision in Cowan v Foreman relating to time limits in 1975 Act cases; take a look at the Office of Tax Simplification’s latest report on its review of Inheritance Tax; and report on the hugely welcome news that the proposed increase in probate fees has been dropped.

For those who were unable to attend, we end with a short report on our involvement with the Institute of Fundraising’s annual Legacy Fundraising Conference.

1975 Act time limits – update on Cowan v Foreman

Readers may remember our comments on the case of Cowan v Foreman, which followed the High Court’s decision to withhold permission for an applicant to bring a claim under the Inheritance (Provision for Family and Dependants) Act 1975 outside of the usual six month deadline from the date of probate.

In this case, Mrs Cowan, the wife of the deceased, had been made the beneficiary of two discretionary trusts. However, Mrs Cowan was worried about the lack of direct provision and control that the trusts provided her. Mrs Cowan did not make an application under the 1975 Act within the six month timeframe, but the solicitors acting for the executors agreed to enter into a “stand-still agreement”, essentially “staying” the limitation period and agreeing not to oppose the application on the basis that the six month deadline had passed.

When Mrs Cowan finally made her claim at court, Mostyn J rejected her application to bring the claim “out of time”, stating that there had been no good reason for the delay. Mostyn J was particularly damning of the use of stand-still agreements, stating that “it is not for the parties to give away time that belongs to the court.

The Court of Appeal has now overturned the High Court decision, thus allowing Mrs Cowan to bring her claim outside of the usual sixth month timeframe. But the Court of Appeal confirmed Mostyn J’s view that the power to extend the six-month limitation period lies solely with the court. The Court of Appeal found that so-called standstill agreements cannot fetter the Court’s discretion to decide to turn down an application made out of time, and made it clear that the most appropriate course of action in most cases would be to issue proceedings within the six month timeframe and to then seek a stay of the court proceedings to allow for time for the parties to negotiate a settlement.

Although the Court of Appeal confirmed that there may be situations where stand-still agreements might be appropriate which is helpful, we welcome the view that there should be certainty as to timescales for parties to 1975 Act cases. This is particularly true for charities, which are often defendants to such actions.

The Office of Tax Simplification’s latest report on its review of Inheritance Tax

In January 2018, the Office of Tax Simplification (“OTS”) was tasked with reviewing administrative and technical aspects of the Inheritance Tax system within the UK. In July of this year, the OTS released its report examining the technical issues and complexities of the system and making recommendations. Within this report the OTS made a number of recommendations as to how the government could simplify and stream-line current tax system. Focus areas include  Lifetime Gifts, Interaction with Capital Gains Tax, businesses and farms, life assurance and pensions, grossing up, the spouse exemption, the residence nil rate band and trusts as well as the reduced rate of inheritance tax which applies where someone leaves 10% of their net estate to charity. The two main themes addressed by the OTS recommendations are fairness for beneficiaries and ease for executors. It has long been noted that the Inheritance Tax system in the UK is incredibly complex, with the general public having little knowledge of the potential Inheritance Tax implications of their decisions, such as choosing to make a lifetime gift.

The recommendations seek to simplify the rules relating to lifetime gifts, including reducing the time period during which lifetime gifts are taken into account on death from 7 years to 5 years and recommending a review of the rules as to how the nil rate band is allocated to lifetime gifts , which can give rise to inequalities between recipients, and unexpected tax bills for some recipients.  The report also aims to clarify guidance as to when a valuation of a business or farm is required.

In relation to the dreaded topic of grossing up, while noting the complexity and unexpected outcomes that the current grossing up rules can produce, the OTS did not recommend any changes.

Of particular interest to charities, the report notes that the charity tax relief where a person leaves 10% or more of their net estate to a charity, which sees the rate of Inheritance Tax payable on their estate reduce to 36%, is “not well understood” and “complicated”. HMRC data shows that this relief has not been widely taken up. Disappointingly, the report concludes that this is because the relief will take time to be bed in and no recommendations are made to change this relief.

Despite disappointment over the lack of recommendations for simplification of the 10% charity tax relief, having reviewed the report, it is refreshing to see constructive recommendations being made, following years of a complicated and often unclear system. It remains to be seen how the government will react to the report and its recommendations.

We will keep our readers abreast of any further updates.

The full report can be found here.

Probate fees – controversial fee increase dropped

Earlier this year we reported on the proposed increase to probate fees, that would have seen those applying for probate in England and Wales pay a fee of up to £6,000 depending on the value of the estate, instead of the current flat fee of £155 via a solicitor or £215 for personal applications.

We referred to the proposed increase in fees as a ‘stealth tax’ for charities: whereas there is a full Inheritance Tax exemption for legacies left to charities, there is no such exemption from probate fees, meaning that estates left entirely to charity would have incurred the much-increased fees thus reducing the amount available to the charity beneficiaries. The Institute of Legacy Management estimated that the knock-on effect for charities would have been an annual loss of a staggering £10 million across the sector.

To the relief of the sector, earlier this month the Justice Secretary, Robert Buckland QC, announced that the plans have been scrapped.

Highlighting a popular concern that the proposed fees increases were really an attempt to force users of the probate service to fund the wider court service, the Ministry of Justice said:

Fees are necessary to properly fund our world-leading courts system, but we have listened carefully to concerns about changes to those charged for probate and will look at them again as part of a wider review to make sure all fees are fair and proportionate.

Leading sector groups, including Remember a Charity and the Institute of Legacy Management, warmly welcomed the government’s back-down.

As ever, we will keep our readers updated with any further or related developments.

Legacies and reputational risk: Bates Wells and the Institute of Fundraising

Bates Wells recently partnered with the Institute of Fundraising for its Legacy Fundraising Conference 2019. Bates Wells’ Leticia Jennings spoke about reputational risks associated with legacies, which continues to be a hot topic for the sector, particularly with legacy giving at a record high. Leticia guided delegates through the law and guidance, and highlighted best practice to help minimise the risks.

Leticia was also on the panel of experts discussing how charities can maximise opportunities to increase the number of legacy donors.

Leticia commented: “the IoF’s annual Legacy Fundraising Conference is always a great event, full of topical and thought-provoking sessions. Although charities continue to face challenges with legacies and legacy fundraising, this year’s income figures demonstrate that there continue to be huge opportunities for charities, which is particularly important as it is often legacy income that keeps many charities motoring.”

If you would like to discuss any of the issues please do contact Leticia.

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of October 31, 2019.