Calculating inheritance tax (IHT) and exit charges for IHT

CALCULATING INHERITANCE TAX

Step 1: Calculate the cumulative total and find the remaining NRB.

Has the testator given any lifetime gifts? (e.g. a car worth £5,000 to his daughter in May 2009)
Are there any exemptions which apply to those gifts? (Annual exemption of £3,000 per year (can back-date unused exemptions by one year using a max of £6,000), spousal exemption, gifts in consideration of marriage, business property relief etc...) If so, reduce the gifts by the exemption rate, then add the cumulative total together. Take the cumulative total away from the nil-rate-band of £325,000 (NRB) and this figure is the new NRB figure to be deducted at Step 6.

Step 2: Work out what property falls inside or outside of the taxable estate.

Property falling outside the estate will be foreign property, life interest trusts in which the deceased was a remainderman but the life tenant is still alive, discretionary pension schemes, and insurance schemes written in trust.

Step 3: Calculate the taxable estate by adding together all property which does not fall outside the scope.

Step 4: Deduct debts (this may include funeral expenses, credit cards, etc)

Step 5: Deduct exemptions and reliefs (NB: these must only be those which apply on death e.g. spousal, charity, business property, agricultural property)

Step 6: Take away the remaining NRB from Step 1 and then tax at 40% to find the total IHT sum due.



CALCULATING EXIT CHARGES FOR IHT

Exit charges may be due where a distribution is made from a discretionary trust or a life interest trust.

Step 1: Ascertain the Hypothetical Chargeable Transfer (HCT) i.e. the amount of money in the trust

Step 2: Calculate the tax on the HCT by removing the NRB of £325,000 and then taxing at 20%

Step 3: Work out the Average Rate using the following calculation: Step 2/Step 1 x 100

Work out the Settlement Rate using the following calculation: Average Rate x 30%

Step 4: Ascertain how many 'quarters' (i.e. 3 months - there are 4 quarters in a year) have passed since creation of the trust; divide this number by 40. Then multiply the answer by the sum of money which is leaving the trust (e.g. if £100,000 is being given to the testator's son then £100,000 is the value leaving the trust) and multiply by the Settlement Rate percentage.

i.e. X/40 x 'amount leaving the trust' x SR%

The answer is the value of the exit charge.

Private Client/Wills and Probate: Variations and disclaimers of beneficiary entitlement

Where a beneficiary receives entitlement under will or intestacy but does not wish to keep that benefit for themselves, there are 2 main options.

Variation - used where the beneficiary wishes someone else to take the benefit
Disclaimer - used where the beneficiary refuses the gift entirely

The governing law is s.142 Inheritance Tax Act 1984 which applies to both variations and disclaimers.

Anyone over the age of 18 with sufficient mental capacity is able to vary/disclaim.

The conditions that must be met are:
- In writing
- Within 2 years of the death
- Not for money or any other form of consideration
- HMRC must be notified where additional tax is due

Variation may be over whole or part of the entitlement; disclaimer must be over the whole.
Variation may be before or after acceptance of the gift; disclaimer must be before acceptance.

Tax consequences of a variation or disclaimer: under usual rules, giving an interest away would be classed as a PET (Potentially Exempt Transfer - IHT is only payable if the person giving the gift dies within 7 years) for IHT, and would be a 'Deemed Disposal' for CGT. However, as long as s.142 IHTA and s.62(6) TCGA are adhered to, no tax will be payable.

Private Client/Wills and Probate: Tax options for dealing with post-death asset losses

Sometimes when a testator dies and an asset within his estate is sold, that asset will produce a loss. i.e. the asset will be worth less at the point of sale than it was at the testator's time of death.

In order to reduce the tax bill, there are circumstances in which the executors will be able to claim tax relief on such a loss. These circumstances are: (1) land that has sold and made a loss within 4 years of death, and (2) shares that have sold and made a loss within 1 year of death.

If one of the above situations applies, the executors will have two possible options:

OPTION 1: Claim 'IHT Loss Relief' - this has the effect of 'pretending' the asset was worth X at the date of the testator's death. X = the current, lower value of the asset. This means the executors can claim a refund from HMRC on the difference between the old value and the new value of the asset.

For example: the testator's shares in Tesco Plc were worth £6,000 at the date of his death but when they were sold 6 months later they were only worth £4,000. IHT Loss Relief would pretend that at his death they had been worth £4,000. This means that too much IHT was paid to HMRC at the time of death, and a refund of £2,000 is now required.

OPTION 2: Offset CGT losses against CGT gains made in the same tax year - this option can only be used where 'gains' have been made in the same tax year. The effect will be to reduce the entire CGT bill for that year.

For example: (continuing on from the above example) if the testator's house had been sold at a gain of £10,000 (it was worth £190,000 at death but sold for £200,000) but then a £2,000 loss was made on his shares in Tesco Plc, the executors would be able to off-set the loss of £2,000 against the gain of £10,000. The total CGT liability would be £8,000.

NB: it is NOT possible to use both IHT Loss Relief and also CGT relief. This is because if IHT Loss Relief is claimed, we are pretending that the death value was the same as the sale value, and therefore there has not been any loss in which we could off-set CGT!

Succession: Reform of Intestacy Rules (short essay answer)

Essay answer:

Intestacy law is governed by the Administration of Estates Act 1925 and the Non-Contentious Probate Rules. The law on intestacy is somewhat controversial, particularly as regards the benefit received by the surviving spouse on the intestacy of a partner. It has been said that the law has developed in line with the rising property market – giving spouses a more realistic chance of being able to remain in the matrimonial home – although for the issue left in any given case, this is arguably unfair and fails to give effect to the deceased’s true wishes.

The current intestacy rules under Part III AEA set out that where the deceased leaves issue who have obtained the age of 18, the surviving spouse will be entitled to a take a fixed net sum of £250,000 with a rate of 6% interest, personal chattels – for example, a yacht in Re Chaplin, and a watch collection in Re Crispin’s WT – and a life interest in half of the residue. There has been some debate as to the effectiveness of retaining life interests as they as somewhat outdated, however, the courts have not yet reformed this. The residue of the estate once these have been distributed will be shared by any issue on life interests.

Usually it would be pertinent to ascertain which assets within the estate can be classed as personal chattels, however the fixed net sum provided for ‘spouses with issue’ already exceeds the general assets of many individuals. Thus, the surviving spouse in many instances will be entitled to the whole of the estate. Unfortunately this means that none of the issue will take any benefit.

This outcome demonstrates just a handful of the problems associated with not leaving a will. In the extreme, the estate may pass bona vacantia under s.46 AEA. More common problems, however, relate to not fulfilling the deceased’s wishes. Intestacy law, for example, will not concern itself with delving into family relationships to ascertain whether the deceased really would have wanted his spouse and issue to benefit – the rules, by nature, have to be rigid in order to apply to a multiplicity of circumstances, but this often doesn’t suit individual situations.

The law of intestacy also only makes provision for family, perhaps because it would be too cumbersome to attempt to provide for friends too. Thankfully the Inheritance (Provision for Family and Dependants) Act 1975 provides a solution to this problem, although attaining locus standi can bring a plethora of its own problems.

In conclusion, although the rules of intestacy may be seen as unfair, this stresses the importance of creating a valid will. As stated above, there may be some redress through the family provision legislation although the certainty of this is not guaranteed as the courts are often reluctant to provide for grown-up children, as demonstrated in Re Coventry.

EU Law: Gender Equality - the basics

Gender equality was introduced by the Treaty of Rome in 1957.

Treaty of Amsterdam increased the power by introducing Article 19 TFEU on combating discrimination.

The Charter of Fundamental Rights has also added additional protection for citizens.

Article 157 TFEU stemmed from the Defrenne case, in which the French government were worried that they were at an economical disadvantage because their law was already enforcing equal pay for men and women, where other member states were not yet obliged to do so. Making Article 157 TFEU directly effective in all member states meant that not only were France back on par with the other member states, who now had to adhere to the EU provisions providing equal pay for men and women, but it also gave additional rights to women across Europe!

Gender equality is now governed by the Recast Directive 2006/54 where previously it existed in the form of 3 different equal treatment directives. Namely: equal pay, equal treatment and social security.

Discrimination in pay: Defrenne v Sabena demonstrated DIRECT discrimination, whereas Jenkins demonstrated INDIRECT discrimination. Cadman wasn’t a case of gender discrimination but of other discrimination in the work place. It established that paying longer-serving employees a higher wage than newer employees was discrimination where the difference in pay was not based on skills. Cadman set a precedent that all wages must be based on the skill set of the employee, as opposed to any other grounds such as gender or length of service.

Meaning of pay: Direct payment would be in the form of money. Indirect payment can include all the additional benefits provided by an employer in exchange for work. In Garland the court held that travel facilities constituted pay, thus when retired males were permitted to continue using their travel benefits but the women were not, it gave rise to discrimination. In Rinner-Kuhn the court established that sick pay constituted payment in kind. In Barber the court held that redundancy pay was also a form of payment, whether or not the person was voluntarily made redundant. In Gillespie the court said that maternity benefits were pay, although it’s important to note that there can be no comparator when the case involves pregnancy, for obvious reasons. In Bilka-Kaufhaus an occupational pension constituted payment.

Work of equal value: The law on gender equality in the work place started off on equal pay for equal work, i.e. where the male and female were doing the exact same job but being paid differently. However, all legislation changes since the Treaty of Rome have extended this principle further, and now the EU is equally as concerned with ‘equal pay for work of equal value’. This means that the male and female do not need to be doing the same job but their contributions to their respective fields should be seen as equally weighted. Enderby concerned a pharmacist and a psychologist being paid different wages, the female counterpart claimed that she was being discriminated against as they were doing work of equal value. The court agreed that although the job tasks were different, they were doing equal value work. This may seem confusing because it’s so difficult to quantify the roles done in different professions and whether their contributions are ‘equal’, however, the NHS have adopted a system of ‘banding’ where this works surprisingly well. The employees of the NHS will be banded within their fields, depending on their level of expertise, so whilst some jobs (for example, a nursing assistant) may go in as a Band 1 and may only go up to a Band 4, others (for example, a surgeon) may go in at a Band 6 and go up to the highest level.

One case where the courts held it was legitimate to pay the male and female differently was Brunnhofer, in which two employees of a bank employed at the same time and in the same job category, fulfilled different roles and tasks. The male was paid more because his work involved more arduous tasks than his female counterpart. She claimed it was discrimination but the court disagreed.

Burden of proof: Always lies with the complainant to prove that she has been discriminated against. Must prove 1) they have been paid less, using a comparator to prove this, and 2) they were doing work of equal value. In Enderby the burden of proof shifted to the employer, which was an exception to the 

Positive action: benefits minority groups but disadvantages majority groups. For example, always choosing females over males; is similar to positive discrimination.

In Kalanke the employers had a rule that where a male and female candidate, at interview, were equally qualified for the job, they would always hire the minority candidate to restore the gender balance in the firm (for example, a lack of males in the firm, would employ the male). It was a neutral rule. Following this case, the Member States and the Commission expressed dissatisfaction with the way Kalanke was decided, since it was often necessary to restore the gender balance in a company. The Commission clarified the position and when the next case, Marshall came along, it was decided that it would NOT be discriminatory to choose the under-represented sex where the candidates were equally qualified, however the firm should be flexible with that rule and not entirely rigid. Finally Abrahamsson stated that there could be no preference towards a particular gender or minority party.

Pregnancy: Directive 92/85/EEC provided additional rights for those women already in work as opposed to those looking for work. The Dekker case occurred prior to the creation of the Directive and certainly demonstrates why further law was required in the area, as a woman was simply refused employment after interview on grounds of being pregnant.

However, since the enactment of the Directive, there have still been instances of discrimination. Webb for example, concerned an employee on maternity leave who was replaced with another female, who turned out to be pregnant. The employer dismissed the replacement woman on discovery of her pregnancy. Tele-Danmark concerned a lady who was successful at interview and was hired for the job, but later dismissed when the employer found out she was pregnant. Interestingly, the job in this case was only scheduled to be for a 6 month period, therefore it seems strange that the employer would dismiss the woman, unless she was in the last stages of her pregnancy, because she’d be able to complete most (if not all) of the work. In Melgar the woman had worked for the company for approximately 15 years, having had her contract renewed after each year of employment. However, on discovery of her pregnancy, the employer refused to renew her contract and the courts said that the employer must prove that the refusal to renew was based on some other reason (e.g. no longer needed her or she was no longer fulfilling her duties) other than pregnancy, otherwise he would be liable for discrimination.

The case of Hertz demonstrated that the Pregnancy Directive will not protect women outside of their pregnancy or maternity leave. The woman was suffering from a pregnancy-related illness which caused her to take considerable absences from work after her maternity leave. The courts said that the employer was within his rights to dismiss her as the illness could no longer be related to the pregnancy and the time limit fell outside of the scope noted in Article 10 Pregnancy Directive. In contrast to Hertz, Brown concerned a woman who suffered from a pregnancy-related illness during her pregnancy but before the start of her maternity leave. The employer was discriminating against her when he dismissed her, as the courts held that she fell within the scope of Article 10 which states that a woman cannot be dismissed from the beginning of her pregnancy to the end of her maternity leave. She was thus protected by the directive.

Paternity: For many years, the issue of pregnancy only concerned women in the work place and the rights of mothers to stay at home with their children following birth, however the issue of fathers is now becoming increasingly pertinent. Cases such as Hoffman (refused the state maternity benefit whilst on unpaid paternity leave) and Commission v Italy (refused the right to paternity leave) demonstrate that fathers were being discriminated against. The case of Roca-Alvarez has demonstrated that fathers are gaining more and more rights, as the Spanish authorities said that fathers were able to use part of the mother’s remaining maternity leave, when the mother returned to work. Interestingly, this is a topical issue in current news as the UK government have proposed to extend the rights of new fathers, allowing mothers in the UK to transfer the remainder of their maternity leave to their partners, allowing women the right to return to work sooner and men the right to bond with the child, where previously UK law had shown no interest in swapping the gender roles from woman as mother and father as worker or bread-winner.

Income Tax

Calculation:

1) Add together gross income (this means the whole sum before tax is deducted) from all sources.

Where tax has already been deducted at source (e.g. by employer), use this calculation to gross up:

- For interest = net interest x 100/80
- For dividend = net dividend x 100/90

2) Then take away any charges (e.g. interest paid on loans or pension scheme contributions)

3) Then take away the personal allowance of £9,440

If the individual's income is over £100,000 use the following calculation: £9,440 - ((net income - £100,000)/2) = reduced allowance to be deducted.

4) Apply the rate of tax in the following order: Non-savings, Savings, Dividends.

Rates:
Basic Rate - £0 - £32,010 = 20% (or 10% for dividends)
Higher Rate - £32,010 - £150,000 = 40% (or 32.5% for dividends)
Additional Rate - over £150,000 = 45% (or 37.5% for dividends)

5) Add together the tax calculated for each type of income at step 4.

6) Take away tax deducted at source (i.e. in step 1 if you had to gross up the interest or dividend, now take away any money added on)

THE FIGURE YOU END UP WITH IS THE AMOUNT PAYABLE TO HMRC

Interview tips: How to answer "What are your weaknesses?"

You’re at the interview of your life and you’re gleaming as you glowingly, successfully deliver the answer to “What are your strengths?”…..and then the dreaded question comes; “So tell us about your weaknesses?”

HORROR!!  Is this the moment you lose the job you haven’t got yet?

Of course not, because the answer to that question and key to hooking that job is right here:

a) Don’t mention a weakness that is a key/core skill for the job you are interviewing for, as the interviewer might doubt your suitability for the position altogether; so for example, saying that you are nervous about group presentations might be acceptable if you are interviewing for an office admin position, but not for a project manager; and

b) Use your weakness in context, don’t just come out with it, then ‘um’ and ‘ah’ as you try to squeeze it into possible context, and don’t say what it is and pause (that is an awkward space after a negative) for the next inevitable question “so what did you do about it then?”.  Turn it immediately into a positive, and without being prompted.  Continue to discuss how you have turned this weakness around to minimise its potential harm to your business.

Example: “I’m a perfectionist” - do not use this wording in reality as every other candidate will have; it is tiresome, lacks originality and after all, you do want to stand out from all the other candidates (for all the right reasons).

So, it might sound like this: “Over checking my work has sometimes been a problem for me.  In the past, I have wasted time double or triple checking a job, because I have not entirely trusted it was right the first time for the client on a big order, or because it was carried out by another member of staff.  Whilst checking the job is always essential, particularly when the buck ultimately stops with me as a manager, I have now put in place a check list system, so that I can just check the job once and know in my mind, the client’s order can be shipped without wasting time worrying about it.  This has had an unexpected knock on effect, that because I just worry about the work less, I have more confidence in leaving my staff to carry out the job, so I find that I can delegate tasks better and micro manage their work less, all because at the end of the job, I know I can simply check off once the work that has been done and send the order out with confidence.”

Perhaps “Organisation” is the issue, as you had a desk like a tornado hit it and were fed up of feeling rushed all day at work, and going home feeling frazzled, unsettled and unaccomplished all evening…so maybe you’re telling the interviewer that you decided to get organised and prioritise your day better – you decided that emails would be checked and responded to as far as possible in the first 30 minutes of each day, which gives you chance to have your morning coffee whilst you respond to queries/orders, and then from your emails, you know what the demands of the day are on you, so you then outline a work plan of attack for the day, so that instead of rushing through the day and letting down your colleagues with ‘sorry, I’ll do it in a bit’, you can respond accurately “well I must do this task before anything else, which will take about half an hour, and then your task is the next priority, so I will be with you afterwards".  Describe the knock on effect that you believe this has with your colleagues around you having more confidence in how you process your workload - perhaps less rushing has lead to fewer mistakes and you go home at the end of the day happier & more content and able to enjoy your evening, because you feel accomplishes.  In effect, it has affected your whole quality of life, and you did that for yourself.

Ultimately, whether or not you are gunning for a sales position, sell, sell, sell yourself.  Smile, and deliver your weakness as confidently and positively as if you were waxing lyrical about your strength, because in effect, this is what your weakness must masquerade itself as!

And finally....good luck!! :)

Written by Helen Gent  LL.B(Hons) CeMAP

Family Law: Domestic Violence basics

Legislation: 

Family Law Act 1996, Part IV and the Protection from Harassment Act 1997

Background and statistics:  

Recognition of the need to protect victims started in 1970s after a feminist movement.

Domestic violence statistics: 1 in 4 women and 1 in 6 men will experience physical abuse from their partner or ex-partner in their lives. Domestic violence causes more deaths in women aged between 19 – 44 than war, cancer or car accidents.

Orders:

Non-molestation order – s.42 prohibits the respondent from molesting a specified individual and any relevant child. May be a specific order or a general order. May be for a specified length of time or until further notice.

Occupation order – s.33 orders the respondent to leave the matrimonial home. This is an extreme course of action and Re Y said it should be “the last resort in an intolerable situation”. Interests of the children are not paramount. Conduct is not considered.

Cases:

R v R – abolished marital rape

Yemshaw – domestic violence is not limited to physical but included threatening and intimidating behaviour.

Davis v Johnson – domestic violence is any threat to mental or physical health.

George v George – abusive letters and shouting obscenities

Horner v Horner – upsetting notes and intercepting journey to work

Spencer – rifling through handbag

Johnson v Walton – must intend to cause distress or harm

Wootton v Wootton – no intention but did cause physical harm so an order was still appropriate to protect victims

P v P – court has to decide between “the compulsive behaviour of that most unfortunate individual and the safety and well-being of his family”

Banks v Banks – elderly woman had dementia – order would not help

Lomas v Parle – breach of a non-molestation order taken very seriously

Equity and Trusts: Duties and Powers of Trustees

Trustees’ duties and powers

Accepting the trust: must investigate any possible breaches; inspect any relevant documents; know and accept the terms of the trust; and ensure the property is vested.

Duties: 

Treat all beneficiaries the same 

Do not delegate 

Do not profit from the trust

Provide information to beneficiaries

Must not act gratuitously

Powers must be exercised unanimously

Powers: 

Remuneration for professional trustees

May delegate to a specialised professional

May invest the property

May insure the property

Dealings with land.

Power of maintenance: s.31 – providing the beneficiary with an allowance out of the income from trust property. The court also has discretion to order this. It may also be expressly requested or permitted by the trust document - Re Stapleton. Should be for the beneficiary’s maintenance, education or benefit. May be expressly excluded by the trust document - Re Turner’s WT.

Power of advancement: s.32 – providing the beneficiary with the capital they would be entitled to anyway, before it becomes due. Pilkington v IRC  - wide definition of benefit and advancement under statute. Limitations to the power: may only ever give up to half of the beneficiary’s interest in advance, any gift given early will be considered and deducted when it eventually becomes due, and it must not interfere with the interest of any other person. Re Pauling’s Settlement Trusts – 1) Is it in the beneficiary’s interests? 2) Have the beneficiaries been treated even-handedly? 3) Has the trustee exercised his fiduciary power correctly?

Equity and Trusts: Breach of Trust

Breach of Trust: Remedies

Personal remedies

Must establish 1) breach occurred, 2) causal link between breach and loss, 3) no defence applies, 4) no applicable exclusion clause

Duty of care – s.1 Trustee Act 2000.

Lay.man trustee – ‘ordinary prudent man’ test under Speight v Gaunt; 

Professional trustee – higher duty of care, see s.1(1) – confirmed by Bartlett v Barclay’s Bank.

Exclusion clause – limits the liability of a trustee. 

Armitage v Nurse – excluded all negligence except fraud; 

Walker v Stones – one judge said a clause could even exclude a trustee who knew himself to be in breach but believed it was in the beneficiary’s best interest – this is highly controversial; 

Re Clapham – area is ripe for reform.

Joint and several liability – Bishopgate Investments v Maxwell

Compensation/restitution – Re Dawson – put the trust back in position it would have been in

Remoteness and foreseeability – Target Holdings v Redferns

Defences:

1) Court discretion where T acted honestly and reasonably, 

2) Beneficiary’s consent/acquiescence, 

3) Impounding a beneficiary’s interest under s.62, 

4) Time limit s.21(3) Limitation Act, 

5) Bankrupt s.128 Insolvency Act

Proprietary remedies: 

Tracing = act of following property and reclaiming it. 

Advantages of tracing: queue jumping past creditors, benefit from any increase in asset value, available when personal remedies are not.

Usually occur in two main circumstances: misappropriation of property into mixed funds, OR overpaid beneficiary/payment to person not entitled.

Three requirements – 1) Initial fiduciary relationship, 2) Property in a traceable form, 3) Not inequitable to trace.

Mixed funds: Re Hallett’s Estate – trustee presumed to spend his own money first.

Rule in Clayton’s case – First in, first out. Although where a volunteer is involved, may take Pari Passu (in proportion to contributions). 

Roscoe v Winder – trustee cannot benefit from the first in first out rule. 

Barlow Clowes v Vaughan – first in first out rule will not be applied where it would lead to unfair results.

Limits to tracing:

1) Bona fide purchaser, 

2) Dissipation of property, Re Diplock, 

3) Unascertainable property, Re London wine co,  

4) Inequitable to trace, Lipkin Gorman.