Is there a capital gains tax problem on sale of marital property? Michael Armstrong and Rebecca Anstey write for Taxation
23 October 2023
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Private Client Counsel, Michael Armstrong, and Private Client Associate, Rebecca Anstey, have written a piece for Taxation answering the reader’s question ‘Is there a capital gains tax problem on sale of marital property?’
In the article, Michael and Rebecca focus on a case study of a couple. Mrs B suffered a serious psychotic episode two years ago and is now permanently in hospital care. Mr B wishes to sell their home, so would like to know:
whether principal private residence relief (“PPR relief”) will apply; and
if not, whether he could transfer her share into his own name before selling using the lasting power of attorney Mrs B granted him.
Michael and Rebecca highlight that:
Mr and Mrs B will still be treated as ‘living together’ and having one residence for the purposes of PPR relief unless separated under a court order, by deed of separation, or in circumstances in which separation is likely to be permanent.
If Mr and Mrs B are permanently separated, Mrs B should still be eligible to claim PPR relief on her share of the property as the final period allowance should be extended to 36 months because she is a long-term resident in a ‘care home’ (defined in the legislation to include any establishment that provides accommodation and nursing or personal care).
Where an asset is transferred between spouses, such as the proposed transfer to Mr B, it will be a “no gain, no loss” transfer. This means that, unlike other gifts, no CGT liability should arise as the recipient spouse takes over the other spouse’s acquisition cost. However, previously, this treatment did not apply to separated couples after the end of the tax year in which they separated.
The provisions of Finance (No.2) Act 2023 (in force from 11 July 2023) now mean that if Mr B were to acquire his wife’s share of the property, then this no gain/loss treatment could now continue until the end of the third tax year after the couple ceased living together (even if Mrs B were not a long-term care home resident).
If Mrs B does not have capacity to make decisions, Mr B should be able to use the LPA to manage Mrs B’s share of the property but the court would need to approve a gift of it to Mr B and any sale or other transfer would need to be in her best interests.
An expert’s guide to…Women and Estate Planning – Rebecca Meade speaks to the Dura Society
20 December 2022
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Trusts and Estates (TTE) Senior Associate, Rebecca Meade, writes for The Dura Society and shares steps to take best advantage of her estate planning advice.
Did you know that, statistically speaking, women are more exposed to inheritance tax (“IHT”) than men?
This may be in part because women have a higher life expectancy and are, therefore, more likely to accumulate wealth.
It may also be because, according to a report published by the Office for National Statistics, despite usually being the ‘planning’ sex, 53% of women actually have no estate planning in place to ensure that their wish that assets pass to loved ones is fulfilled.
Emma Gillies to speak at Transatlantic Wealth & Estate Planning conference
16 November 2022
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Private Client Partner, Emma Gillies, has been invited to speak at the Informa Connect Transatlantic Wealth & Estate Planning conference.This London conference features US and UK tax experts as well as specialists in immigration and wealth management, and is designed to provide full coverage of the transatlantic tax ecosystem. Emma will be speaking at the session entitled ‘Estate Planning and Charitable Giving’ alongside Jaime McLemore of Withers and Jo Crome of CAF American Donor Fund.
The conference will take place on 30 November. You can view the full agenda and register to attend here.
Attempts to block probate rose to a record level in England and Wales last year. Challenges to the distribution of inherited estates jumped to 9,926 in England and Wales’s courts and tribunals service centres in 2021, up 37 per cent compared with 2019.
On the rise, Fiona commented: “People are becoming more litigious when it comes to wills. Those who might have accepted being left out of a will 10 years ago may now be more likely to challenge it”.
The full article can be read here, behind the paywall.
With a rise in attempts to block probate, it is imperative to seek robust legal advice to avoid disputes. For more information, please contact Private Client Partner, Fiona Smith, or Head of Contentious Trusts and Estates, Roberta Harvey.
Divided We Plan: Alastair Laing and James Hamilton write for STEP Journal Plus
20 July 2022
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Partner, Alastair Laing, and Associate, James Hamilton, both in our Corporate department, have authored an article for the STEP Journal Plus entitled ‘Divided We Plan’.
In their article, Alastair and James outline the considerations for succession planning and the division of wealth in family offices.
The article highlights that a vast amount of generational wealth is predicted to be passed down over the next 25 years and includes an in-depth review of details regarding the structuring of assets through generations, the complicated nature that may occur regarding the division of assets, private equity fund investments, property matters and disparities in value.
An undisputed legacy – Ensuring your wealth is passed on unhindered
21 June 2022
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Any individual fortunate enough to have generated wealth, or to have been a custodian of family wealth, during their lifetime should plan for how it will be dealt with after their death.
In this paper, we consider nine key steps individuals can take to help ensure that their estates pass to the next generation without disputes or litigation.
A smooth generational transfer of wealth is taken for granted by most, but statistics from the Ministry of Justice show that this might not be the case. Over the past ten years, more than 2,300 will disputes have been heard by the High Court. Many thousands more didn’t end up in court but did destroy numerous family relationships and incur a great deal of costs before being settled.
Before you make your will
Undertake a capacity assessment to avoid disputes
A capacity assessment is undertaken and a report prepared by a medical practitioner, either a GP or a psychiatrist. The report can be used to show that the testator had mental capacity when instructions were given for the will to be prepared/the will was executed.
If the testator is particularly elderly, vulnerable, unwell, or is making significant changes to their will it is possible that the will could be challenged post death on the grounds of lack of capacity. A capacity assessment and report should make it more difficult for the will to be challenged on these grounds.
It is important to note that the instructions to the GP/psychiatrist must explain why the assessment/report is required and set out the rule in the case of Banks v Goodfellow.
Prepare your family members in advance if you have unusual plans for your wealth
Most family members expect wealth to be primarily kept within the family. If this is not how you intend to structure your estate, it is advisable to inform your family of your intentions, however difficult this might seem.
Avoid accidentally ‘creating’ dependants – this can lead to litigation
Another key argument individuals may use to challenge a will is that they were financially dependent on the deceased, and that they have not been properly provided for by your will/under the intestacy rules. It may be surprising to learn that you can ‘create’ a relationship of dependency accidentally, by establishing a regular and long-term pattern of making gifts. If you wish to give money to someone – a child or a grandchild perhaps – it is better to do so in a single lump sum, as this cannot create a relationship of dependency, making it far more difficult for them to challenge your will.
If your family is international, plan for this aspect in detail
It is critical for specialist advice to be taken on the international aspects of a will if the testator and their heirs are living in multiple jurisdictions. Different countries handle inheritance differently, and that can easily end up with your wishes not being followed. For example, some countries do not view a child as a legitimate heir to an estate if their parents were not married when they were born. It is very important for the solicitor preparing the will to have a complete understanding of the family circumstances, this should ensure that the testators wishes can be adhered to irrespective of where the testator or heirs live.
When you make your will
Record all wishes in your will or leave a very detailed letter of wishes if the will creates a discretionary trust
Recording everything appropriately and/or preparing a letter of wishes if a discretionary trust is created will go some way to preventing challenges to a will. However, it might not prevent a claim being brought under the Inheritance (Provision for Family and Dependant’s) Act 1975 or a claim for undue influence or promissory estoppel.
Choose your executors carefully to avoid disputes
If you are leaving real estate as part of your will, it is advisable to name at least two executors. Choose these two individuals carefully, as executors with a poor relationship can easily lead to disputes, as happened in the estate of the renowned architect Zaha Hadid . A dispute between the executors of her estate led to more than four years of litigation following her death, depleting the value of the estate significantly.
Make sure you execute your will properly with witnesses in person
The Covid-19 pandemic led to difficulties for some families in executing a will correctly. Social distancing and lockdown restrictions during 2020 and 2021 meant that some found it challenging to get two witnesses to sign the will in person at the same time. Failure to follow this requirement, set out in section 9 of the Wills Act 1837 can render the will invalid. If you are concerned that your will was not executed properly during lockdown, we recommend you seek legal advice on whether it should be corrected.
‘Competing’ wills in different jurisdictions can lead to litigation
There have been cases where an individual has significant assets in two different countries, and a different will in each jurisdiction that covers all assets globally. This kind of ‘competing will’ situation can end in costly cross-border litigation. If it is necessary to have different wills in different jurisdictions, it’s important to make sure that they complement each other.
After you make your will
Consider a postnuptial agreement for further protection
Some individuals may feel it suitable for their wishes to have even more protection from future disputes. This may be achieved by having their spouse’s acceptance of their will confirmed by a postnuptial agreement. If your spouse has read your will, accepted it in full and contracted separately to respect it following your passing, it is much more difficult for them to challenge it.
Conclusion
An estate dispute between loved ones is difficult for many to contemplate. But, as disputes like these become more common, and the stakes involved in them continue to rise, anyone with significant assets to pass on must consider the steps they should take to minimise the risk of it happening in their own family.
The Forsters team is very well-placed to guide high net worth individuals through the process of estate planning to try to ensure the risk of disputes is minimised when their estates are administered. Their expertise includes some of the highest-value and most complex cross-border estates.
From growing a business to starting a family or handing over control of that business to the next generation, every individual has their own goals to aspire to. Our Private Wealth lawyers advise our clients throughout this family life cycle, providing the legal advice required for specific transactions such as purchasing a home or selling a business, whilst also advising on the long-term opportunities for succession and estate planning.