Inheritance Tax Update

Inheritance Tax is the successor to what used to be known first as Death Duty and then Estate Duty, and is levied on estates (i.e. property, money, investments and possessions, plus the value of gifts made in the last seven years) over £300,000.

An important exemption is that transfers between husband and wife and, in the last couple of years, civil partners, are normally free of tax. Because of the way in which the tax operates, married couples have often ended up paying more tax than is necessary, but with proper advice and planning it has been possible to use special types of trust, or gifts to their children, in their Wills to minimise the tax on their combined estates.

In October 2007 the Chancellor announced changes to the way in which the tax is calculated so that, with immediate effect, a married couple could between them be exempt from tax on combined estates of up to £600,000 – effectively £300,000 for each of them – without using any special planning. These changes will operate even if the first death occurred before October.

On the face of it, this would appear to make the role of trusts redundant in Inheritance Tax planning. Although the overall benefit of trusts (and outright gifts) has been substantially reduced, there are several reasons why married couples may still consider using trusts:

• Although the change in legislation has been announced, it will not be formally passed into law until this year’s Finance Bill is enacted, probably in July. During that time it is possible that further changes may be made.
• The law could be changed again in the foreseeable future, limiting the effect of the changes currently going through.
• The wording of the proposed legislation contradicts the Government’s apparent intention and until this is resolved it is unclear whether £600,000 will always be available or whether this will be limited in some way.
• Although the Government has indicated its intention to increase the £300,000 figure in line with property inflation, it is under no obligation to do so and the amount of any increase after 2010, when it rises to £350,000, cannot be guaranteed.
• Using a trust can allow any growth in value of the trust assets to remain outside the survivor’s estate, possibly saving Inheritance Tax on part of the growth in value.
• In calculating the exempt amount it will be necessary to take into account all gifts made in the seven years before the first death. This may be difficult to calculate if the first death occurred several years ago; more detailed records will have to be kept in future.
• Trusts can be used to shelter assets for passing on to the next generation. For example, if the survivor needs residential care in the future, the trust assets will not be treated as forming part of the survivor’s estate and need not be used to pay for care fees.
• If the survivor has re-married, or re-marries in the future, no more than one additional amount of £300,000 can be used on the survivor’s death, or passed on to the survivor’s widow or widower. Use of a trust may result in tax savings on all deaths.
• There may be an opportunity to distribute assets from a trust to children or grandchildren, so enabling them to receive an inheritance during the survivor’s lifetime.

Our advice on the use of trusts will depend on individual circumstances. However, there is still no tax disadvantage for married couples to have trusts in their Wills to reduce Inheritance Tax in the future. At this stage, we would recommend that you at least consider the potential advantages of using trusts, and we would advise against making hasty changes to existing arrangements.

If you would like further advice on Inheritance Tax planning, please contact David Kingham at our Redhill office on 01737 854529 or email david.kingham@morrlaw.com; Rebecca Fisher on 020 8971 1037 or email Rebecca.fisher@morrlaw.com

Commercial Buildings Must Go Green

From April 2008, the owners of commercial buildings must obtain an Energy Performance Certificate (EPC) or face fines.

The implementation of the law in this area has been staggered so that by 6 April 2008 newly built or newly leased buildings of over 10,000m² must have an EPC. This obligation extends to buildings of over 2,500m² by 1 July 2008 and to all other commercial buildings by 1 October 2008. There are further regulations that also apply to local authority buildings. The latest Building Regulations will also have an impact on energy efficiency requirements of existing, as well as new, buildings.

Energy Performance Certificates

• The EPC requirement is triggered by the sale, lease or underlease of a property.
• An EPC will not be required when a lease is surrendered, renewed, extended or is subject to a compulsory purchase order.
• The EPC is valid for 10 years unless it is superseded by a requirement for a new EPC.
• An accredited assessor must be commissioned to carry out the assessment.

The EPC is a standard measure of the energy efficiency of a building. The system rates a building on a scale from ‘A’ to ‘G’ where A is the most efficient. If a building has low energy bills, it will be likely to be fairly energy efficient and this would be reflected in its EPC.

An advisory report containing guidance as to how the energy efficiency of the building may be increased will also be prepared with the EPC. The EPC and the advisory report must be registered with the local authority.

Penalties for Non-Compliance
Under the 2007 Regulations governing the law in this area (The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007), a fine of 12.5% of the rateable value of the property will be applicable (subject to a minimum of £500 and a maximum of £5,000) when an EPC is not obtained on the sale or lease of a commercial property.

Green Leases of the Future
It has been suggested that buildings which are less energy efficient may be subject to lower market values in the future. This in turn may impact a tenant’s decision to take up a lease and may affect any future rent review of the building. It is also envisaged that a landlord may be able to demand a higher rent for a lease of a more energy-efficient building.

With the global trend towards environmental protection and the increased interest in preventing climate change, the EPC is another step towards standardising the approach in the commercial sector. There is a definite trend in favour of being environmentally friendly and it is clear that many corporations pride themselves on being energy efficient. It would seem, therefore, that it is in a landlord’s interest not only to obtain an EPC, but to obtain one which contains a good energy-efficiency rating.

For further information contact Nirav Patel on 01737 854510 or email nirav.patel@morrlaw.com

Powers of Attorney deadline

After September 2007 it will no longer be possible to create Enduring Powers of Attorney (EPAs). These are being replaced by Lasting Powers of Attorney (LPAs), which are likely to be more complex and expensive to create.

Morrisons Solicitors LLP is advising clients to draw up EPAs before it is too late. You do not need to see a solicitor to set up an EPA but you may find it helpful to obtain advice before executing the document to make sure that it is valid and to consider every angle.

Below is an outline of the different legislation and documentation involved.

The Power of Attorney
This is a legal process where you hand over to someone else the power to make decisions on your behalf. This can include acting in your financial affairs and dealing with property. The Power of Attorney can only be effective whilst you continue to be mentally capable of managing your affairs.

The Enduring Power of Attorney (EPA)
The EPA is a special type of Power of Attorney which allows an attorney’s authority to continue, even if a person has become mentally incapable of managing his or her own affairs. This is an important part of financial planning, which enables you to choose someone you trust to look after your affairs.

Incapacity can lead to difficulties for the family if a mentally incapable person does not have an EPA (or an LPA after September 2007). In its absence, it would be necessary for an application to be made to the Court of Protection (a public body which looks after the affairs of people with mental incapacity), to appoint a ‘receiver’, which is an expensive and time-consuming process.

The EPA is simple to create by completing a four-page form. It can take immediate useful effect or, if you wish, can be used only if you become unable to manage your affairs in the future. The authority of the attorney can deal with all of your affairs or may be limited to specific matters, such as buying or selling a house, or operating a bank account.
If you become mentally incapable, your attorney is required to register the EPA at the Court of Protection and you will not be able to cancel it. Of course, before an EPA has been registered you can cancel it at any time.

An existing EPA will continue to be valid after Lasting Powers of Attorney are introduced but EPAs can only continue to be signed up to and during September 2007.

Lasting Powers of Attorney (LPAs)
There will be two types of LPAs. One will cover decisions over health and welfare and the other will be for finance and property. Both forms are likely to be 10 pages long, and a certification of the mental capacity of the person granting the LPA will be required in both cases.

Jessica Richards, Solicitor, says, “Whereas EPAs can be used by your attorney immediately, LPAs will need to be registered before they can be used and there will be a fee for this, although the amount has yet to be confirmed."

Morrisons has considerable experience in the area of powers of attorney and we are happy to discuss making an EPA either at our offices, or by home visit if necessary. If the deadline is missed, you may find it helpful to consult a solicitor when creating an LPA to make sure that your particular requirements are met.