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Family Asset Protection Trusts

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H M Revenue and Customs introduced compulsory registration of all trusts in September 2022. A number of our clients had been contacted by the companies who had advised on and set up, a Family Asset Protection Trust, asking them to arrange registration of their trust.

It has become apparent that many people are being advised by such companies to enter into these trusts at considerable cost believing that their property will be protected against inheritance tax and/or care home fees.

These companies are advising clients to transfer their property or cash into these trusts during their lifetimes and advising them that their property or cash would no longer form part of their estate and that the trust would then own them. The inference being that their value would not be taken into account on death for inheritance tax purposes or when moving into permanent care and calculating their contribution towards care fees.

However, local authorities are permitted to investigate a person’s financial history, including money transferred outright to another person or into a trust. The local authority can deem this to be deliberate deprivation of capital i.e. the transactions had been entered into specifically to reduce the value of a person’s estate. In such instances, the local authority can disregard the transfer and deem the person to still own those assets. The local authority have been known to look back into transactions up to 15 years prior to a person going into care for transfers. The long and short of it is that if the transfer had been entered into due to concerns over care fees, it will be deemed to be deliberate deprivation of capital.

In addition, if an asset has been transferred and the person retains some benefit in that asset i.e. they transfer their house but continue to live in it, they are deemed to have reserved a benefit in the asset. For inheritance tax purposes this is known as a gift with reservation of benefit, which does not reduce their estate for the calculation and its value is still taken into account.

Unfortunately, it appears these trusts, which often cost thousands of pounds, are not correctly explained to clients and they end up entering into what Age Concern describe as “a worthless piece of paper”. Sadly, they can also lead to future costs where the trust company are named as trustees and any changes are needed to the trust.

If you have any queries about Family Asset Protection Trusts or wish to discuss care home fees or inheritance tax planning, please contact our private client team.

Sarah Bruce, Legal Executive, Haverhill/Saffron Walden office
19 April 2023

Changes to tax rules between spouses April 2023

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Under the existing tax rules, a transfer of assets between former spouses or civil partners is made on a ‘no gain or no loss’ basis as long as said transfers take place in the tax year in which the former spouses or civil partners separated, thus any gains or losses from the transfer are delayed until such time that the asset is sold.

However, if the transfer takes place after the tax year in which the spouses separated it is treated as a regular disposal and will be subject to Capital Gains Tax (CGT) in the usual way.

The new rules which relate to transfers which occur after 6 April 2023 will allow for a lengthier period of the ‘no gain, no loss’ rule for up to three years after the year spouses cease to reside together.

Also, the ‘no gain, no loss’ rule will also now apply to assets that are transferred between spouses as part of an order on divorce without a time limit.

Situation 1

A married couple separated in June 2021, being the 2021/22 tax year. They agree that the wife will transfer to the husband her interest in an investment property that they jointly own.

If this transfer occurs in the same tax year in which they separated, then it will not be subject to any CGT further to the ‘no gain, no loss’ rule.

If this transfer of the investment property happens in the following tax year, the following tax year being 2022/23, it will be subject to normal CGT rules based on 50% of the market value less the wife’s 50% share of the purchase costs and accompanying legal fees.

However, if the transfer is deferred and does not occur until after the new rules are applied in April 2023, then it will be subject to no CGT under the new prolonged ‘no gain, no loss’ rule, and the husband will be taken to have received the asset at the original purchase cost.

The above situation will apply to married couples or those in civil partnerships who separated from April 2019 onwards, for the reasons that the new rules will benefit transfers within three years of a separation.

Situation 2

A married couple separated in February 2018. Unfortunately, they could not agree on the division of assets, and so, they decided to instruct legal representatives to issue applications at Court, which leads to lengthy delays. If their matter fails to settle until after April 2023, then the new tax rules will then be effective and any transfers made between them will be conditional on the ‘no gain, no loss’ rule.

Situation 3

A married couple separated in August 2022. Harmoniously, they broker a financial agreement after the application of the new rules (the husband will remain in the former family home and the wife will transfer her interest to him. The wife is to get a 45% share in the proceeds of sale when the house is sold. Consequently, the wife will be permitted to have her CGT Private Residence Relief remain despite the fact that she did not reside in the former family home at the time of its sale.

The CGT consequences of property division on separation or divorce is a complicated area to get to grips with. That being the case, do not delay on getting the right legal advice. Please contact our Family Department here at Adams Harrison on 01799 523441 (Saffron Walden), 01440 702485 (Haverhill), or 01223 832939 (Sawston). enquiries@adams-harrison.co.uk.

HMRC Cash Seizure

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The Finance Bill currently in Parliament will authorise HM Revenue and Customs (HMRC) with the right to seize money directly from the bank accounts of taxpayers who have failed to pay their taxes.

Under the rules, HMRC will be able to take money, but must leave the taxpayer with a minimum of £5,000 in their bank or building society accounts, and can only remove money from accounts containing a minimum £5,000. HMRC will be able to exercise ‘direct enforcement’ to collect tax debts of more than £1,000. It is estimated that this will generate about £100 million a year for the Treasury.

The changes do give the taxpayer the right to object to the County Court, although this may be of little use after the money has been seized.

Problem With Transferring Property To Family Members

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For many people their home is their only or main asset and such people are often concerned about that asset having to be sold in order to meet the costs of care. Often people seek to transfer their homes to third parties (usually their children) to avoid them being brought into assessment, and perhaps not surprisingly there are anti-avoidance rules to prevent such an arrangement being abused.

One businessman has recently found out the risks of transferring his property to his son the hard way when his son’s bankruptcy left the family’s substantial buy-to-let property portfolio exposed to his son’s creditors.

The son’s name appeared on the title deeds of numerous properties for which his father had largely paid. When the son was declared bankrupt, his creditors focused on the portfolio as a potential means of recovering what they were owed.

A judge found that a purported declaration of trust had been post-dated and that both father and son had given unreliable evidence in an attempt to protect what they viewed as family assets. The ruling meant that the portfolio formed part of the son’s property in bankruptcy and was available to his creditors.

If you would like further information about this topic, please contact us today for expert and professional advice.

FATCA Registrations Delay: Important Update

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HM Revenue & Customs (HMRC) has advised that some individuals are experiencing difficulties in validating Foreign Accounts Tax Compliance Act (FATCA) registrations, in advance of the 31 May 2015 deadline for reports.

The advice from HMRC is that you should continue to file your FATCA return as soon as possible and it will not seek to apply a late FATCA filing penalty while these online delays continue.

HMRC has further advised that its published guidance is being updated to include a specific reference to these delays being considered a reasonable excuse to avoid penalties for late filing.

FATCA is US legislation aimed at reducing tax evasion by their citizens. It requires financial institutions outside the US to pass information about their US customers to the US tax authorities, the Internal Revenue Service (IRS).

Woman Jailed For Under Declaration Of Inheritance Tax

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HM Revenue and Customs (HMRC) will not hesitate to bring criminal proceedings when tax evasion is significant, as the recent jailing of a woman who under-declared the Inheritance Tax (IHT) due on her mother’s estate proves.

The executor declared that the value of her late mother’s taxable estate to be approximately £285,000, well under the IHT threshold which is currently set at £325,000. The executor had, however, received substantial cash gifts within the seven years prior to her mother’s death, which should have been included on the IHT returns. The correct value of the taxable estate for IHT purposes exceeded £1.5 million, meaning that the IHT liability on the estate was approximately £500,000.

Pleading guilty to cheating the Exchequer, she was ordered to be jailed for 32 months.

There are a number of ways such evasion can be detected by HMRC.  For example, they operate a tax evasion hotline, they can cross-check values of properties sold against the relevant IHT returns, they can use information gleaned from one tax enquiry to start another and they are sometimes able to ascertain that the way a person lives is not commensurate their disclosed financial means.

Please contact us for expert and professional advice to ensure that you fully meet your responsibilities as an executor.