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Patriarch’s Succession Planning Triggers Ruinous Family War

In a thought-provoking example of the best laid succession plans leading to grave and unforeseen consequences, a landowner’s lifelong obsession with avoiding ‘ruinous taxation’ was the root cause of a venomous dispute that tore apart his family after his death.

John Vincent Sheffield had been left with the ‘mental scars’ of seeing his family's fortune severely depleted by death duties when he was a young man and was determined to avoid the same happening again. His efforts to rebuild the family holdings saw him rise to become Chairman of a public limited company and establish a 1,000-acre farming estate in a prime corner of Hampshire.

Mr Sheffield’s fervent wish was that the estate should pass to his heirs intact. He died, aged 95, in 2008, unaware that his attempts to minimise the tax authorities’ share of his fortune would ultimately lead to a High Court dispute that set his grandson, John, against the estate trustees, including his father, Julian.

After being advised that he could save on Capital Transfer Tax by making lifetime gifts to his heirs, Mr Sheffield had signed documents in 1983 that handed a 25 per cent share of the net income from the estate to John, who was then aged 19 and in his second year at university.

John did not read the documents properly before he signed them and his grandfather led him to believe that he would not see any real financial benefit from the transaction until after his death. It was only in 2004 – by which time John was bitterly estranged from his father and other members of the family – that he discovered the truth about the gift and the income rights that no-one had ever told him about.

Ruling in favour of John following a week-long hearing, the High Court found that there 'could be no real doubt' that the true effect of the gift had been 'deliberately concealed' from John and that he had been entitled to a 25 per cent share of the estate's net income since the day the documents were signed.

By retaining his income from the estate and continuing to behave 'as if nothing had changed' until the day he died, Mr Sheffield had acted in breach of trust. At no time was John consulted, as he should have been, about any aspect of the management of the estate and Mr Sheffield had continued to live free in his home on the estate when, in reality, he ought to have been paying rent to his grandson.

The court's decision was a devastating blow to the family trust that owns the estate as it meant that John was entitled to be paid a 25 per cent share of its net income for 25 years, between 1983 and the date of his grandfather's death. The Court also found that he should be compensated for the lost rent on his grandfather's home and for Mr Sheffield's failure, in breach of trust, to properly exploit opportunities for commercial shooting on the estate – something which he had ‘simply never considered’ during his lifetime.

The estate trustees had argued that John was well aware that the 1983 transactions were part of his grandfather’s estate and tax planning. It was submitted that there had been ‘an informal arrangement’ between John and his grandfather that the former would receive no income from the estate until after the latter’s death.

But the Court noted that, if that were so, the gift to John was ‘a sham in its classical sense’. The trustees had failed to prove the existence of any such side agreement and the documents signed in 1983 ‘took effect in accordance with their terms’, conferring an absolute right to 25 per cent of the estate's net income on John.

Post-Mortem Vigilance Failed to Defuse Family Dispute

A widow who hesitated for more than six years before taking legal action, despite her conviction that her wealthy husband had not made reasonable financial provision for her in his will, has paid a heavy price after the Court of Appeal ruled that her claim had rightly been dismissed on grounds of delay.

Successful solicitor and property investor, Clive Zola Berger, who left a £7.5 million fortune, had written a letter shortly before he died urging his sons to maximise their step-mother's income for her lifetime and to avoid family squabbling over his estate. He signed off with the words ‘I shall be watching!’

But the prospect of post-mortem surveillance was not enough to prevent a bitter legal tussle in which his widow, Rosana Berger, accused her stepsons, as executors of the estate, of starving her of the income she needed to live in reasonable comfort. The 84-year-old argued that she needed more than £220,000-a-year to keep herself in the style that her husband had clearly intended.

Lawyers representing Mrs Berger submitted that her net income of £72,000-a-year was nowhere near enough to maintain her home - an eight-bedroom mansion valued at £4.5 million over which she holds a life tenancy – to pay her domestic staff and to cover her other reasonable out-goings.

She launched proceedings under the Inheritance (Provision for Family and Dependents) Act 1975 seeking reasonable provision from her husband’s estate. However, her claim was dismissed at the County Court on the basis that it had been brought far outside the strict six-month time limit laid down by the statute.

Ruling on her appeal against that decision, the Court found that the trial judge had erred in his assessment of the merits of Mrs Berger’s claim and that she had an 'arguable' case that, despite her husband's dying wish that she receive a generous income, the terms of his will did not provide for her adequately.

However, in dismissing her appeal, the Court noted that Mrs Berger would not have needed anyone's permission to launch her claim if she had done so within six months of her husband's death. Although she had been understandably reluctant to air the family dispute in court, the delay of more than six-and-a-half years meant that it was inappropriate for her claim to proceed.

Urging an end to the legal wrangling, the Court noted that Mr Berger’s sons had 'shown an appreciation of their obligations' as trustees of his estate and expressed the hope that, in a spirit of compromise, a way could be found to make ‘suitable provision’ for their step-mother’s income needs.

Mr and Mrs Berger were together for 36 years until his death and she had helped to bring up her step-sons from boyhood. His estate included half of a £1.2 million ranch in Arizona, three London flats and shares in his property company worth almost £3 million. Less than three months before he died, he had written a letter urging his sons to use their best endeavours to maximise their step-mother’s income and to ‘make absolutely sure that the estate is not involved in the arguments and problems that can so often arise in probate’.

Bride’s Wedding Jewellery Seized by Customs Officers

A newly-wed who was stripped of her wedding jewellery by customs officials as she returned to the UK following her marriage celebration in Pakistan has had her hopes of getting it back boosted after the First-Tier Tribunal directed a reconsideration of her case in the light of the symbolic and traditional factors involved.

The Muslim woman had been given gold jewellery by members of her husband's family following their marriage. When she flew back to Birmingham Airport wearing the gifts, they were seized by customs officers on the basis that their value – approximately £2,850 - exceeded the maximum permitted allowance for 'other goods' being brought into the UK from outside the European Union.

She appealed to the Director of Border Revenue who declined to return the items after a reviewing officer expressed the view that she had deliberately tried to avoid paying duty on them. However, in overturning that decision, the Tribunal found that her account of what happened at the airport was ‘entirely truthful’.

The woman argued that it was traditional for the groom's family to dress the bride in the jewellery that they have given her and that was why she was wearing it when she arrived at the airport. The Tribunal found that there was no reason to doubt her credibility and that the reviewing officer had failed to take into account ‘the traditional and symbolic significance’ of the jewellery.

Taxman Issues Final Warning for Second Property Owners

HM Revenue and Customs (HMRC) have issued a reminder that people who have sold properties, either in the UK or abroad, that were not their main residence have one week (until 9 August)  to disclose any capital gains on which Capital Gains Tax (CGT) is due.  Any tax due as a result of a disclosure must be paid by 9 September.  Those who come forward voluntarily will receive more favourable treatment than those identified by HMRC as not having paid what they owe.

HMRC will be examining sales of properties which were not the main home of the owner but where no CGT has been paid.  Where HMRC discover that CGT should have been paid, they will raise a charge for the appropriate tax plus interest and, normally, penalties. In extreme cases, HMRC will prosecute.

For more details, see the HMRC website.

New guidance on decision making for charity trustees

In the wake of a number of high-profile disputes involving charity trustees, the Charity Commission has today issued new guidance on decision making for charity trustees.

The guidance explains the key principles of decision making that the courts and the Commission expect trustees to apply when they are making significant or strategic decisions about their charity.

Among other matters emphasised for trustees are:[bulletlist]

  • ensuring they have the relevant powers to carry out their plans;

  • managing conflicts of interest; and

  • making informed decisions based only on relevant considerations.[/bulletlist]

If trustees follow the principles laid down, it will assist them in defending themselves if something goes wrong. Trustees who can show that they have applied and followed the principles in making their decision are unlikely to be held personally responsible for them by the courts or the Commission

The guidance also covers practicalities - making sure meetings are properly conducted, recording decisions accurately, and what to do if trustees disagree.

Tax Evasion and Avoidance – What They Said at Lough Erne

Much has been made of the announcement of the 'new order' in policing tax avoidance and evasion following the recent G8 conference. Here is what was agreed.

The G8 Lough Erne Declaration

Private enterprise drives growth, reduces poverty, and creates jobs and prosperity for people around the world. Governments have a special responsibility to make proper rules and promote good governance. Fair taxes, increased transparency and open trade are vital drivers of this. We will make a real difference by doing the following:

  1. Tax authorities across the world should automatically share information to fight the scourge of tax evasion.

  2. Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.

  3. Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.

  4. Developing countries should have the information and capacity to collect the taxes owed them – and other countries have a duty to help them.

  5. Extractive companies should report payments to all governments - and governments should publish income from such companies.

  6. Minerals should be sourced legitimately, not plundered from conflict zones.

  7. Land transactions should be transparent, respecting the property rights of local communities.

  8. Governments should roll back protectionism and agree new trade deals that boost jobs and growth worldwide.

  9. Governments should cut wasteful bureaucracy at borders and make it easier and quicker to move goods between developing countries.

  10. Governments should publish information on laws, budgets, spending, national statistics, elections and government contracts in a way that is easy to read and re-use, so that citizens can hold them to account.

Deadline for registering Chancel Repair Liability approaching

Since medieval times, some Parochial Church Councils (PCCs) have been able to compel local residents to fund repairs to the chancel of their local parish church.  

The "chancel" is the part of a church near the altar, which is reserved for the clergy and choir.

The law is now changing and soon a PCC will only be able to enforce chancel repair liability against a person who has purchased land on or after 13 October 2013, if the liability has been registered at the Land Registry before that date.

PCCs have therefore until 12 October 2013 to identify all affected land and to enter a notice in the register at the Land Registry (or lodge a caution against first registration if the property is not yet registered).  If the PCC fails to do so, a person buying land on or after 13 October 2013 will take free of the liability - although those who have owned the property since before 13 October 2013 will still be bound.

If you are a member of an affected PCC, you may feel that it will harm relations with your local community to now register the PCC's right.  However, it is worth noting that a member of a PCC (which is after all a charity) could, at least in theory, be found personally liabile if he or she fails to take reasonable steps to protect and enforce the PCC's rights.  Failure to enforce the liability can also affect a PCCs ability to obtain grants.

The Charity Commission has published useful guidance, which can be found here.

If you are a member of a PCC and are concerned about chancel repair liability, or would like to register the PCCs rights with the Land Registry, then please contact us for advice.



Tax Tribunal Shows Mercy to Negligent but Honest Publican

The First-Tier Tribunal has come to the aid of a negligent, but fundamentally honest, publican who failed to deduct PAYE from sums paid to part-time bar staff in the belief that their earnings fell well below the taxable income threshold. In overturning £8,000 in penalties and greatly reducing the publican’s assessed liability, the tribunal noted that it would be ‘an absolute travesty’ to force him into bankruptcy.

In what the tribunal described as ‘a sad case’, the publican had been ignorant of his obligation to complete tax forms P46 and P38S when employing part time staff, mainly students, who had no P45s to illustrate their past earnings. Following an inquiry by Her Majesty’s Revenue and Customs (HMRC), the publican was hit with penalties totalling £8,000 and a tax assessment of more than £35,000, although this was subsequently reduced to approximately £30,000 after a review.

Reducing the tax assessment to approximately £3,000 and overturning the penalties, the tribunal found that the publican was an honest witness and accepted his account in its entirety. It found that the ‘plain reality’ was that most, if not all, of the part-time workers would have fallen below the taxable income threshold.

Although the tribunal acknowledged that the publican had been negligent, it found that he did have a reasonable excuse for late filing of end of year returns in that he had been acting on his accountant’s advice. Paying tribute to the tax authorities’ conduct of the case, the tribunal concluded: “It was extremely encouraging to see HMRC being realistic and not wishing to inflict pain and bankruptcy on an honest taxpayer”.

CIOs – New Registrations Being Accepted

The Charity Commission is now accepting new applications or registration from existing unincorporated charities with annual incomes over £250,000 who are setting up a Charitable Incorporated Organisation  (CIO) and transferring assets into it.

The Charity Commission website provides guidance on registration as a CIO.
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