Private client law in UK (England and Wales): overview
A Q&A guide to private client law in the UK (England and Wales).
The Q&A gives a high level overview of tax; tax residence; inheritance tax; buying property; wills and estate management; succession regimes; intestacy; trusts; charities; co-ownership; familial relationships; minority and capacity, and proposals for reform.
To compare answers across multiple jurisdictions, visit the Private client Country Q&A tool.
The Q&A is part of the global guide to private client law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateclient-guide.
Tax year and payment dates
The tax year runs from 6 April in the current year and ends on the 5 April of the following year.
Tax is payable on 31 January following the year of assessment. However, if the previous year's tax liability exceeds GB£1,000, advance payments on account for the forthcoming year must be made. These are payable in two equal instalments that are due by midnight on:
31 January following the year of assessment.
31 July following the year of assessment.
If an individual wishes for HM Revenue & Customs (HMRC) to compute their liability, the filing date is 31 October. However, if the tax liability is self-assessed, the filing date is the 31 January following the year of assessment (for example, for the financial year 2015/16, the filing dates are either 31 October 2016 or January 2017).
Most employees pay tax under the Pay As You Earn (PAYE) system. The tax is therefore deducted at source by the employer, acting as an agent for HMRC. However, if the employee has additional income (for example, from investments or capital gains) a self-assessment return must be filed, respecting the above dates. Irrespective of the two filing dates the payment dates are not altered.
Domicile and residence
Domicile is a concept of private international law. The rules for establishing an individual's domicile are rooted in common law and are modified by their status.
The United Kingdom (UK) consists of the three countries (England, Wales, Northern Island and Scotland). A person domiciled in the UK can therefore be domiciled in any one of these countries.
Domicile can affect a taxpayer's income tax, inheritance tax and capital gains tax (CGT).
The UK recognises four categories of domicile:
Domicile of origin. This is usually the place of birth. A legitimate child born during the lifetime of his father has his domicile of origin in the country in which his father was domiciled at the time of his birth. A legitimate child not born during the lifetime of his father, or an illegitimate child, has his domicile of origin in the country in which his mother was domiciled at the time of his birth (Dicey, Morris & Collins, Conflict of Laws (15th ed., 2012), para 6R-025).
Domicile of dependence. Individuals that are legally dependant on another automatically generally acquire that person's domicile. The domicile of an unmarried child under the age of 16 years can be determined as follows (section 4, Domicile and Matrimonial Proceedings Act 1973):
the domicile of a legitimate child is, during the lifetime of his father, the same as, (the father) and changes with, the domicile of his father;
the domicile of a legitimated child is, from the time at which the legitimation takes effect, during the lifetime of his father, the same as, and changes with, the domicile of his father;
the domicile of an illegitimate child and of a child whose father is dead is, in general, the same as, and changes with, the domicile of his mother;
the domicile of a legitimate or legitimated child without living parents, or of an illegitimate child without a living mother, probably cannot be changed;
the domicile of an adopted child is determined as if he were the legitimate child of the adoptive parent or parents.
A child's domicile of dependency can be abandoned once the child reaches the age of maturity (see Question 43).
However, the rules are different in Scotland. Under section 22 of the Family Law (Scotland) Act 2006, a child under the age of 16 years will be domiciled in the same country as the child's parents if both:
the parents of a child are domiciled in the same country as each other; and
the child has a home with a parent or a home (or homes) with both of them.
If the above does not apply, the child will be domiciled in the country where the child has had the closest connection for the longest period of time.
Domicile of choice. Individuals above the age of 16 years can acquire a domicile of choice through the combination of residence and an intention to permanently and indefinitely reside in the jurisdiction. The question is whether the individual intends to make the new country his country of residence until the end of his days unless and until something happens to make him change his mind (IRC v Bulloc 51 TC 522 at p.540).
Deemed domicile. This applies only for Inheritance Tax (IHT) purposes. Deemed domicile is used to identify foreign nationals who have close connections with the UK. For IHT purposes, a person not domiciled in the UK can be treated as domiciled in the UK (and not elsewhere) if he was either (section 267(1), Inheritance Tax Act 1984 (IHTA):
domiciled in the UK during the last three years (three-year domicile rule); or
resident in the UK for at least 17 of the 20 years, ending the current tax year (17-year residence rule).
However, in July 2015 the government announced that the provisions relating to deemed domicile under the IHTA are set to change. The 2016 Finance Act will amend the:
three-year domicile rule by: adding the concept of a "domiciled resident" for the tax year in which the relevant time falls; and
17 year resident rule to allow for a new 15-year resident rule.
An individual is deemed domiciled (whether or not they are tax resident) on a particular date. There is no minimum period of presence and domicile will therefore commence immediately on arrival if the intention is to stay (Fasbender v AG  2 Ch 850; Bell v Kennedy (1868) LR 1 Sc & Div).
Since 6 April 2013, a statutory residence test (SRT) has been used to determine whether an individual is resident in the UK for tax purposes (that is, in relation to income tax, CGT, IHT and/or corporation tax, so far as the residence of individuals is relevant to them). Under the SRT, a person is a resident for a tax year if either:
The automatic overseas residence tests are not met for that year (see below, Automatic overseas tests).
The sufficient ties tests are met for that year (see below, sufficient ties tests).
If the SRT does not apply, the common law residence test is still applicable. If neither test is met for that year (an annual test), the person will resident in the UK for that year.
For tax years before 6 April 2013, residence is determined by considering a combination of:
Case law (Glyn v HMRC  UKFTT 645).
Guidance from HMRC.
A taxpayer can choose to apply the SRT for determining his residence status before 6 April 2013 for the five tax years following 6 April 2013.
Automatic overseas tests. A person is a non-UK resident for a tax year if he meets any of the automatic overseas residence tests required for domicile in a foreign jurisdiction. A person meets these tests if he:
Was resident in one of the three preceding tax years and spend fewer than 16 days in the UK in that tax year.
Was not resident in any of the three preceding tax years and spend fewer than 46 days in the UK in that tax year.
Works full-time overseas and spend fewer than 91 days in the UK and work in the UK for fewer than 31 days in that tax year.
Automatic UK tests. A person is a UK resident for a tax year if he does not meet one of the overseas residence tests required for domicile in a foreign jurisdiction (see above, Automatic overseas tests) and meets one of the automatic UK residence tests. These tests are satisfied if the person:
Spends 183 days in the UK.
Has a home in the UK for more than 90 days, is present at that home for at least 30 days and there is a period of more than 91 consecutive days when he has no overseas home meeting these requirements.
Works full time in the UK and 75% of the days he works are days on which he does more than three hours work in the UK.
The meaning of "home" can vary according to its context and it is not possible to provide an absolute definition of the term. What a home may or may not be will depend on the facts and circumstances of its use by the individual. HMRC may choose to enquire into those facts and circumstances.
Sufficient ties tests. A person is a UK resident for a tax year if he does not meet one of the overseas or UK automatic tests (see above) but has sufficient UK ties or connections and spends a specified number of days in the UK. UK ties include:
Having a UK resident dependant family member.
Having accommodation in the UK.
Working in the UK for more than three hours or more than 40 days a year.
Spending more time in the UK than overseas.
Taxation on exit
There is no general charge to income tax on leaving the UK. However, when a person domiciled in the UK leaves the jurisdiction, there are certain consequences (for example, there will be clawbacks on hold-over relief).
The right to freedom of movement is protected for individuals moving within EU member states (Lasteyrie du Saillant v Ministère de l' Économie, des Finances et de l' Industrie,  STC 1722 and National Grid Indus BV v Inspecteur van de Belastingdienst Riijnmond/ Kantoor Rotterdam  STC 436).
Although there is no statutory definition of residence, the consequences of being resident in the UK are significant.
Residence is one of the factors that "connects" a taxable person to the tax jurisdiction. A "connector" is essential because it would be impractical, unacceptable, contrary to international comity (and, in some places, unconstitutional) for the tax jurisdiction to attempt to tax a person who has no connection with that jurisdiction.
Therefore, in the absence of relief, an individual temporary resident in the UK is only liable to UK taxation on UK source income.
Taxes on the gains and income of foreign nationals
Non-UK residents, irrespective of nationality, are not subject to capital gains tax (CGT) on assets located in the UK. However, if the individual uses an asset in the conduct of UK trade (for example a branch/agency or a permanent establishment (PE)), the disposal of that asset would form part of the persons' chargeable profits and the gain would be subject to CGT.
Non-resident individuals that own residential property located in the UK are subject to a non-resident resident capital gains tax (NRCGT) on the disposal of their residential property (section 14B(1), Finance (no.1) Act 2015).
The current CGT and NRCGT rates are:
18% for basic rate taxpayers.
28% for higher rate taxpayers, executors and trustees.
In calculating NRCGT, the general rule is to rebase the property to its market value as at 6 April 2015 and deduct any allowable cost after that date. If the NRCGT-rebasing is not adopted, the taxpayer can choose to either:
Time-apportion the gain over the period of ownership. This option is not available if the disposal is subject to annual tax on envelope dwelling CGT.
Not rebase or time-apportion the gain, but instead make the entire gain the NRCGT-gain. This requires a historic-cost election.
Regardless of nationality, a UK-resident individual must pay tax on his worldwide income and assets unless he elects for his income to be taxed on the remittance basis using the Remittance Basis Charge (RBC). If the individual elects to pay the RBC, this is payable at the following rates:
For individuals who have been UK resident in seven or more of the nine tax years before the year of claim: the RBC is GB£30,000.
For individuals who have been UK resident in 12 or more of the 14 tax years before the year of claim: the RBC is GB£60,000.
For individuals who have been UK resident in 17 or more of the 20 tax years before the year of claim (17-year residence test): the RBC is GB£90,000.
The RBC is not avoided where there is a failure to nominate income/gains and such failure may result in duplicate or higher taxation in future years.
Income tax and capital gains tax (CGT) can be employed on either the:
Arising basis, where the tax is charged on the amount of income/gains which arise. Income arises when it is credited to the individual or made available for their enjoyment without restrictions (the individual is legally entitled to the income).
Remittance basis, where the tax is charged on the amount of income/gains received in the UK. This basis applies if a foreign domiciliary receives foreign income/gains and deemed income/gains under the settlement provisions. Income or gains credited to an individual in a jurisdiction outside the UK that are transferred to or enjoyed in the UK at the convenience of the individual. If the income or gain is never transferred or enjoyed in the UK, no UK tax liability arises. The remittance basis only applies to income and capital gains: it has no bearing on liability to inheritance tax.
The 2015/16 income tax rates are:
0% (starting rate) for income up to GB£5,000.
20% (basic rate) on income up to GB£32,000.
40% (higher rate) on income from GB£32,001 to GB£150,000.
45% (additional rate) on income over GB£150,000.
For dividend income, the first GB£5,000 is exempt from taxation. Thereafter, dividend income is taxed as follows (unless the dividend nil rate applies):
7.5% up to GB£32,000.
32.5% on dividend from GB£31,786 to GB£150,000.
38.1% on dividends over GB£150,000.
Taxpayers receive dividends net of basic rate tax at 10%.
Inheritance tax and lifetime gifts
Inheritance tax (IHT) is charged on the "value transferred by a chargeable transfer" (section 1, Inheritance Tax Act 1984). A chargeable transfer can accrue in relation to lifetime gifts, gift between living persons, or on death. IHT applies on the basis on the individual's domicile status, for example:
An individual domiciled in the UK is subject to IHT on their worldwide estate.
An individual not domiciled in the UK is subject to IHT on only their UK estate.
IHT is payable on the value of:
All assets owned in the sole name of the deceased.
The relevant share of any jointly owned assets.
On death, IHT is payable on the net value of the deceased's estate. This includes:
Gifts made within seven years prior to the date of death.
Gifts with reservation of benefit.
In addition, property trusts have their own IHT regime under which the IHT charge can arise:
When assets are given to the trust.
On each ten-year anniversary of the creation of the trust.
When capital is distributed to beneficiaries.
A gift of assets to a relevant property trust is a chargeable lifetime transfer, triggering an immediate 20% charge to IHT. In addition, if the settlor fails to survive seven years from the date he gives assets to the trust, further IHT may be due.
IHT is usually payable by the transferor and not the transferee (that is, the beneficiary). However, where the transferor declares that the gift is a net gift, the beneficiary will be liable for the any IHT due at the same rate payable by the transferor. The value of the beneficiary's estate has no bearing on the rate of IHT payable.
There are four applicable rates for inheritance tax (IHT) (section 7, Inheritance Tax Act 1984 (IHTA)):
0% (nil rate band). This rate applies to transfers made up to the lifetime exemption (currently GB£325,000). Individuals who die on or after 6 April 2017 can also benefit from an additional residence nil rate band (RNRB) (see below, Tax free allowance).
20% (lifetime rate). This rate applies to transfers made during the lifetime of the individual in excess of the nil rate band.
40% (death rate). This rate is applicable to the net value of the deceased estate, as at the date of death, including any gifts made within the last seven years of death that have not been fully abated.
36% rate. This reduced rate applies where at least 10% of the individual's estate at the date of death is left to a qualifying charity.
Tax free allowance
From 2006, the IHT tax free allowance has been GB£325,000. However, for individuals that die after 6 April 2017 and leave their interest in the family home to their lineal descendants (that is, their legitimate children, including adopted or step children, who has been dependant on the deceased) will qualify for an RNRB of GB£100,000, which rises to GB£175,000 in 2020/21. With planning, a couple could achieve a tax free allowance of up to GB£1 million on the second death.
The following exemptions from IHT are available (IHTA):
Transfers between spouses or civil partners.
Annual exemption (currently GB£3,000). Any unused amount can be carried forward for one year.
Small gifts (currently GB£250 per person). In reality, an individual can give as many small gifts as he/she deems appropriate in any one year.
Normal expenditure out of income. To be applicable, the individual must demonstrate that the transfer is out of annual income in excess of their needs.
Gift in consideration of marriage or civil partnership. A party, parent or remote ancestor to the marriage can give up to GB£5,000 each, other family members are limited to GB£2,500 per family member, and other persons GB£1,000.
Gifts to charities or registered clubs.
Gifts to political parties.
Gifts to housing associations, to the extent the value transferred is attributable to land in the UK.
Gifts for national purposes.
Gifts for the public benefit.
Potentially exempt transfer (PET) of property subsequently held for national purposes (among other things). PETs include gifts to other individuals or gifts into an accumulation and maintenance trust or a disable trust.
Maintenance funds for historic buildings.
Abetment of exemption (that is, in cases where the claim is settled out of the beneficiary's own resources).
Techniques to reduce liability
Techniques to reduce liability for IHT include:
Using annual allowances.
Using gifts out of ordinary income.
Using a PET and then surviving seven years.
Using a bare trust Transfers into bare trusts are treated as a PET and the settlor has the ability of protecting the asset from dissipation (see also Question 30, Type of trust and taxation: Types of trust).
Establishing a family limited liability partnership (LLP). Assets are moved into the partnership without a charge to stamp duty land tax, the LLP effectively operates in a similar way to an interest-in-possession trust (qualifying for PET treatment while the controlling family member retains a degree of control over the assets).
Ensuring that existing assets used in a trade or business qualifies for business property relief or agricultural property relief.
Restructuring shareholding (income and capital shares). In such a scenario, a new company would be created and the senior members of the family would be issued with income only shares and the junior members would be issued with capital only shares. However, this route is quite technical.
Creating an immediate post-death interest trust.
Use of a pilot trust.
Making gifts that will not qualify as a disposal for IHT purposes (for example, gifts for the maintenance of family or gift out of ordinary income).
The inheritance tax (IHT) or gift tax regime applies to foreign owners of real estate. Therefore, non-UK domiciled individuals owning assets situated in the UK are subject to UK IHT on the event of making a chargeable transfer. UK individuals who are deemed domicile in the UK are subject to IHT on their worldwide assets (see Question 2, Domicile).
There are no other direct taxes payable on the death of an individual. However, if the deceased was the recipient of a lifetime gift that qualified for capital gains tax (CGT) hold-over relief, and the recipient had elected for CGT hold-over, the death would trigger a charge to CGT. This is because the asset would be deemed disposed of at current market value at the time the CGT held-over crystallises.
Taxes on buying real estate and other assets
Purchase and gift taxes
Foreign nationals must consider the following purchase and gift taxes when purchasing real estate and other assets.
Stamp duty. This is charged on instruments transferring shares and marketable securities, and interest in partnerships that hold shares as partnership property. Stamp duty payable on the transfer of shares by way of a share transfer form (Form J30), calculated at a rate of 0.5%, subject to a minimum charge of GB£5 (if the consideration payable is in excess of GB£1,000).
Chargeable consideration for stamp duty is:
The issue or transfer of shares or marketable securities.
The release or assumption of a liability.
As stamp duty is a tax on a document, if the document does not exist, no stamp duty is payable.
Stamp duty reserved tax (SDRT). This is payable on the purchase of shares. A charge to SDRT is payable when an agreement to transfer chargeable securities is made for consideration in money or money's worth. SDRT applies wherever the parties are resident and whenever the agreement is entered into. In practice, if stamp duty is payable, SDRT does not need to be paid. A charge to SDRT will frequently arise in the following circumstances:
The taxpayer transfers chargeable securities in an uncertificated form, within an electronic transfer system (for example, by using CREST, the electronic settlement and registration system administered by Euroclear).
The taxpayer buys a certificated security and resells it before settlement of the purchase (trading within an account bed and breakfast transactions).
The taxpayer buys renounceable letters of allotment.
The taxpayer buys shares registered in the name of a nominee who acts for both buyer and seller.
The taxpayer transfers securities to an electronic transfer system on the occasion of their sale, or the shares are held in dematerialised from.
SDRT is charged at 0.5% if the transaction is over GB£1,000. Unlike stamp duty, there is no requirement to round up the SDRT payable to the nearest GB£5. Therefore SDRT can be paid to the nearest penny. Where the transaction was completed in some depositary receipt or clearance services, where the shares were transferred to a service operated by a third party (for example, a bank), the rate of SDRT originally charged was 1.5%. However, following the ECJ decision in HSBC and Vidacos Nominees v HMRC (Case C-569/07), HMRC no longer seeks to impose the 1.5% charge because it was found to be contrary to EU law.
Stamp duty land tax (SDLT). This is payable when all or part of an interest in land or property is acquired in exchange for anything of monetary value. SDLT is payable on the purchase or transfer of real property (except in Scotland, where Land and Building Transaction Tax must be paid by the purchaser). A land transaction involves the acquisition of a chargeable interest in UK land. This includes the:
Transfer of a freehold interest in land.
Assignment or grant of a leasehold interest in land.
The triggering event is the effective date of the transaction on completion (or earlier if the contracts are exchanged unconditionally) when the buyer has taken possession and/or has paid substantially all of the consideration for the transaction. A transaction return must be filed within 30 days of the effective date of any notifiable transaction.
SDLT is charged at 15% on residential properties costing more than GB£500,000 bought by certain corporate bodies or non-natural persons (NNP). An NNP can be any of the following:
A company or any corporate body (other than a partnership) not acting in its capacity as a trustee of settlement or as a bare trustee.
A partnership where one or more of its members is a body corporate or a collective investment scheme.
A collective investment scheme (where the property is acquired for the purposes of the collective investment scheme).
The standard SDLT progressive rates range from 2% to 12% and are charged on transactions valued above GB£125,000 if the property is used for any of the following:
A property rental business.
Property developers and traders.
Property made available to the public.
Financial institutions acquiring property in the course of lending.
Property occupied by employees.
From 4 December 2014, SDLT is charged at the following progressive rates on the acquisition of residential property (12% is the maximum rate):
For property valued up to GB£125,000: 0%.
For property valued GB£125,001 to GB£250,000: 2%.
For property valued GB£250,001 to GB£925,000: 5%.
For property valued GB£925,000 to GB£1.5 million: 10%.
For property valued GB£1.5 million or above: 12%.
From 6 April 2016 an additional 3% is payable if the property acquired is by an individual for the purpose of re-letting as an investment (buy-to-let).
The rates applicable to non-residential property or mixed property, without a rental consideration, are:
For property valued up to GB£150,000: 0%.
For property valued GB£150,000 to GB£250,000: 1%.
For property valued GB£250,000 to GB£500,000: 3%.
For property valued at more than GB£500,000: 4%.
SDLT is payable on the granting of a residential or commercial lease calculated at 1% of the net present value (NPV) of the rent over the term of the lease, applying a temporal discount rate of 3.5% of the rent payable in each year, to the extent the NPV exceeds:
GB£125,000 for residential property.
GB£150,000 for commercial or mixed use premises.
The UK presently does not have a wealth tax regime.
Annual tax on enveloped dwellings (ATED). Non-residents holding residential properties in a non-resident company must pay ATED on any day within a chargeable period (of 12 months commencing on April 2013) if it owns a UK dwelling worth more that GB£500,000 million. The company is subject to ATED calculated as a percentage of the property's value, calculated as follows:
For property valued between over GB£500,000 and under GB£1 million: the annual chargeable amount is GB£3,500.
For property valued between over GB£1 million and under GB£2 million: the annual chargeable amount is GB£7,000.
For property valued between over GB£2 million and under GB£5 million: the annual chargeable amount is GB£23,350.
For property valued between over GB£5 million and under GB£10 million: the annual chargeable amount is GB£54,450.
For property valued between over GB£10 million and under GB£20 million: the annual chargeable amount is GB£109,050.
For property valued over GB£20 million: the annual chargeable amount is GB£218,200.
A person subject to the ATED charge must file an ATED return within a period of 30 days from the first day in the chargeable period on which that person is subject to ATED (section 159(1) and (2), Finance Act 2013).
Local council tax. This is payable annually on residential properties. The rate is variable depending on the relevant local council applying the tax.
The introduction of the annual tax on enveloped dwellings (ATED) from 1 April 2013 has made corporate ownership of real estate less attractive (see Question 11, Other: Annual tax on enveloped dwellings (ATED)). However, non-resident individuals intending occupy property (or allow property to be used by connected parties) can still hold real estate through offshore companies. Typically, shares in an offshore company can be owned personally or via an offshore trust.
ATED is not due if the property is rented to unconnected persons, in which case the company qualifies for property rental business relief. In addition, non-resident companies and trusts are also subject to ATED capital gains tax on sales of residential properties subject to ATED at a rate of 28%.
Taxes on overseas real estate and other assets
An individual resident in the UK is subject to:
Income tax and capital gains tax (CGT) on income derived from properties (property income), wherever situated.
CGT on the disposal of assets, wherever situated.
If the individual qualifies for the remittance basis, he can elect to have non-situated income and gains from overseas be tax on that basis (see Question 6). However, double tax relief is available if the UK has an existing treaty in force with the relevant country.
International tax treaties
The UK has double tax treaties in force with over 130 countries for the avoidance of income tax and capital gains tax.
The UK also has several double tax treaties for the avoidance of inheritance tax (IHT). The IHT treaties between Italy, India, France and Pakistan are advantageous to individuals domiciled in any of those countries but are deemed domiciled in the UK.
Wills and estate administration
Governing law and formalities
There is no requirement for individuals resident or domiciled in the UK to make a will, although it is advisable. A will drafted in the UK does not need to be government by the laws of England and Wales.
A will made in the UK is capable of making a disposal of an individual's worldwide assets.
An individual who dies without a will is said to have died intestate. This will mean the rules of intestacy under Part 3 of the Administration of Estates Act 1925 will determine how the estate is disposed of.
A valid will must satisfy the requirements of section 9 of the Wills Act 1837 (as amended by section 17 of the Administration of Justice Act 1982). The formalities emphasise the importance of making a will and providing reliable evidence of a person's testamentary intentions.
The following requirements must all be satisfied before a court can admit the will to probate:
The will must be in writing. However, there is no restriction on the kind of material on which it must be written, or what language must be used.
The will must be signed by the testator or some other person in his presence at his direction.
The testator must intend (by his signature) to give effect to the will. However, the court does not require the intention to appear from the will itself.
The testator's signature must be provided or acknowledged in the presence of two or more witnesses present at the same time.
The witnesses must sign or acknowledge the will in the presence of the testator, but not necessarily in the presence of each other. The testator must be both mentally and physically present at that time.
If a beneficiary inherits an interest in the deceased's estate under a will or under the rules of intestacy, for the purposes of inheritance tax (IHT) or capital gains tax (CGT), he can redirect that interest by making a deed of variation so that another beneficiary receives the interest. Usually, the original beneficiary making a gift of his interest achieves the redirection. However, this can also be made by the exchange of assets.
There are recognised IHT rules on the taxation of lifetime transfers and CGT rules in relation to lifetime disposals. These apply to the redirection unless it meets the conditions set out in specific statutory provisions that allow for the retrospective treatment of a variation for IHT and CGT. Under these provisions, the variation is treated as being made by the deceased and is effective from the date of death rather than made by the original beneficiary. In other words, there is a "writing back" effect in which the terms of the variation are written back into the will or intestacy rules or so as to affect the operation of a nomination or the survivorship principle. The retrospective effect is for taxation purposes only and is limited to IHT and CGT.
Variations are not treated as being retrospective for income tax, stamp duty land tax (SDLT) and stamp duty purposes.
To ensure a variation is retrospective to the date of death for IHT and CGT purposes, it is necessary to comply with the statutory provisions set out in section 142 of the Inheritance Tax Act 1984 (IHTA) and sections 62(6) to 62(10) of the Taxation of Chargeable Gains Act 1992 (TCGA). To comply with these provisions, a deed of variation must:
Be in writing.
Be made by the individual who benefits or would benefit under the will or intestacy rules and who is giving up that benefit.
Be made within two years of the deceased's death.
which disposition (that is, the benefit inherited) is the subject of the variation; and
that the variation changes the destination of the disposition (that is, redirects it so that another beneficiary benefits from it).
Contain a statement of intent specifying that the beneficiary wants section 142(1) of IHTA and section 62(6) of the TCGA to apply (that is, he intends the variation to be treated as made by the deceased). This statement must be altered accordingly where the beneficiary wants the variation to be retrospective for only IHT or only CGT purposes.
Not be made for consideration in money or money's worth from a source outside of the estate.
Alternatively, a beneficiary can reject his entitlement by making a deed of disclaimer, in which case the beneficiary will not be able to redirect his entitlement.
Validity of foreign wills and foreign grants of probate
Validity of foreign wills
Wills made in another jurisdiction are deemed valid if their execution complies with section 1 of the Wills Act 1963.
The execution of the will is valid if it conforms to the law of any of the following:
The territory where the will was executed.
The territory where the testator was domiciled at the time of execution or death.
The territory where the testator had his habitual residence at the time of execution or death (for example, if a testator is habitually resident in Grenada when he makes his will, the will is valid if it conforms to Grenadian law).
The state of which the testator was a national at the time of execution or death (for example, if a testator is an Italian citizen when he dies, his will is valid if it conforms to Italian law).
If the will is not proved to be valid, the deceased will be deemed to have died intestate (without leaving a valid will) for the purpose of any UK assets.
EU Succession Regulation
Regulation (EU) 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession (Succession Regulation) (also known as Brussels IV) aims to remove obstacles to the free movement of persons in relation to cross-border estates. This is to:
Allow EU citizens to organise succession matters in advance.
Effectively guarantee the rights of beneficiaries, other persons close to the deceased and creditors.
Since 17 August 2015, the Succession Regulation is binding in all of 27 EU member states except for the UK, Ireland and Denmark (which have decided not to opt in). The rules on the formal validity of testamentary dispositions (such as wills) in the Succession Regulation are consistent with those of the Wills Act.
Validity of foreign grants of probate
To administer the estate, the UK estate of a non-domiciled person, the administrator of executors must either:
Obtain an English grant of representation, with or without will attached.
Make an application for the foreign grant to be resealed.
The process for obtaining an English grant or resealing the foreign grant depends on the following:
The jurisdiction under which the foreign grant was made.
Whether the foreign will is admissible to probate in England and Wales.
Whether the deceased died intestate.
Death of foreign nationals
Non-UK assets can vest in the deceased's heirs under the law of the deceased's domicile. Therefore, UK-resident executors and personal representatives of the deceased can face jurisdiction issues.
The ability to settle debts of the estate and make payment of UK inheritance tax liability can be problematic if the deceased was domiciled in England or Wales and is therefore liable to inheritance tax (IHT) on his worldwide assets.
Administering the estate
Responsibility for administering
The following are responsible for administering the estate:
The personal representatives (PRs), who are appointed under the rules of intestacy (that is, when no executor is named under a will) and must administer the estate in accordance with these rules.
The executors, who are appointed under the will and must administer the estate in accordance with its instructions.
The PRs or executors must first pay any inheritance tax due and pay all liabilities due under the estate, before distributing any assets to the beneficiaries. These persons have extensive powers under common law, including the right to:
Value and dispose of properties.
Pursue, defend or commence legal action in the name of the estate.
The executors derive their title from the will and the deceased's estate automatically vested in them from the date of death. The grant of probate acts as evidence of the executor's title, which must be registered with any institutions holding assets on behalf of the deceased. For example, an executor can validly enter into a contract for sale or mortgage before obtaining probate. Failure to have probate before completion would prevent him from giving a complete indemnity.
The PRs derive their authority from the grant of probate. Before the grant is issued, the deceased's estate vests in the Public Trustee. Once the probate is granted, the PRs (administrators) have the same common law powers and responsibilities as an executor.
Establishing title and gathering in assets (including any particular considerations for non-resident executors)?
Establishing title and gathering in assets
The executors or personal representatives (PRs) that have obtained a grant of probate or letters of administration must deal with the deceased's personal affairs in to order to agree the free estate (that is, the estate after the payment of inheritance tax (IHT)).
If the gross estate is less than GB£5,000, a grant of probate is not required. However, where the gross estate exceeds GB£5,000, most financial institutions and banks would agree to release the estate funds without a grant on the fulfilment of certain requirements such as:
The production of the death certificate and will (if one exists).
An undertaking or promise from the PR that it is appropriate to make the payment.
Jointly owned assets are not subject to probate. However, surviving joint tenants must show that the deceased has died.
Under the Administration of Estates (Small Payments) Act 1925, assets with a value up to GB£5,000 can be paid out without a grant of probate. These can include:
National Savings products (such as National Savings Bank accounts, Savings Certificates and Premium Bonds).
Friendly Society and Industrial and Provident Society deposit accounts.
Arrears of salary, wages and superannuation benefits, where the deceased was an employee of a central or local government department.
Pensions where the deceased was a member of the police, fire authority, air force or army.
Accounts held in a building society.
Personal and household property is often realised without a grant of probate. This is because for these assets:
Evidence of ownership is often not available.
The PR does not have to prove to the buyer that he has the authority to sell them.
Procedure for paying taxes
Before making a payment of IHT, executors appointed under the will with immediate powers, or PRs who obtain the power once the letters of administration are granted, must obtain an IHT reference number by either filing Form IHT422 or making an application online at least three weeks prior to making the payment. IHT must be paid on or before the end of the sixth month following the month of death. Failure to do so will incur a late payment interest charge. A quirk in this procedure is that IHT must be paid before the probate or letters of administration is granted by the Probate Registry. However, IHT due on certain assets (UK land and buildings, shares and businesses) can be paid over a period of ten years if a minimum of 10% is paid before the expiry of the sum months (section 227(1)(2) , Inheritance Tax Act 1984 (IHTA)).
Distributing the estate
The PRs and executors should therefore ensure that they have discharged all the estate's liabilities. Claims against the deceased's estate can be made up to six months from the grant of probate or letters of administration (section 4, Inheritance (Provision for Family and Dependants) Act 1975). The PRs and executors should be aware of this time limit.
The PRs and executors will be protected against claims from unknown creditors if they (section 27, Tax Act 1925):
Place an advert of their intention to distribute the estate in the official Gazette and a newspaper that has a circulation in the district in which any land owned by the deceased is situated.
Wait until the end of the statutory six-month period from the date of giving the public notice (see below).
If the estate is subject to IHT and the PRs and executors believe all IHT has been paid, a certificate of tax clearance should be obtained. This can be obtained from HMRC by filing Form IHT30.
Although the inheritance tax (IHT) due must be paid within six months of the date of death (failing which penalties and interest will apply), Form IHT400 (that is, the IHT return) is not due until 12 months of the date of death.
Assets outside the UK that form part of a UK domicile estate must be valued in accordance with UK valuation principles (open market value as at the date of death).
From 1 April 2011, the personal representatives and executors must reclaim any IHT that has been overpaid within four years (section 241, Inheritance Tax Act 1984).
Challenging the validity of the will
It is possible for a beneficiary to challenge the will. The main grounds for challenging the validity of a will are:
Improper execution (for execution in a foreign jurisdiction) (section 9, Wills Act 1837) (see Question 16).
The testator was subject to undue influence in making the will.
The testator lacked testamentary capacity (see below).
The common law test for capacity necessary to execute a valid will was set out at common law where it was established that the testator must (Banks v Goodfellow (1870) LR5 QB 549):
Understand the nature of making a will and its effects.
Understand the extent of the property that he is disposing of.
Be able to comprehend and appreciate the claims to which he ought to give effect.
Have no disorder of the mind that negatively affects his sense of right or prevents the exercise of his natural ability to dispose of his property by will.
The statutory test for capacity is governed by five principles that are designed to help individuals take appropriate action to find solutions when facing difficulties or uncertain situations (section 1, Mental Capacity Act 2005):
A person must be assumed to have capacity unless established that he lacks capacity.
A person is not to be treated as unable to make a decision unless all practicable steps to help him to do so have been taken without success.
A person is not to be treated as unable to make a decision merely because he makes an unwise decision.
Acts done or decisions made under the Mental Capacity Act 2005 for or on behalf of a person who lacks capacity must be done/made in his best interests.
Before an act is done or a decision is made, regard must be had in relation to whether the purpose for which it is needed can be as effectively achieved in a way that is less restrictive of the person's rights and freedom of action.
Claims by family dependants
Testators can choose how their estate should be distributed. Where the testator dies in the UK and has not made provision for family members under a will, the family members can make a claim under the Inheritance (Provision for Family and Dependants) Act 1975. Such claims must commence within six months after probate or letters of administration is granted. The following class of individuals can bring a claim:
Spouse or civil partner of the deceased.
Former spouse or civil partner of the deceased who has not remarried or formed a new civil partnership.
Cohabitee who lived with the deceased as husband and wife in the two years immediately before death.
Children of the deceased.
Such claims are also available to:
Adopted children, step-children or any person treated by the deceased as a child of the family.
Persons that were being maintained (wholly or partly) by the deceased immediately before the death of the deceased.
Claim against personal representatives (PRs)
Beneficiaries can bring a claim against PRs or executors who acted in violation of their duties through deliberate, reckless or negligent acts or omissions and actions that constitute a breach of trust or fiduciary duty.
There are no forced heirship rules requiring a person to leave a portion of his estate to specified individuals. No member of the deceased's family has an automatic right to an inheritance.
However, if the deceased dies domiciled in England and Wales, certain categories of people can bring a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for financial provisions from the deceased's estate (see Question 23, Claims by family dependents). These claims can be brought if the person has a reasonable belief that reasonable financial provision has not been made for them from the deceased's estate under either:
The terms of the deceased's will.
The intestacy rules.
Forced heirship regimes
There is no forced heirship regime (see Question 24).
Real estate or other assets owned by foreign nationals
An individual's immovable property is subject to the succession laws of the jurisdiction in which the property is situated. Movable property is subject to the succession laws of the deceased's domicile.
For information about the EU Succession Regulation on Practical Law Private Client, see Practice note, EU Succession Regulation (Brussels IV) .
English law recognises the doctrine of renvoi (a reference back). However, the succession of a person's immovable property is governed by the law of the country in which that property is located.
If renvoi is allowed and the foreign jurisdiction's Private International Law (PIL) rules refer the case back to the law of England and Wales, there are two possible outcomes:
Single or partial renvoi. This is where the English court accepts the renvoi and applies its domestic law. However, in practice the courts of England and Wales will not apply single renvoi (Re Askew  Ch 259).
Double or total renvoi. This is where the English court applies the law that the foreign court would apply if the matter came before it (which depends on whether the foreign court, in turn, applies the doctrine of renvoi and will accept a renvoi). The English courts have applied total renvoi in relation to some issues, such as succession (Re Duke of Wellington  Ch 506).
An individual dies intestate when any of the following apply:
He did not make a will.
He revoked a will by an action such as:
physically destroying the will with the intention of revoking it;
marrying or entering into a civil partnership after making a will.
Either of the above immediately revokes the will, unless the will states that the testator made it with the intention of marrying or entering into a civil partnership with a particular individual.
Made an invalid will.
An individual dies partially intestate if the will failed to dispose of the entire estate.
In this case, the intestacy rules will apply to the part of the estate not disposed of in the will.
The intestacy rules only apply to property that the deceased could have left under a will. Therefore, the intestacy rules do not apply to:
Assets held jointly with another party where the right of survivorship applies, such as assets passed direct to the survivor (bank accounts, house held as joint tenants and so on).
Assets held on trust.
Nominated assets. Subject to certain limits with particular institutions.
Pension benefits paid by the trustees of the pension fund.
The intestacy rules are set out in the Administration of Estate Act 1925. The rules depend on (section 46):
The net value of the deceased's estate.
Which family members survive the deceased.
Under the Inheritance and Trustee Powers Act 2014, the intestate estate is allocated as follows:
Surviving spouse or civil partner and issue. The residuary estate is distributed as follows:
spouse or civil partner receives all personal chattels;
spouse or civil partner receives a statutory legacy of GB£250,000 free of inheritance tax (IHT) and costs plus gross interest from the date of death until payment. If the residuary estate is worth less than GB£250,000, the spouse or civil partner receives everything and the issue receive nothing;
the rest of the residuary estate is split equally into two halves. The spouse or civil partner takes one half absolutely and the issue take the other half on the statutory trusts;
where there is a matrimonial home, the spouse or civil partner can ask the personal representatives (PRs) to appropriate this asset to him/her in satisfaction of their entitlement.
Surviving spouse or civil partner but no issue. The spouse or civil partner inherits everything.
No surviving spouse or civil partner but deceased has blood relatives. The deceased's residuary estate passes in the following order, passing to the next category only if there are no surviving members in a preceding category:
issue, on the statutory trusts;
parents (equally, if both alive);
brothers and sisters on the statutory trusts;
half brothers and sisters on the statutory trusts;
grandparents (equally, if more than one alive);
uncles/aunts on the statutory trusts;
half-uncles/aunts on the statutory trusts.
If the intestate dies leaving no blood relations, his estate passes as bona vacantia to the Crown, Duchy of Lancaster or Duke of Cornwall. These may provide for dependants of the intestate and other persons for whom the intestate may reasonably have expected to make provision.
A family member (including an ex-spouse or ex-civil partner) or a dependent of the deceased can bring a claim for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975, provided the deceased was domiciled in England and Wales at the time of death (see Question 23, Claims by family dependants).
Type of trust and taxation
Recognition of trusts. In the UK, trusts are recognised at both common law and under the Trustee Act 1925, which has codified and updated the regulation of trustees' powers and their appointment. A trust can be created expressly or by implication by any individual over 18 years during the settlor's lifetime or on death (by will).
To bring the trust into existence, the trust document must be completed and the relevant asset must be transferred to the trustees (however, where the settlor makes a declaration of trust, it is not necessary for the asset to actually be transferred to the trustees).
In the UK, trusts are subject to the following taxes:
Inheritance tax (IHT).
Capital gains tax (CGT).
Trusts created for the benefit of young persons under a will (bereaved minor trust), or disabled beneficiaries are subject to special tax rules.
Types of trust. The main types of trust are:
Bare trust. The assets are held in the name of a trustee. However, the beneficiary has the right to all capital and income of the trust at any time if they are:
18 years or over (in England and Wales); or
16 years or over (in Scotland).
For IHT purposes, the assets that were set aside by the settlor will always go directly to the intended beneficiary, therefore escaping IHT in the estate of the trustee (the legal owner). For income tax and CGT purposes, income and gains generated from the asset are taxable on the beneficiary. However, if the beneficiary is a child the income can be assessed on the trustee for the child beneficiary. For IHT purposes, bare trusts are deemed potentially exempt transfers (PETs) (section 3A, Inheritance Tax Act 1984). The assets of the trust form part of the estate of the beneficiary.
Interest in possession trusts (IIP) (or life interest trust). The trustee must pass on all trust income to the beneficiary as it arises (less any expenses). The beneficiaries that are entitled to the trust property on the death of the life tenant (or other specified event) are called the "remaindermen". IIP trusts created during the settlor's lifetime on or after 22 March 2006 are taxable as relevant property trusts (see below, Relevant property trusts), subject to limited exceptions. The old rules continue to apply to qualifying IIP trusts:
Created before 22 March 2006.
Created on death on or after 22 March 2006.
Contingent interest trust. This trust gives the beneficiary the right to receive the trust property on the occurrence of a certain specified future event (usually on reaching a certain age).
Relevant property trusts. All trusts created on or after 22 March 2006 (whether created during a settlor's lifetime or on death) are taxed as relevant property trusts. Relevant property trusts have their own IHT regime. Under this regime, IHT charges apply as follows:
an entry charge at 20% is due when assets are given to the trust 20%;
for each ten-year anniversary of the creation of the trust, a 6% IHT charge is due computed on the value of the trust fund (the principal or periodic charge);
when capital is distributed to beneficiaries, an exit charge of 6% IHT is due computed on the value of the asset distributed.
A gift of assets to a relevant property trust is a chargeable lifetime transfer, triggering an immediate 20% entry charge to IHT. In addition, if the settlor fails to survive seven years from the date he gives assets to the trust, a further 20% IHT subject to abetment if the gift was made within seven years before the date of death will apply.
Discretionary trusts. These are where the trustees can make certain decisions about how to use the trust income (and sometimes the capital, depending on the trust deed). The trustees can decide:
what gets paid out (income or capital);
which beneficiary to make payments to;
how often payments are made; or
any conditions to impose on the beneficiaries.
Discretionary trusts are sometimes set up to put assets aside for:
a future need (for example, for a grandchild that may need more financial help than other beneficiaries at some point in their life); or
beneficiaries who are not capable or responsible enough to deal with money themselves.
Accumulation trusts. This is where the trustees can accumulate income within the trust and add it to the trust's capital. They may also be able to pay income out, as with discretionary trusts.
Mixed trusts. These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.
Settlor-interested trusts. These are where the settlor, the settlors minor children, or their spouse or civil partner benefits from the trust. The trust can take the form of:
an interest in possession trust;
an accumulation trust;
a discretionary trust;
Non-resident trusts. This is a trust where the trustees are not resident in the UK for tax purposes.
Application of CGT. Trustees are subject to CGT on chargeable gains arising on a trust and (in some cases) when assets are transferred out of the trust. The trustees main rate is 20% (28% on gains realised on residential property not eligible for Principle Private Residence Relief).
Trustees have an annual tax-free allowance of GB£5,500 from 2015/16 (half the allowance for individuals).
If the settlor creates more than one trust, any trust created before 7 June 1978 has its own allowance. Trusts created on or after that date share one allowance, but there is a minimum allowance of one-tenth of the allowance for individuals (Paragraph 2, Schedule 1, Taxation of Chargeable Gains Act 1992 (TCGA)). A disposal for CGT can arise on:
An actual disposal, made by the trustee.
A deemed disposal (for example, when a beneficiary becomes absolutely entitled to an asset)
Tax-free uplift on death. Qualifying IIP trusts will not be subject to CGT where the beneficiary of an "18-25 trust" dies before reaching the age of 18 years. In such a case, the assets are passed to the remaindermen at the current market value, and not the cost or value when the asset was placed into the trust fund.
Hold-over relief. When hold-over relief applies to the disposal of an asset, any chargeable gain that would normally be taxed on the disposal is held over and added to the gain that accrues on the next disposal of the asset (if any). Hold-over relief can apply in relation to:
Gifts on which IHT is chargeable.
Gifts of business assets (but not if the relief is already available as a regular gift) under any other provisions.
Residence of trusts
The residence of a trust is relevant for CGT and income tax purposes. The trust's residence status follows that of the trustees (for example, if all trustees are UK-resident, the trust will be UK resident). If the trust has both UK and non-UK resident trustees, the trust will he UK resident if the settlor was UK-resident or domiciled when the trust was created or settled.
If the trustees of a non-resident trust become resident in the UK (see Question 30, Residence of trusts) they would be taxed in the UK on the trust's worldwide income and capital gains, on an arising basis, at the rate of the trust.
Does the law provide specifically for the creation of non-charitable purpose trusts?
Does the law restrict the perpetuity period within which gifts in trusts must vest, or the period during which income may be accumulated?
Can the trust document restrict the beneficiaries' rights to information about the trust?
With the exception of charitable trusts (see Questions 36 to 38), purpose trusts are normally considered invalid by UK courts. This is generally because a purpose trust will have no beneficiaries and therefore nobody can enforce the trust.
Perpetuities and accumulations
Trustees must consider perpetuity and accumulation issues when making a disposition:
The rule against perpetuities prescribes a period within which the interests of beneficiaries must vest. The period must be no more than 125 years from the date of the trust being set up. These rules do not apply to charitable trusts or trusts subject to a power of revocation reserved by the settlor.
The rule against excessive accumulations restricts the period during which income can be added to the trust capital rather than distributed as income.
From 6 April 2010, the Perpetuities and Accumulations Act 2009 (PAA 2009) came into effect. This Act provides for a mandatory perpetuity period of 125 years to replace the previous alternatives of either a:
Relevant life or lives in being plus 21 years (at common law).
Specified number of years not exceeding 80 years (under the previous Perpetuities and Accumulation Act 1964).
The 125-year period takes precedence over any provision in the trust instrument. The Act applies to trusts taking effect and wills executed on or after 6 April 2010. As a result, trusts already in existence and wills executed before 6 April 2010 are not generally affected.
Beneficiaries' rights to information
The trustees have a fiduciary obligation to account to the beneficiaries in relation to the trust. In addition to a general right to request information from the trustees, when a grant of administration is made in relation to a will it will be open to public inspection and its information can be inspected.
A further method of obtaining information is to seek disclosure in the course of litigation. The drafter of the trust cannot, however, restrict the court's power to order disclosure in the course of litigation.
Beneficiaries can therefore request information about the trust, regardless of their entitlement, but are not absolutely entitled to receive such information.
The general approach of the Family Courts is to make orders for the division of property on divorce.
When allocating property, the court first looks at the parties needs, with a cross test to ensure the decision is equitable. The overriding requirement is to produce a fair outcome and essentially give each party an equal share. In considering these matters, the court must consider both:
Assets held directly by the parties.
Assets held indirectly through trusts and companies.
The Family Court may regard the trust as a financial resource of the beneficiary and something capable of variation.
The courts can make orders affecting trust property situated outside the UK. However, such orders may not be recognised or implemented by the foreign jurisdiction.
In cases where the beneficiary has a fixed interest under the trust with no power for the trustees to revoke it, the court can order the beneficiary to assign the interest to the divorcing spouse.
If the beneficiary of a trust is declared bankrupt, the assets will vest in a bankruptcy trustee appointed by the court, who will hold the bankrupt beneficiary's assets in trust for his creditors. If the bankrupt beneficiary has a fixed entitlement (for example, the right to receive income from a trust) the court can make an order to direct the payment of that income to a creditor or the bankruptcy trustee.
Potential beneficiaries of a discretionary trust have no trust interest. Trusts can therefore be created to protect a vulnerable beneficiary by automatically converting a life interest into a discretionary trust on bankruptcy (protective trust).
A UK court can set aside a transaction (including settling assets into a trust) if it was entered into by a person with the intention of defeating the claims of potential creditors (section 423, Insolvency Act 1986). Therefore, while assets held in a trust do not generally form part of a person's estate and are not available to meet the claims of the creditors, the court can set aside a trust if it was either:
Created within two years of the settlor becoming bankrupt.
Created within five years of the settlor becoming bankrupt if he was insolvent at the time the trust was created or became insolvent as a result of its creation.
There is no time limit on the court's ability to set the trust aside if the trust was created with the intention of putting assets beyond the reach of creditors.
Recognition of charities
Charities will be recognised in the UK if they are constituted in accordance with the Charities Act 2011. To qualify as a charity, an institution must:
Have a charitable purpose. A purpose is charitable if it falls within the list of purposes in the Charities Act (for example, the advancement of education, religion and so on).
Demonstrate a public benefit.
Be wholly and exclusively charitable.
In the UK, the High Court has jurisdiction over charities.
Exempt charities are institutions that have charitable status and must comply with general charity law. However, these charities are:
Exempt from the requirement to register with the Charity Commission (that is, the UK charities regulator) and cannot register voluntarily.
Not entered on the register of charities (and therefore do not have a registered charity number).
Not directly regulated by the Charity Commission.
Instead, each exempt charity has (or will have) a principal regulator for that charity's compliance with charity law.
Exempt charities have charitable status. They must comply with:
General charity law (including the rules relating to fundraising).
Their governing document.
Regulation specific to their area of operation (for example, education law).
Regulation specific to the form of the charity (for example, trust law and company law).
The trustees of exempt charities have the same duties and responsibilities as trustees of other charities.
The Charity Commission does not issue certificates of exemption. Exempt charities sometimes quote the reference number given to them by the charities division of HMRC as proof of charity status.
It is a criminal offence (punishable by a fine) to solicit money or other property for the benefit of an institution by representing that the institution is a registered charity when it is not (section 63, Charities Act 1992).
Charities in the UK generally take one of the following four legal forms:
Trust (governed by a trust deed).
Charitable incorporated organisation (CIO).
Company limited by guarantee.
From 3 January 2013, it is possible for an existing corporate body to be converted into a CIO (section 228 to 69A-69Q, Charities Act 1993).
The scope, management, turnover and activities proposed to be carried on by the charity will be a deciding factor in determining the legal form that a charity should take.
The Charity Commission is the regulator of charities in England and Wales and has both an advisory and regulatory role. Charities with an annual income of GB£5,000 or more must register with the Charity Commission.
In accordance the Charity Act 2011 (as amended), the Charities Commission regulates:
Persons who can be trustees of a charity.
The duties and powers of the trustees.
Individuals setting up charitable organisations that are registered with HMRC benefit from the following tax advantages:
Charities do not pay tax on the gains on disposal of their assets or on most of the income they receive (provided these are used for charitable purposes).
Charities can reclaim the basic rate tax on grossed up donations by individuals who pay sufficient income tax in the UK (gift aid scheme).
Charities do not pay stamp duty land tax (SDLT) on buying property used for charitable purposes or held as an investment.
Charities do not pay more than 20% of the business rates (if any) on property used for charitable purposes.
Donations made by individuals to registered charities benefit from an increased basic rate band for income tax purposes. Equally, donations made by a company are deemed a deductible expense in the computation of the company's profit for corporation tax (subject to qualifying conditions being met).
Inheritance tax (IHT) donations made are treated as an exempt transfer (see Question 8, Exemptions). In addition, if an individual leaves 10% or more of their net estate to charity, this can reduce the IHT death rate from 40% to 36% (see Question 8, Tax rates). Gifts to charities are exempt from CGT.
UK tax reliefs and exemptions are available to qualifying bodies in the EU. To qualify, these bodies must be registered with HMRC and recognised as charities under UK law. If these requirements are satisfied, charities based outside the UK in other EU jurisdiction will be able to access the tax benefits offered by UK legislation.
Ownership and familial relationships
If there are multiple owners (co-owners), it is always advisable for them to hold property as tenants in common. This relationship can be formalised by entering into a declaration of trust to:
Confirm the extent of their respective beneficial interests.
Set out any express terms that the co-owners want to include. These might include provisions to deal with a situation where one of the co-owners wants to sell or make practical arrangements for day-to-day issues (for example, how the parties will arrange for the property to be maintained, how other expenses related to the property will be met and so on).
Co-owners hold property on a trust of land (section 2(1), Trusts of Land and Appointment of Trustees Act 1996).
The legal estate in a property must be held by co-owners as joint tenants (section 36(2), Law of Property Act 1925).
The equitable estate can be held as either:
Joint tenants. Each joint tenant has an indivisible share in the property and all of the tenants are equally entitled to the whole property. On death, the property passes automatically to the surviving joint tenant without forming part of the deceased's estate (right of survivorship). However, for inheritance tax (IHT) purposes, the share of the property is treated as part of the estate.
Tenants in common. Where co-owners hold as tenants in common, each has a distinct beneficial share in the property. The need for a declaration of trust between co-owners only arises where there is a tenancy in common. On death, their share in the property passes in accordance with their will or the rules on intestacy. The property share is taxed to IHT as part of the deceased co-owner's estate.
For income tax and capital gains tax, each co-owner is assessed to tax on any income or gain attributed to that share irrespective of whether joint tenants or tenants in common.
There is no community of property or other statutory matrimonial regime in England and Wales. On divorce or dissolution, the Family Court has wide powers to make orders for the division of property.
On separation, cohabitees do not have any automatic rights to their partner's assets. However, an unmarried parent can make a claim against the other parent for the maintenance of the child, which can include the benefit of settled property.
Under UK trust law, cohabitees who are not the legal owners can acquire a beneficial in property through their contributions to the purchase price or the mortgage used to buy the property.
The court can also impose a trust in favour of a cohabitee in circumstances where it considers it unconscionable or inequitable for the legal owner to hold the full beneficial interest.
Spouses, civil partners, ex-spouses and civil partners, and in some circumstances cohabitees, are also able to bring a claim for financial provision from their partner's/ex-partner's estate on their death.
The Civil Partnerships Act 2004 introduced the concept of civil partnerships for same-sex couples. Civil partners have the same rights and obligations under UK tax and succession laws as married couples.
The Marriage (Same Sex Couples) Act 2013 came into effect on 13 March 2014 and permits same-sex couples to be married.
According to the Marriage (Same Sex Couples) Act 2013, which came into effect on 13 March 2014, a marriage is a legally recognised contract between a man and a woman or two persons of the same sex. Both persons must be unmarried and consent.
There must be no other factors that would invalidate the marriage (for example, family relationship, age or incapacity).
From 13 March 2014, all legislative references to "marriage" must be read as including same-sex marriage (Marriage (Same Sex Couples) Act 2013).
Divorcing couples can request a decree absolute six weeks after receiving the decree nisi. A couple is divorced once a decree absolute is issued to dissolve the marriage by the Family Court.
Once the decree absolute is issued, the couple are no longer married and free to remarry if they wish. Unlike getting a marriage annulled, divorces cannot be sought until the couple have been married for at least 12 months.
To adopt a child in the UK, the adopting parent(s) must be over the age of 21 years (there is no upper age limit) and the child must:
Be under the age of 18 years when the application to adopt is made.
Not be (or have never been) married or in a civil partnership.
There are different rules for private adoptions and adoptions of looked-after children.
Normally, both birth parents must consent to the adoption unless:
They cannot be found.
They are incapable of giving consent (for example, due to a mental disability).
The child would be put at risk if they were not adopted.
When a child is adopted, the duties and legal rights between birth parents and child are terminated and transferred to the adopting parents.
Children are legitimate if their parents are married at the time of their conception or birth.
A civil partnership is defined as a relationship between two people of the same sex and creating the same legal status and rights as a marriage (Civil Partnerships Act 2004).
The age of majority in the UK is 18 years.
If a parent dies intestate, the minor's interest is contingent on them reaching 18 years (or marrying or entering into a civil partnership earlier at 16 years with consent) and will be held on trust until then (section 33(3) , Administration of Estates Act 1925).
If the minor is subsequently adopted, he is still entitled to his inheritance on reaching 18 years, provided the adoption took place on or after 1 October 2014.
If a minor inherits under a will, the terms of the will govern:
The way in which the child's inheritance is held.
The age at which the child becomes entitled to it. The assets will be held on trust until this time.
There are wide powers under UK trust law to apply the income and capital of the minor's expected inheritance for their maintenance, education and benefit.
Capacity and power of attorney
Two types of power currently exist under English law:
Lasting power of attorney (LPA), executed from 1 October 2007.
Enduring power of attorney (EPA), executed before 1 October 2007.
EPAs exist only apply to those who have executed a power of attorney before 1 October 2007. Therefore, LPAs are currently the only available type of power of attorney that can be executed from now.
Both LPAs and EPAs can be used before and after a person loses capacity. EPAs only cover the person's property and financial affairs, and are effective from the time of registration, whereas LPAs can also authorise an attorney to make decisions regarding the person's health and welfare, effectively only after the individual loses capacity, solely or jointly depending on the terms of their appointment.
An EPA or LPA is valid if the person appointing the power of attorney has sufficient mental capacity to understand the nature and effect of the powers they grant over their assets, and for health and welfare LPAs: their capacity to understand their personal medical and related matters.
If there is no EPA or LPA, the Court of Protection can appoint a deputy who effectively acts as an attorney.
The UK, is signatory to HCCH Convention on the International Protection of Adults 2000 (Protection of Adults Convention), which requires signatories to recognise powers of attorney (or their equivalent) valid under the law of other jurisdictions. The UK signed this on 13 January 2000, and it was ratified only in respect of Scotland on 1 January 2009.
The Mental Capacity Act 2005 (MCA) requires the recognition of valid foreign powers made in the country of the donor's habitual residence (Schedule 3, paragraph 13). The MCA 2005 expressly requires its provisions to be interpreted consistently with the Protection of Adults Convention. This means that the material provisions of the Convention are, in effect, in force in England and Wales.
Proposals for reform
Cap on care costs: 1 April 2020
The government is introducing a cap on care costs from 1 April 2020. Under these proposals, individuals will be required to meet their care costs if their assessable capital exceeds certain thresholds. For individuals at or above retirement age, from April 2020 the individual contribution to care cost will be capped at GB£72,000 after which point the individual's local authority must pay for any future care cost.
Pensions: tax relief reform
The government is considering fundamental reforms to the system of pension tax relief. One option under consideration is a move from the current "exempt, exempt, taxed" system (that is, where pension contributions and investment income receive tax relief but pension payments are taxed), to a "taxed, exempt, exempt" system (with a government top-up), where pension payments are free of tax.
Individual savings accounts (ISAs): flexibility and new ISA types
The government is changing the ISA rules to extend the list of qualifying investments. These plans will introduce an Innovative Finance ISA from 6 April 2016, to allow investment in peer-to-peer loans and debt securities offered via crowdfunding platforms. It is considering whether to add equity crowdfunding.
Income tax: personal allowance and higher rate limit
In the July 2015 Budget, the Chancellor confirmed the Conservative election manifesto commitment to increase the personal allowance to GB£12,500 and the higher rate limit to GB£50,000 by the end of the current Parliament. It is unclear when this will be enacted.
Dividend tax credit
Legislation will be introduced in Finance Bill 2016 to amend the Inheritance Tax Act 2007 and to implement a new 0% rate for dividend income received by individuals, as well as changing the rates of tax for dividend income. The new nil rate will apply to the first GB£5,000 of a person's dividend income and will be available annually.
UK residents will pay tax on any dividends received over the GB£5,000 allowance at the following rates on or after 6 April 2016:
7.5% on dividend income within the basic rate band.
32.5% on dividend income within the higher rate band.
38.1% on dividend income within the additional rate band.
Dividends received on shares held in an ISA will continue to be tax free.
2015 Autumn Statement/and Spending Review/draft Finance Bill 2016
On 25 November 2015, the Chancellor delivered his Autumn Statement and Spending Review. He announced that the Finance Bill 2016 will include a relief from annual tax on enveloped dwellings (ATED) for equity release schemes (home reversion plans) and will extend the reliefs available for property development and properties occupied by employees. These will apply for chargeable periods beginning on or after 1 April 2016.
Finance interest in relation to property income
The Chancellor announced in the July 2015 Budget that higher rate tax relief on mortgage interest payments by individual buy-to-let landlords (and partnerships of individuals that are landlords) will be gradually withdrawn. Instead of treating the interest as a deduction in the computation of net property income, a landlord will claim basic rate relief as a reduction of his tax liability (section 24, Finance (No. 2) Act 2015).
The restriction will not apply to the interest relating to properties that qualify as furnished holiday lettings. The restriction on deductibility applies equally to:
Loans taken out by partnerships to finance the acquisition, conversion or adaptation of dwelling-houses for letting.
Loans to individuals to buy a share in or lend to such partnerships.
Reform of non-domiciled UK residents
The Chancellor announced at Summer Budget 2015 the government's intention to reform the taxation of non-domiciled residents of the UK (non-doms) (that is, persons living in a country but not legally domiciled in it, sometimes obtaining tax advantages in the country of residence).
Legislation will be introduced in Finance Bill 2016 to deem certain persons, who would otherwise be non-domiciled in the UK as a matter of general law, to be domiciled here for the purposes of income and capital gains tax.
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Taxation of Foreign domiciliaries
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HM Revenue & Customs
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Dr Clifford J Frank, LLM, PhD, Partner
Professional qualifications. LLM (tax), 2005; HDipICA 2008, London University; PhD, 2015, Cavalla University; Certified Mediator, Regent University, London
Areas of practice. International and domestic taxation; trust; corporate law; arbitration and mediation.
- Acting for seller in share sale, involved de-grouping issues and properties held outside the UK transferred to the UK: GB£6.1 million.
- Dialogue Group reorganisation of international group for royalty planning: GB£26 million.
- National Crime Agency investigation: GB£1.3 million.
- Acting for creditors group in GLA, action against an insolvent group: GB£6.4 million.
- Structuring an American group in Bio-fuel start up project in South Africa: US$600 million.
- Prime Property Collection inheritance tax planning/cross-border Cyprus, Jersey and UK.
- Restructuring an individual's estate CMV GB£35 million, resulting in income tax savings of GB£1.6 million and inheritance tax (IHT) of GB£12 million.
- Representing clients in HMRC fraud investigation, involving non-resident companies.
- Restructuring family property company and trust to enable the trade to qualify for Business Property Relief.
- Incorporating property investment partnership resulting in SDLT savings of GB£560,000.
- EIS application for business operating in central Africa, in bio-fuel (renewable energy) to raise capital of GB£4 million.
- Consulting major Italian Merchant bank on establishing UK interim holding company.
- School fee planning.
- Restructuring GB£1 million of foreign loans bringing the same onshore, with a 10% tax charge.
Languages. English; Italian (elementary)
- 3 Ways to Settle Your Tax: Staying in Switzerland and Preserving Your Anonymity.
- REIT' s creating value & liquidity from a property portfolio tax efficiently.
- Why me? A tax investigation, June 2016.
- Up Close and Personal, LEXeFISCAL, October 2015.