Probate fees: how we got to where we are

Emily Deane TEPFollowing the news late last week that the UK government is scrapping its plans to hike probate fees, Emily Deane TEP looks back on an eventful 15 months for STEP and practitioners.

February 2016
In February 2016 the Ministry of Justice (MoJ) issued a consultation paper on reforms to the fee system for grants of probate. The paper proposed to increase the fees for estates of over GBP50,000, with a banded fee structure depending on the estate value. Larger estates faced a 13,000 per cent rise to GBP20,000.

STEP strongly opposed the new system on the basis that the proposed fee would be completely disproportionate to the service provided by the probate court, and would effectively be a new tax on bereaved families.

We raised concerns on the grounds of fairness, practicality and legality, in particular that the new measures being introduced via the Draft Non-Contentious Probate Fees Order 2017 may be ultra vires, i.e. beyond the power of the order.

The consultation was widely circulated, with over 97% of respondents opposing its proposals. Then the matter went quiet for almost a year.

February 2017
On 24 February 2017, STEP received notice from the MoJ that, subject to parliamentary approval, and despite overwhelming opposition to the proposals, the new fee system would be implemented in May 2017: just weeks away.

Concerned that this would have a huge impact on bereaved families and their legal advisors, we set out to highlight the issue to ministers, the media and the public.

We contacted the MoJ highlighting our concerns and requesting a meeting. We received no reply, with the MoJ remaining extremely quiet on the issue. No clear information was posted highlighting the new fee structure to the public, with a discreet link to the consultation response on the gov.uk website the only notice that these changes were coming.

We therefore sought to raise public awareness of the issue, issuing press releases and explaining our concerns to the media, and developing guidance for members of the public.

Our work paid off, with national media including BBC Moneybox, the Daily Mail  and the Mirror  covering the issue. Our guidance for the public was viewed nearly 2,600 times and our social media channels were buzzing with activity.

April 2017
Then at the beginning of April we heard that the influential House of Commons Joint Committee on Statutory Instruments had questioned the legality of the proposals, given that the new ‘fees’ looked very like taxes. But while hopes were raised, the government continued to push forward with no changes to its plans.

Concerned that the issue would not be given proper scrutiny, STEP obtained a legal opinion from leading expert in public law, Richard Drabble QC, who agreed with the SI Committee’s findings and confirmed that ‘the proposed Order would be outside the powers of the enabling Act’.

Then, on Tuesday 18 April, Prime Minister Theresa May called a snap election. The pressure was suddenly on to get all orders through before parliament was dissolved.

On Wednesday 19 April the House of Commons Second Delegated Legislation Committee rushed though the Non-Contentious Probate Fees Order 2017 meeting at 8.55am, with no advance warning that it would be tabled that day. It was approved 10 to 2.

On Thursday 20 April we finally received a response from the MoJ to our earlier letter, dismissing our concerns and advising that the fee changes would be going ahead.

We understood that the Lords were due to discuss the matter on Monday 24 April, so we immediately sent the legal opinion to senior politicians in the House of Lords to inform the debate.

Later that evening press reports suddenly emerged that the proposals were to be dropped, and the next day we received a bulletin from the MoJ stating: ‘There is not enough time for the Statutory Instrument which would introduce the new fee structure to complete its passage through parliament before it is dissolved ahead of the general election. This is now a matter for the next government.’

Success…for now…

Our effort, and those of practitioners across the country, to highlight the issue had paid off. The legal uncertainty highlighted by Richard Drabble QC, combined with the media attention, meant that it could not be pushed through the Lords in time.

We have since heard from senior sources in the Lords that the subject may re-surface as primary legislation post-election, in which case it would need to be approved by both Houses of Parliament. We presume it would be re-introduced as a new tax, rather than an increased fee. If so, the funds will go to the Treasury, not the MoJ.

STEP will continue to work closely with our members and the media to increase awareness of the matter, although we sincerely hope it will not re-emerge in a different guise.

Emily Deane TEP is STEP Technical Counsel

HMRC consultation on 4AML implementation

Emily Deane TEPHMRC invited STEP to attend a consultation on 30 March regarding the UK’s implementation of the EU Fourth Anti-Money Laundering Directive (4AML), in particular in relation to the requirement to implement a central register of trusts.

The consultation was hosted by HMRC’s Policy Specialist, Tony Zagara, and focused on Article 31 – trust beneficial ownership. The UK trust register will be implemented on 26 June 2017 and will register trusts anywhere in the world with UK assets that generate tax consequences.

Information about the settlors, beneficiaries and trustees will be required to be reported in an annual submission and the information could be exchanged with law enforcement and competent authorities, but not the public. The focus group discussed the following key issues:

New registration system

The old paper registration system will be replaced with an online service for registration, which will be introduced in two tranches in June and September. The June online service will replace Form 41G for registering new trusts. Form 41G will be removed from HMRC’s website later this month.

The second online service will be introduced in September, which will allow users to make amendments to existing trusts online, further replacing the paper system.

Annual reporting

The trustees will need to report on the trust on an annual basis, but only if it generates tax in that tax year. HMRC was unable to clarify whether, once a trust has been registered with a tax consequence, it is still necessary to submit annual updates in the following years if it has been dormant and has not generated any further tax consequences.

The panel agreed that annual reporting would probably not be necessary if there have been no changes since the first registration, however they agreed to check and revert back on this point.

Bare trusts will be excluded from reporting and new guidance will be produced on HMRC’s landing page in due course.

Letters of wishes

HMRC said trustees should report the identities of beneficiaries who are named in letters of wishes. Every person named in a letter of wishes would need to be identified, regardless of whether they have received a payment, unless they are included as a ‘class’ of beneficiary.

Practitioners were quick to point out that this could be an impossible task for trustees.

They explained to the HMRC panel that if beneficiaries have not received payments they cannot be associated with money laundering, and if they do receive a payment they will be reported anyway under the regulations. Letters of wishes can also be changed frequently and, more often than not, without the advisor’s knowledge.

HMRC defended the reporting obligation by suggesting that letters of wishes could be used as a loophole for criminals if they were excluded from the regulations.

The general consensus of the attendees was that the word ‘vested’ should be incorporated into the definition so that default beneficiaries in letter of wishes are excluded from being reported on unless they receive a payment.

HMRC will be feeding back the discussions from the consultation to its legal team to redraft the regulations.

Consultation deadline

HMRC’s consultation paper was published on its website (see below) and the consultation closes on 12 April. HMRC is requesting responses as soon as possible since there is a short time frame following the closing date. If you have any drafting points to be incorporated in STEP’s consultation response, please email Emily.Deane@step.org by 10 April.

Emily Deane TEP is STEP Technical Counsel

Probate fees – will common sense prevail?

George HodgsonThe government’s threat to radically increase probate fees next month (Probate fee rise ‘a new tax on bereaved families’) may be receding, following a meeting of the House of Commons Joint Committee on Statutory Instruments on 29 March.

Using some very welcome common sense, the committee raises the issue (para 1.12) that it is a constitutional principle that there should be ‘no taxation without the consent of Parliament’. This is something I suspect 99% of people will agree with.

It finds that the proposal from the Ministry of Justice (MoJ) is clearly a tax, not a fee, in every normal definition of the term, and should therefore be subject to full parliamentary scrutiny, rather than brought in via the back door through a Statutory Instrument.

The committee also finds (para 1.13) that ‘charges’ of the magnitude proposed by the MoJ were probably never envisaged when the original legislation the government was attempting to use here was approved. In other words, using this process is an abuse.

We would hope that this will provide an opportunity for the government to re-think its approach, which was criticised by over 90% of those responding to the consultation, and submit re-worked proposals for proper scrutiny by Parliament.

• Joint Committee on Statutory Instruments: Non-Contentious Probate Fees Order 2017

 

George Hodgson is Chief Executive of STEP

Have you registered your LEIs?

Emily Deane TEPEvery legal entity will need to get a Legal Entity Identifier (LEI) by 3 January 2018. Emily Deane TEP explains what LEIs are, and how to get one.

What is an LEI?

The Global Legal Entity Identification Foundation (GLEIF) has designed a system where every ‘legal entity’ will need to register and obtain a unique identification number – a Legal Entity Identifier (LEI) before it can trade on financial markets in the UK after 3 January 2018.

The London Stock Exchange (LSE) requires investors who are deemed to be legal entities to obtain an LEI, which is a 20-character alphanumeric reference code that is unique to the legal entity. Legal entities include Trusts (but not Bare Trusts), Companies (Public and Private), Pension Funds (but not Self-invested Personal Pensions), Charities and Unincorporated Bodies that are parties to financial transactions.

Do trusts need one?

Bare trusts have been excluded from the requirement to obtain an LEI, but all other trusts will be obliged to obtain one if they are parties to financial transactions. In the case of discretionary trusts which have legal restrictions and cannot disclose trust details, the LSE will accept a validation from the trust itself and will not require sight of the trust deed. However, in all other cases the LSE will generally accept a scanned copy of the first couple of pages of the trust deed in the same way that many banks do for AML compliance.

Entities other than trusts are obliged to provide information such as their official registry details and business address. All LEI data will be consolidated in one database in an effort to improve global entity identification and standardisation.

What if I don’t apply?

If the LEI has not been obtained by 3 January 2018 then investment firms will not be able to provide the legal entity with investment services. The legal entity itself is ultimately responsible for obtaining the LEI, but some investment firms may agree to apply for the LEI on behalf of their legal entity clients. The LSE has produced a draft format (pdf) which will be acceptable in order to transfer the application authority from the entity to a third party such as a management company.

The LSE will charge an initial allocation cost of GBP115 + VAT and annual maintenance cost of GBP70 + VAT per LEI.

How do I register?

Registration for individual LEI allocation requests started on 5 August 2013. You can request your LEI via the link below, and there are two user guides to help you:

More information can be found on the Financial Conduct Authority’s website:


Emily Deane TEP is STEP Technical Counsel

 

European Data Protection Supervisor voices privacy concerns over 4AMLD

George HodgsonThe European Data Protection Supervisor’s Opinion on proposed amends to the Fourth EU Anti-Money Laundering Directive (4AMLD) shines a welcome spotlight on data protection implications and the ‘significant and unnecessary risks to an individual’s right to privacy’.

The Opinion, published on 2 February 2017, raises questions as to whether or not the proposed collection of personal data is proportionate to the fight against money laundering and terrorism financing and scrutinises the access to beneficial ownership information and the significant and unnecessary risks that this might cause an individual who has a right to privacy and data protection.

STEP has been heavily engaged with Brussels for some time on proposed revisions to 4AMLD. We have also, via our relevant STEP branches, been active on the issue in several EU Member States.

The existing 4AMLD recognises that many trusts are sensitive family arrangements, often designed to protect the interests of vulnerable family members. Trusts are therefore treated differently to corporate structures: beneficial ownership information on trusts is not publicly available and is only accessible by recognised competent authorities, and registers of trusts are confined to trusts with tax consequences, reflecting the fact that any risk assessment suggests that this is where the highest risk of abuse lies.

The proposed revisions to 4AMLD effectively put trusts on the same basis as most corporate structures. This means Member States would be required to establish comprehensive beneficial ownership registers of ALL trusts – a change that will impact on millions of ordinary families. It also would require that such register should be available, as a minimum, to anyone who has a ‘legitimate interest’ (not defined – but understood to include journalists and NGOs with an interest in this area), and allowing Member States to open such registers even to those with no demonstrable ‘legitimate interest’ in the information.

In spite of STEP’s best efforts, and the best efforts of other professional bodies who have been working with us on this issue, our arguments against these proposals were getting little attention from policy makers. The original proposals for the revision were sparked by a wave of terrorist attacks in Brussels, and then were increasingly seen as a necessary political response to the Panama Papers scandal. Brexit then did few favours for those trying to argue in Brussels for the merits of what are still generally seen as ‘Anglo-Saxon trusts’…

It is encouraging, therefore, that the European Data Protection Supervisor, a powerful voice in Brussels, has now weighed in with a stinging review of the proposed amendments. They are seen as having muddled objectives underpinned by little objective risk assessment and paying scant regard to the issue of proportionality, particularly in the proposal to allow wide access to beneficial ownership information on family trusts. We can only wait and see how this impacts on the intense debate that is currently going on in the EU Parliament on the proposals.

 

George Hodgson is Chief Executive of STEP

CRS and Charities: January 2017 update

Donations boxHMRC hosted another Charities CRS working group on 16 January. The following issues were on the agenda for discussion:

Anti-Avoidance Rules

HMRC would like to refine its currently broad regulation regarding anti-avoidance. It is scheduled to discuss it with the compliance team shortly. It will also be reviewing the anti-avoidance issues surrounding donations channelled through other charites and some more detailed guidance is expected to be issued shortly thereafter.

Trust Guidance

HMRC is in the process of preparing some guidance with the OECD focusing on some of the grey areas surrounding trusts. STEP has produced a memorandum on the issues of concern on how the CRS is intended to apply to trusts, persons connected with trusts and trust assets. The memorandum sets out our understanding of the application of the CRS in certain circumstances and highlights points of uncertainty in the reporting framework. We have submitted the paper to HMRC and the OECD and hope that it will form part of the additional new OECD guidance.

Human Rights

HMRC has issued new guidance, Charities: Protection on Human Rights Grounds, which will assist charities concerned about the human rights implications associated with information they are required to report under the automatic exchange of information (AEOI) agreements. HMRC recognises that there may be cases where the threat to an individual’s human rights as a result of his or her information being exchanged may justify information being redacted from that transmitted. The guidance covers the redaction of information on human rights grounds; threats to human rights, and safeguards already in place; and how to apply for redaction of information, including the HMRC process and the documentation required.

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC.

 

Emily Deane TEP is STEP Technical Counsel

What next for offshore?

Offshore PerceptionsSTEP has published Offshore Perceptions, a major new piece of research looking at the current state of the offshore world. It paints a picture of a sector adapting rapidly to a new regulatory and institutional environment. It also confirms that measures designed to tackle abuse by a few, are actually having a major impact on costs for the legitimate clients who are the overwhelming majority of users of private client services both offshore and onshore.

The research, sponsored by First Names Group, is based on a survey of over 1,000 respondents, fairly evenly split between the offshore and onshore world, and with a very broad geographical reach.

Over three quarters of the offshore respondents to the survey report that compliance has become a burden to a ‘great’ or ‘large’ extent. Not surprisingly, this rising burden of compliance is driving up costs to the client and the report highlights a shift away from smaller clients and lower value work, both of which are no longer economically viable in the new cost environment.

Another major factor impacting the industry is the move by banks to de-risk their business. Half of all offshore respondents identified this as impacting their business to a ‘great’ or ‘large’ extent. Intriguingly, the de-risking issue was seen as important by even more onshore practitioners, with 60% telling us that it was having a ‘great’ or ‘large’ impact on the offshore worlds.

This mix of rising costs and the major banks withdrawing from many areas as they lower their risk appetite is, not surprisingly, expected to produce yet more consolidation in the offshore world, with most offshore respondents expecting the pace of consolidation to accelerate still further.

This inevitably raises fears about employment prospects, although there is still considerable optimism about business opportunities, not just in Asia and other traditional offshore markets but also, increasingly, from Africa. The survey confirms that family offices are also seen as an important growth area within the overall offshore environment.

Measures to improve transparency and tighten regulation have been one of the key global themes of the past few years, impacting offshore and onshore practitioners alike. The Offshore Perceptions report confirms that industry concerns have proved accurate in predicting that these measures, aimed at tackling abuse by a few, would result in sharply higher costs and less choice for the many.

The report also suggests, however, that the offshore world is busy adapting to the new environment and is far from gloomy. Over three quarters of offshore respondents feel optimistic (to a ‘great’, ‘large’ or ‘moderate’ extent) about the prospects for their jurisdiction and a broadly equivalent number are also optimistic about the prospects of their business sector. Many of the offshore centres have had to adapt to major challenges in the past. Generally they seem well placed to do so again.

George Hodgson is Interim Chief Executive of STEP

CRS and Charities October update

Emily Deane TEPHMRC hosted another Charities CRS working group on 12 October. The following issues were on the agenda for discussion:

Human Rights Guidance

  • HMRC has been collecting examples from the working group to increase transparency and address concerns where the exchange of information could put individuals at risk. Its new guidance has addressed some of these concerns.
  • It was pointed out that HMRC has highlighted the absolute rights within the Human Rights Act, but it does not refer to the qualified rights of individuals, and these should also be considered.

Discretionary Management

  • Some discretionary management scenarios were discussed by the group and it was suggested that HMRC provide examples of these in its guidance.

    HMRC noted that it was difficult to provide examples to cover every scenario, because the facts of each individual case will determine whether or not it falls within the scope of CRS. However, it agreed to continue to refine its guidance where possible.

  • HMRC confirmed that simply setting parameters for an investment manager (for example that he/she may only invest in ethical investments) does not mean that discretion is retained by charity trustees.

Communications

  • HMRC will be producing a webinar for charities setting out a basic introduction to CRS, which should be available before December.
  • HMRC was asked to produce a proforma for charities to use when completing the self-certification process. It advised that while this was not possible, some examples on the OECD automatic exchange portal might be useful instead.
  • HMRC has been hosting some CRS Charity events in conjunction with STEP. If you would like more information please contact Emily.Deane@step.org

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC. The next meeting is in January.

 

Emily Deane TEP, STEP Technical Counsel

Legacy giving: the role of the practitioner

charity jarOn 18 October, my colleague Beatriz Brockhurst (STEP News Editor) and I attended the launch of Legacy Giving and Behavioural Insights – a research report which examined how will writers discussed charitable giving with their clients.

Bridging the gap

The research illustrates the gap between clients expressing an interest in leaving charitable gifts (35 per cent) and those who actually do so (6 per cent). The event considered the ways in which practitioners can encourage greater giving by testators, drawing on evidence gathered from eight law firms and 31 solicitors, as well as 2,600 wills that were analysed during the two-year study.

Having the conversation

As a starting point, professionals should be talking about charitable legacy with their clients as part of the will preparation process.

But are clients comfortable with having this conversation? The study found that 69 per cent of clients generally deemed it acceptable for such a topic to be raised – and 46 per cent regarded it as the duty of the professional to mention it.

Different approaches

The research trialled three different ways of talking to clients about charitable legacies:

  1. Social norm framing – informing the client that charitable bequests was something many people did, and to ask if they would like to do the same. Legacy giving increased by 40 per cent for people making their first will.
  2. Emotional framing – asking the client to think about charities they or their families were passionate about, and/or had benefited from. This type of messaging was found to increase donations from clients both with and without children.
  3. Posthumous benefit framing – highlighting the good work that would result from a charitable bequest. This was regarded as the least acceptable and least effective form of messaging.

Tax incentives

The study also found that, in most cases, the tax advantage of legacy giving due to inheritance tax thresholds was not a motivating factor.

A TEP’s perspective

Jo Summers TEP, a member of STEP’s UK Practice Committee, offered a practitioner’s point of view. She emphasised the need to broach the subject of charitable legacy carefully and sensitively, not least to protect against being regarded as having exercised undue influence. Jo cited the initial client questionnaire as a good way to introduce the topic, with scope for a further conversation, if the client indicated this would be appropriate.

Practitioners also need to be aware that the charity the client would like to leave a donation to could change over time. As a practical solution, Jo suggested the will could contain a clause stating a percentage legacy, or a fixed sum to be split between charities chosen by the executors, with a letter of wishes to indicate where the money should be donated, depending on the client’s family circumstances at the time of their death.

Conclusion

The study concludes that will clients are generally open to having a conversation about charitable legacy. Practitioners can therefore play an important role in raising the level of charitable donations as legacy gifts.

The report offers interesting behavioural insights around legacy giving – I encourage you to read it:

 

Sean Smith, STEP Policy Manager

April 2017 changes to the UK’s taxation of long-term resident, non-domiciled individuals

Update on discussions relating to the treatment of trusts

Following the consultation paper issued on 19 August 2016, members of STEP’s UK Technical Committee have been closely involved in discussions with HM Treasury and HM Revenue & Customs in relation to the latest proposals.

The most difficult area is the treatment of offshore trusts set up by non-domiciliaries who become deemed domiciled in the UK as a result of having lived there for 15 years in a 20 year period.

When the changes were announced in the July 2015 budget, much was made of the fact that assets held in trust would be protected from inheritance tax, capital gains tax and income tax (other than in relation to UK source income which would continue to be taxed as it arises). A deemed domiciled settlor would only be taxable on benefits received from the structure or conferred on close family members.

One significant surprise in the August consultation paper therefore was a proposal that a deemed domiciled settlor would be taxed on all of the gains of an offshore trust once the settlor or a close family member has received any benefit from the trust – ie the receipt of the benefit would mean that the capital gains tax protections would be lost for the future.

As part of the consultation discussions, a paper has been prepared by a barrister with input from colleagues from various representative bodies including STEP. The paper is very much in draft form but sets out a potential alternative approach to legislating the trust protections. A copy of the paper can be found below.

We have been asked to make it absolutely clear that the paper was not commissioned by HMRC or HMT. Nor does it represent an approach to trusts preferred either by HMT, HMRC or the government. The paper was prepared to facilitate discussion at a consultation meeting between HMRC/HMT and various representative bodies to consider alternative approaches to how it is best to legislate the protections and it should be read in that context.

Having said this, it is important that STEP members are aware that alternative proposals are being put forward and discussed and that the final proposals may well be different to those made in the 19 August 2016 consultation paper.

We are expecting the government’s position to be announced as part of the Autumn Statement on 23 November 2016 with draft legislation being available by 5 December as part of the draft Finance Bill.

 

STEP UK Technical Committee