Reviewing the New Zealand Property (Relationships) Act: have your say

New ZealandYou might not know it, but New Zealanders have a love affair with trusts. NZ practitioners probably won’t be surprised to hear that there may be anywhere between 300,000 to 500,000 trusts in the country, one of the highest per capita rates in the world.

But trusts can lead to unfair outcomes when a relationship ends. As a general rule, trust property isn’t divided equally between the partners. It’s only divisible to the extent that each partner is a beneficiary of the trust, and has a vested or contingent interest in the trust property. That means the Property (Relationships) Act 1976 (PRA) doesn’t apply to a lot of the property used and enjoyed by New Zealand families.

While the law does offer some remedies, there are issues with those too. Sections 44 and 44C of the PRA are limited, and the proliferation of alternative remedies to attack trusts is making it difficult for practitioners to provide advice. Many people argue that the PRA should deal with trusts more effectively, and on a clearer and more principled basis.

Our preliminary view is that the PRA doesn’t strike the right balance between the preservation of trusts and enabling a just division of property at the end of a relationship. Unfortunately there’s no ‘silver bullet’ solution. So we’ve presented four options for reform in our paper, Dividing relationship property – Time for change? Te mātatoha rawa tokorau – Kua eke te wā?

1. Change the PRA’s definition of ‘property’ to include any interest under a trust through which it is both likely and permissible that the partner will receive a distribution of trust property. This may include a partner’s power of appointment if they can exercise it in their own favour. Option 1 would mean that qualifying discretionary beneficial interests could be treated like any other item of property under the PRA.

2. Change the PRA’s definition of ‘relationship property’ to include the value of trust property attributable to the relationship if the court considers it just. The focus of this option is on the character of the underlying trust assets rather than option 1’s focus on the nature of the partner’s beneficial interest in the trust. It seeks to bring trust property into the relationship property pool when that property has the character of relationship property. The court would, however, retain discretion to prevent sharing of the trust property when the partners have genuinely, and with informed consent, alienated the trust property for the benefit of third party beneficiaries.

3. Broaden section 44C to overcome its main limitations. This would include changes to remove the requirements that the disposition be of relationship property and that it must occur after the relationship began. Section 44C(2) would be expanded so that the court may order the trustees to pay to one partner a sum of money from the trust property or transfer to a partner any property from the trust. The matters the court must take into account in exercising its powers under section 44C(2) could also be expanded. These changes would give section 44C a much wider application.

4. A new provision modelled on section 182 of the Family Proceedings Act 1980. Section 182 has proven to be a useful provision that gives effect to the original expectations of people that settle trusts and deals with injustice that could otherwise be caused by changed circumstances. But it needs to be enlarged to apply to de facto relationships as well as marriages and civil unions, and there’s a case for bringing it into the PRA.

There will be varying degrees of support for, and opposition to, the options above. That’s why it’s so important for you as STEP members to have your say. Please visit our consultation website below and tell us how you think the law should be reformed. Part G of our issues paper is dedicated to what should happen to property held on trusts.

Reviewing the Property (Relationships) Act

Please email your submission to pra@lawcom.govt.nz by 7 February 2018

Helen McQueen, Commissioner, New Zealand Law Commission

Will-writing reforms proposed

Signing Last Will and TestamentThe Law Commission of England and Wales is holding a public consultation on reform of the law of wills. The current law, largely derived from the Wills Act 1837, is understandably antiquated and requires an overhaul. The Commission notes that 40 per cent of people in England and Wales die without leaving a valid will, which often results in application of the unfavourable laws of intestacy.

Background

Significant changes in society, technology and medicine have prompted the Commission to review the wills law. Some of these factors include:

• the ageing population;
• the greater incidence of dementia;
• the evolution of the medical understanding of disorders, diseases and conditions that could affect a person’s capacity to make a will;
• the emergence of, and increasing reliance on, digital technology;
• changing patterns of family life – for example, more cohabiting couples and more people having second families; and
• with more people having substantial amounts of property, clarity about what happens to it after death being more important than ever.

Objectives

The Commission’s objective is to modernise and improve the current, archaic wills law. Some of the key focus areas include:

More flexibility: This would enable courts, when it is clear what the deceased wanted or intended, to dispense with the formalities of a will. If a particular formality, such as having two witnesses sign the will, had been overlooked or incorrectly administered, new ‘dispensing powers’ would enable the court to validate the will.
Capacity review: It may be necessary to improve the test for capacity to reflect the modern understanding of medical conditions such as dementia. This review could result in the introduction of a new test specifically linked to these conditions, where the testator makes a will with specific new guidance and support.
Statutory guidance: It may be necessary to introduce statutory guidance for doctors and other professionals when assessing whether or not a person has the required mental capacity to make a will. This could reduce the need for lengthy, costly litigation.
Undue influence: New rules should be considered to protect testators from being unduly influenced by another person. In particular, elderly and vulnerable testators should be better protected from fraud.
Testamentary capacity: Lowering the age at which a will can be made from 18 years old to 16. A child of 16 or 17 might have significant assets that he or she may not want to pass to an estranged parent under the rules of intestacy.
Electronic wills: It may be necessary to review how technology can be adapted in relation to making a will; it may become easier, cheaper and more convenient to a testator if they are able to do so electronically, though some practical challenges will need to be considered.
Ademption: The Commission would like to encourage discussions as to whether or not the ademption rules need to be reviewed. The rules could be improved to better align the testator’s wishes and intentions with the operation of the law.

Consultation events

STEP is working closely with the Law Commission and the Association of Contentious Trust and Probate Specialists (ACTAPS) on this consultation project. STEP is hosting free consultation events in London, Newcastle and Manchester, and STEP members are invited to provide feedback to Commission representatives.

Consultation event schedule:

London, 13 Sep
Newcastle, 18 Sep
Manchester, 18 Oct

The consultation closes on 10 November 2017, and the Commission’s conclusions, along with its final recommendations and a draft Bill, are expected to be published in early 2018.

Emily Deane TEP is STEP Technical Counsel

UK buy-to-let tax and SDLT changes

cottageSignificant tax changes are on the way for anyone buying a second home or a buy-to-let property in England & Wales. The Scottish and Northern Irish Governments have also unanimously backed the changes, which will come into effect from 1 April 2016.

Robert Jamieson TEP explained the new changes in a STEP seminar for tax planning for businesses held in London on 22 February.

Under the current rules, you are entitled to claim all of the mortgage interest that you pay against the income of your buy-to-let property, and then only pay tax on the remainder, whether it is the basic rate of 20 per cent or the higher rates of 40 per cent and 45 per cent. Other valid expenses can also be deducted before the tax is payable.

However, from next year the calculation of the tax relief is going to be greatly reduced to a flat rate of 20 per cent on the whole income of the property. This will be slowly phased in from 2017 and by 2021 the rules will be fully enforceable. Landlords who pay the basic rate of 20 per cent will see no change, whereas the higher rate tax payers of 40 per cent or 45 per cent will lose 50 per cent or more on their tax relief. These rules do not apply to owners of furnished holiday accommodation or to landlords of rented commercial property (S24 F(No2)A 2015).

From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) are also being introduced resulting in an additional 3 per cent on top of the fixed 2014 rates which will be charged on the purchase of both second homes and buy-to-let properties. The Chancellor George Osborne quoted ‘People buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be 3 per cent higher on the purchase of additional properties like buy to lets and second homes.’

This increase significantly inflates the stamp duty tax on a GBP275,000 buy-to-let purchase from GBP3,750 to GBP12,000.

The Chancellor has also proposed that from April 2016, ‘wear and tear’ costs will only cover furnishings that have actually been replaced or repairs that have been carried out, with receipts to evidence the expenditure. The current rules are that landlords are given a wear and tear allowance regardless of how much of it they actually use.

These imminent reforms are making it far less attractive for individuals – or financial entities – to invest in second homes and buy-to-let properties. There are, however, two ways in which these charges can be mitigated by using S116(7) FA 2003 ‘multiple dwellings relief’, or the more complicated partnership or LLP arrangement set out in Schedule 15 FA 2003.

Nonetheless, the new rules will disincentivise most landlords from investing further in a rental portfolio when the scope for profit has been cut so significantly.

 

Emily Deane TEP is Technical Counsel at STEP