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Private Client Section

Brain trust

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At the Private Client Section annual conference, Lesley King provided an update on recent developments in private client law, including the online trusts register, recent case law, and the rules around adoption and succession

It has been another eventful year, and we have the next instalment of the probate fees story yet to come. At the conference, I spoke about a number of the more recent developments, outlined below.

Online trusts register

The Fourth Anti-Money Laundering Directive took effect on 26 June 2015. We had to implement it within two years, so the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017.

The directive seeks to prevent anonymous structures (companies and trusts) from financing terrorism and laundering money. Therefore, all trustees of express trusts will be required to gather information to identify the settlor, trustees, protector, beneficiaries or class of beneficiaries, and any other natural person exercising control (regulation 44(1)).

States must maintain a register of beneficial owners of ‘taxable’ trusts. Regulation 45(14) of the draft defines a trust as ‘taxable’ for this purpose in any year in which its trustees are liable to pay any of the following taxes in relation to assets or income of the trust: income tax; capital gains tax; inheritance tax; stamp duty land tax; land and buildings transactions tax; or stamp duty reserve tax. HM Revenue & Customs (HMRC) is developing an online trusts register which will replace the current system using form 41G (trust).

The April 2017 Trusts and Estates Newsletter said: ‘Any new trusts with a UK tax consequence will be required to use the registration service to obtain a unique taxpayer reference (UTR)’ and ‘trustees will need to update the register each year that the trust generates a UK tax consequence’.

HMRC is no longer accepting form 41G, but has asked taxpayers to delay notifying it of any new trusts until the register is operational. Agents will apparently be able to register new trusts and update existing ones by October 2017.

In cases where it is not possible to wait because there is a tax liability which, if unpaid, will attract interest or penalties, HMRC has apparently indicated that it will accept a form 41G, but it would be sensible to explain the circumstances before sending the form.

Trustees’ duties in relation to accounts

Two recent cases – Henchley and others v Thompson [2017] EWHC 225 (Ch) and Royal National Lifeboat Institution and others v Headley [2016] EWHC 1948 (Ch) – contain four interesting points on the extent of trustees’ obligations in relation to the production of accounts by trustees.

Trustees have a duty to be ready to account to beneficiaries

Lord Justice Millett in Armitage v Nurse [1998] Ch 241 at paragraph 261 said that: ‘Every beneficiary is entitled to see the trust accounts, whether his interest is in possession or not.’ However, (i) accounts do not have to be in the form of conventional business accounts, nor (ii) will accounts in conventional business form necessarily suffice.

In relation to (i), Master Matthews said in the RNLI case that conventional balance sheets and profit and loss accounts were not essential. Trustees had be ready to account to their beneficiaries for what they have done with the trust assets. ‘This may be done with formal financial statements, or with less formal documents, or indeed none at all.’

In relation to (ii), Master Marsh said in Henchley that a profit and loss account and balance sheet produced in 1990 and 1991 did not provide beneficiaries with an adequate understanding of how the trustees had managed the trust assets in the relevant periods. Hence adequate trust accounts had not been prepared.

All beneficiaries are entitled to information about their interest but not necessarily to information about other interests

In the RNLI case, Master Matthews made the point that the information a beneficiary was entitled to see depended on what was ‘needed in the circumstances for the beneficiaries to appreciate, verify and if need be vindicate their own rights against the trustees in respect of the administration of the trust’. So, for example, remainder beneficiaries are not entitled to information about income, because that concerns only the life tenants.

Failure to provide accounts is not subject to a limitation period

Under section 21(3) of the Limitation Act 1980 (LA 1980), an action by a beneficiary in respect of any breach of trust cannot be brought more than six years from the date on which the right of action accrued (unless the claim is in relation to the trustee’s fraud or to recover trust property from the trustee).

Section 23 of the act provides that an action for an account cannot be brought after the expiry of any time limit which is applicable to the claim which is the basis of the duty to account.

In Henchley, the argument centred on whether the application for account was barred under section 21(3). Master Marsh held that it was not.

The claimants were not alleging a breach of trust. They wanted an order enforcing the obligation, not a remedy for breach. Section 21(3) therefore had no application. The LA 1980 has no limitation period which applies to proceedings brought by a beneficiary for an order for an account.

All trustees are responsible for good record-keeping

In Henchley, the surviving trustee claimed that he was absolved from providing an account, because no documents had been retained and he had left record-keeping to another trustee. Master Marsh said trustees remained collectively liable to beneficiaries, however they chose to divide responsibilities.

Professional negligence in the context of tax advice

The claimants in Halsall & others v Champion Consulting Ltd & others [2017] EWHC 1079 (QB) were litigation solicitors in the same firm. They claimed they were negligently induced to invest in two tax schemes. Both failed, leaving the claimants with significant tax liabilities.

Mr Justice Moulder accepted that the advisers had described one scheme as ‘guaranteed’ and a ‘no-brainer’, and had rated the prospects of success of the other as 75 to 80 per cent.

The advisers were held to have acted negligently, in that no reasonably competent tax adviser could have advised as they did, and loss had been caused as a result. Unfortunately, the claims were statute-barred.

The following points are of interest.

Terms of retainer

In relation to the ‘no-brainer’ scheme, the taxpayers had entered into written contracts after the initial meetings with the advisers, which said that there was no guarantee of success and ‘It is not possible… to predict whether a challenge will be made and if so whether or not it would be successful’.

Some, but not all, of the engagement letters had the relevant paragraph deleted. Mr Justice Moulder held that even where the paragraph remained, it did not have the effect of amending the retainer or ‘correcting’ the oral assurances given to the claimants.

Standard of care

The applicable test is whether no reasonably competent tax planner / adviser could have acted as the defendants did (see Saif Ali v Sydney Mitchell & Co [1980] AC 198 at paragraph 220).

The experts on both sides accepted that it was not reasonable for a professional adviser to give guarantees that a scheme would work.

Information / advice

There is a distinction between providing information and providing advice (see SAAMCO v York Montague Ltd [1997] AC 191). A person who is under a duty to provide information is responsible only for the consequences of the information being wrong. A person under a duty to advise whether or not a course of action should be taken must take reasonable care to consider all the potential consequences of that course of action. If they are negligent, they will be responsible for all the foreseeable loss which results from the course of action.

Here, the defendants were clearly acting as advisers responsible for advising the claimants as to their course of action.

Limitation

Section 14A(5) of the LA 1980 required the claimants to show that the action was brought within three years from the earliest date on which the claimant had (i) the knowledge required for bringing an action for damages, and (ii) a right to bring such an action.

Correspondence revealed that the claimants had knowledge that HMRC was challenging both types of scheme by, at the latest, 2011.

Adopted children

The Adoption of Children Act 1949 provided for the first time that adopted children were to be treated as children of the adopting parents for succession purposes. However, that act and subsequent statutes contained transitional provisions preventing their application to any disposition made prior to the coming into force of the statute in question.

There have been several unsuccessful challenges to this rule, based on alleged breaches of article 8 (respect for private and family life) and article 14 (no discrimination on any ground including birth) of the European Convention on Human Rights.

In Hand v George [2017] EWHC 533 (Ch), Mrs Justice Rose concluded that UK legislation was discriminatory and should be read in such a way as to remove the discrimination.

In relation to the issue of retrospectivity, Mrs Justice Rose analysed the House of Lords decision in Wilson and others v First County Trust Ltd (No 2) [2003] UKHL 40, which she considered was ‘authority for the proposition that the [Human Rights Act 1998 (HRA)] does not generally have retrospective effect’. However, the question whether an individual died leaving ‘children’ must be answered at the date of their death (2008) and thus, ‘to apply the HRA in combination with the wording of the will is not, in my judgment, truly a retrospective application of the HRA’.

To prevent any unfair interference with pre-existing rights, she suggested that the exclusion of adopted children under dispositions already in existence should be allowed to continue if the beneficiary of the disposition has done something to avail themselves of the property right in question before the coming into force of the HRA. This will rarely be the case.

The same reasoning will apply to illegitimate children.

There has apparently been an application for leave to appeal. 

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