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Ending Assured Shorthold Tenancies

John Devlin, Litigation and Dispute Resolution Specialist



Despite its title the Deregulation Act has introduced greater regulation into the residential letting market. Typically a landlord when granting an AST to a tenant would at the same time serve on the tenant a section 21 notice enabling the landlord to take back possession at the end of the tenancy. The law now says that a valid section 21 notice cannot be served within the first 4 months of the tenancy and, once served, the landlord must act on it within 6 months or serve a fresh section 21 notice.

Among other changes introduced by the Act, before service of a valid section 21 notice, the landlord must have supplied the tenant, free of charge, with an Energy Performance Certificate, a Gas Safety Certificate and a leaflet entitled “How to rent: The checklist for renting in England”.

In a recent court case the judge decided that a landlord who had served the tenant with a Gas Safety Certificate after the start of the AST but before serving a section 21 notice could not rely on the section 21 notice to bring the AST to an end because the obligation on the landlord was to serve the Gas Safety Certificate before the start of the AST. At the time of writing the judge’s decision is the subject of an appeal to the Court of Appeal and until such time as the appeal has been heard the legal position will remain unclear.

Other conditions have been introduced by the legislation and failure to comply with all the changes may result in a landlord being unable to bring an AST to an end. A landlord contemplating granting an AST or seeking to bring one to an end would be well advised to obtain legal advice first. 

For more information and advice please contact John Devlin at jdevlin@horseylightly.com or Katie Harris kharris@horseylightly.com or telephone on 01635 580858.

   

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Wills for Unmarried Couples

by Stephen Meredith, Consultant Tax Specialist

                                                                                                                                  

 

The most obvious problem that unmarried couples face when making Wills is that spouse exemption for Inheritance Tax (IHT) purposes will not apply on the first death in the way that it would for a married couple or civil partners.  Instead the only allowance that will be available on first death is the individual IHT Nil Rate band (currently £325,000).  The value of any assets in excess of that amount will be chargeable to IHT at the rate of 40% subject to any reliefs that might be claimed for business or agricultural assets eg shares in a trading business or agricultural land.

 The new Residence Nil Rate Band (RNRB) can only be claimed to the extent that any interest in a residence is left down to lineal descendants eg children or grandchildren. From 6 April 2019 the RNRB is worth up to £150,000 for an individual rising to £175,000 on 6 April 2020 (see separate article on RNRB).

 It is NOT therefore sensible for unmarried couples to make Wills leaving everything (except possibly assets with a value below £325,000) to each other.  This is because those assets will suffer a double IHT hit at 40% on each death subject to any Quick Succession Relief (QSR) that might be claimed on second death if the deaths take place within 5 years of each other.

 What then can unmarried couples with significant assets do to protect themselves from this double IHT hit, assuming that they want the survivor to continue to have some benefit from their estate after they have died? The answer is to make a Discretionary Trust (DT) Will with an accompanying Letter of Guidance to the Trustees (who can include the survivor) setting out who the beneficiaries should be (again, these can include the survivor but can also include children, other family members, friends and charities) and how they should benefit eg whether from income or capital or both, or whether they should be permitted to occupy any residence (or share therein) forming part of the Trust Fund. DT Wills can also protect assets against care or nursing home fees.

 While the whole estate will be subject to IHT at 40% on the first death, on second death none of the assets will be subject to a further 40% IHT hit for the simple reason that the survivor does not own them – instead they are held within the Trust.  Discretionary Trusts are subject to their own IHT regime but this is much more benign than that which applies to individuals. Instead of the 40% rate which applies on death, the top rate of IHT applying to a Discretionary Trust is only 6% and this is levied every 10 years or when assets leave the Trust ie they are transferred out of the Trust to a beneficiary.  The 6% rate is levied on the extent to which the value of the assets in the Trust exceed the IHT Nil Rate Band (currently £325,000) at the date of the 10 year anniversary.  For example, if the value of the Trust assets at the 10 year point was £825,000 then the IHT charge would be (825,000 - £325,000) = £500,000 x 6% = £30,000 compared to 40% on death = £200,000. Therefore, even if the survivor were to live for another 20 or 30 years after the first death had occurred you can see that the total IHT payable on the Trust assets over that period would still be less than half of the 40% rate that would have applied on death.

 The IHT savings that can be achieved by unmarried couples simply having tax efficient Wills in place are very significant but are often missed out on by them either by not making Wills at all or by having had inappropriate or poor advice.  

This is a specialist area.  If you would like to learn more please contact our Trusts and Tax expert Steve Meredith at smeredith@horseylightly.com  or on 01635 580858


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Resolving Disputes

By John Devlin, Partner


Most people are familiar with the term litigation which involves two or more parties asking a judge to determine the outcome of their dispute. It is however the case that litigation is not only lengthy and costly but the outcome is often unpredictable. Litigants hand control of their dispute to the court which dictates the pace of the litigation, the evidence that each side is permitted to rely upon and the amount of legal costs that the successful litigant can recover from the other party which, invariably, is substantially less than the actual legal costs incurred.

But there are less costly alternatives which allow the litigating parties to retain control of their own destinies. One alternative is mediation which, contrary to popular myth, is not a form of counselling but rather a process designed to strip the dispute back to its essentials and to encourage the parties to concentrate on the advantages of reaching a compromise. The process is facilitated by a trained mediator but unlike a judge the mediator does not decide who is right and who is wrong, but instead encourages the parties to resolve the dispute themselves. The advantages of mediation are many not the least being that fact that there is no element of compulsion and the outcome is in the hands of the parties alone.

Another alternative is neutral dispute evaluation in which the parties put the dispute and their evidence before an experienced third party lawyer, often a retired judge, who then lets the parties know what his/her decision would be if he/she were trying the case.

At Horsey Lightly we encourage our clients to explore these and other forms of alternative dispute resolution which is why our lawyers work under the banner of the Litigation and Dispute Resolution team.

For more information or advice on personal or business disputes please contact John Devlin (jdevlin@horseylightly.com) ; or Katie Harris (kharris@horseylightly.com) or telephone on 01635 580858.


 

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Wills for Couples with Young Children

By Steve Meredith - Tax Consultant

                                  

When couples have young children ie teenagers and pre-teens it is always better to be safe rather than sorry when it comes to their Wills. This is because it is simply impossible to know at that age whether children are likely to be sensible with money when they get to 18, 21 or 25, the common trigger ages of inheritance. Certainly 25 is a much more sensible age for inheritance than 18 but it may still not be the right age, especially if either a lot of money is involved or the child is still pursuing the follies of youth.

 While on first death, the Wills can, in the case of married couples and civil partners, be kept simple with everything passing to the survivor. However, in the unfortunate event of both parents dying while their children are still young, in our view it is much better to include in the Wills a comprehensive trust for children on second death. This will protect their inheritance against fortune hunters and avoid the risk of them squandering it as a result of getting in with the wrong crowd or through lack of maturity.

 The Will Trust will take the form of a Discretionary Trust and the couple will need to appoint Trustees to administer the Trust. Effectively, in the event that both parents die, the Trustees will be stepping into their shoes and, in conjunction with any testamentary guardians appointed, will be making financial decisions about how best to bring the children up eg about the payment of school fees, University tuition fees, the payment of fees to obtain professional or technical qualifications eg to train to be a doctor or a lawyer etc.

 The choice of Trustees is absolutely fundamental as they will have a wide discretion about how the Trust monies should be best used for the benefit of the children. The parents will need to think long and hard about who they should appoint as Trustees. The Trustees must be able to work well together, have a reasonable understanding of the children and their financial needs – this will be particularly important if any of the children is handicapped or has learning difficulties.  The Trustees should also be prudent and reasonably financially astute although they can, and should, obtain independent professional financial and investment advice about the Trust monies eg from an Independent Financial Adviser (IFA) or stockbroker. 

 It is important that the parents ask the persons that they wish to take on the role of Trustees to confirm that they are willing to undertake these duties as they can be onerous and continue for many years particularly if the children are very young when their parents die. The Trustees can be other family members, though perhaps better to appoint siblings rather than parents if the latter are elderly.  Alternatively they can be friends or professionals or, perhaps best of all, a combination of all 3. Ideally both sides of the family will be represented.  As mentioned above, ideally the Trustees who have been appointed will get on with each other and will not squabble but, in the event of a disagreement, it is possible to provide in the Wills that the majority decision of the Trustees will prevail or that one of them is to have a casting vote.. This will prevent deadlock as otherwise financial decisions must be unanimous.

 No doubt couples will invariably appoint Trustees who know them and their children well and have probably got a reasonable idea of how they would like the children to be brought up if they are no longer around.  However, in our view, it is most important, if not vital, that, at the same time as they make their Wills, the couple also write a Letter of Guidance to the Trustees setting out their instructions as to how they wish them to exercise their wide discretionary powers over the Trust monies for the benefit of the children.

 The Letter of Guidance is important not only because the Trustees will then have a good idea of how to act in any given situation, but also in case a child challenges the authority of the Trustees, which is not uncommon as they get older. A child may, for example, on attaining 21 or 25, demand that the Trustees hand over their share of the Trust monies.  In those circumstances, the Trustees can point to the Letter of Guidance which will generally give the Trustees a discretion to continue to hold monies in trust indefinitely for any child and can show the child or children their parents’ wishes set out in black and white..

 Such a Letter of Guidance is not binding on the Trustees, who retain an overriding discretion (this is desirable because it is impossible either to predict how a child may turn out eg they may have health issues, or to foresee every situation that may arise).  For this reason it is important that any Trustees appointed must be reliable. A professional Trustee will of course generally feel obliged to follow the instructions contained in any written Letter of Guidance, save in exceptional circumstances.

 A Letter of Guidance can take many forms and can be specifically tailored to the particular couple’s wishes but will generally include the following:

-        A declaration that the children should benefit equally but also containing flexibility for the Trustees to treat the children differently in defined circumstances eg because of concerns about financial instability eg gambling or extravagant tastes, the possibility of divorce, ill-health eg due to drink or drug use or otherwise or other personal or financial problems

-        That Trust monies should be used for the children’s education, maintenance and benefit while they are still in full time education and that significant capital should not be advanced to them during that time

-        That, even once they are settled in careers and relationships, they should not inherit their share of the Trust monies in one lump sum but in instalments over time

-        Ideally capital should be released for a particular purpose ie the purchase of a (sensible!) car, to get a foot on the property ladder, or pay privately for a medical operation

-        Guidance as to what should happen to their share of the Trust monies in the event that the child dies – this is likely to depend on whether they have children themselves

-        Guidance as to what the Trustees should do with the Trust monies in the event of family wipe-out ie all the children and any grandchildren have died. Obviously this is more likely to occur where there is only one child of the family. In those circumstances so-called ‘default beneficiaries’ can include wider family members, close friends or charities.

 If you have young children and think that the approach suggested in this article might work well for you and your children please contact the author, Steve Meredith, of our Private Client Department. Steve has specialised in Trusts and Tax work for more than 20 years and has wide experience of how Trusts work in practice as he is a Trustee of a number of large family Trusts dating back to the early 2000’s.

 

  Steve can be contacted at   SMeredith@horseylightly.com   or on 01635 580858

 

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Farmers and Agricultural Business Inheritance Tax (IHT Reliefs)

By Stephen Meredith


Farmers are very well treated by the IHT rules and farming is the only type of business where the proprietor can claim an exemption from IHT on their home.  However, farmers are notoriously poor at keeping records and there are a number of pitfalls which need to be avoided if the farm is to be passed smoothly down to the next generation without adverse IHT or CGT consequences.

Turning to the farmhouse first, there are 2 conditions that must be satisfied if the farmhouse is to be eligible for 100% Agricultural Property Relief (APR):

1.      It must be ‘occupied for agricultural purposes’ ie one or more individuals who are involved in the faming business must live there eg a sole trader or 1 or more of the partners in a farming partnership

2.      It must be ‘of a character appropriate’ to the land being farmed ie in broad terms, the bigger the farmhouse, the more land that must be farmed with it

The golden rule to avoid falling foul of the first test is that a farmer should never retire no matter what age he is. The simple reason for this is that if, for example, an elderly famer is still living in the farmhouse, if he retires, the farmhouse will no longer be ‘occupied for agricultural purposes’ and will therefore be fully exposed to IHT at 40%.  Please note that farmers will not generally qualify for the new Residence Nil Rate Band (RNRB) – see separate article – since the high value of agricultural land usually means that the value of their assets exceeds the £2 million limit. In any event the RNRB will be capped at £350,000 from 6 April 2020 and farmhouses are often worth considerably more than that.

If we take, for example, the not uncommon case of a father and son where, over time as Dasd gets more frail,  the son has taken over responsibility for the bulk of the farming operation, there is no reason why the 2 of them should not farm in partnership with the son taking a larger profit share. The key thing is that the father should remain as a partner, perhaps with a 10% or 15% profit share, thereby ensuring that the farmhouse remains eligible for 100% APR.  Of course, if the son was also living in the farmhouse with his father then the farmhouse would then be being ‘occupied for agricultural purposes’, regardless of the status of the father. However, where, as is common, the father retains an interest in some or all of the land being farmed, there may be other good reasons (see further below) why he should remain as a partner until he dies.

Turning to the bare land itself, generally whether the land is being farmed by the owner or another person, the land will qualify for 100% APR.  If the land is being farmed in hand, then a minimum 2 year ownership period is required in order to claim APR although where the land has been inherited from a spouse, the spouse’s period of ownership can be included. Where the land is being farmed by a third party, 100% APR can generally be claimed, subject to a minimum ownership period of 7 years. Accordingly where the land is tenanted, provided it has been owned for 7 years, 100% APR can be claimed except where it is subject to an old-style Agricultural Holdings Act tenancy entered into before 1 September 1995 where there is no right to vacant possession within 2 years, in which case only 50% APR is available. Please note, however, that in the latter case, such a tenancy can be converted into a post 1 September 1995 tenancy qualifying for 100% APR, although great care must be taken to avoid triggering adverse CGT charges on the surrender of the old tenancy.

It is also important to note that, where land has been let out and the landlord continues to occupy the farmhouse, the farmhouse will no longer qualify for 100% APR because it is no longer being ‘occupied for agricultural purposes’ vis it is the tenant, rather than the landlord, who is carrying on the farming business. For that reason, often elderly farmers enter into arrangements such as ‘share farming’ and ‘contract farming’ so that they can claim that they are still farming thereby preserving their entitlement to IHT and CGT reliefs.  However, one can expect HMRC to scrutinise such arrangements carefully to ensure that the landowner retains responsibility for and is actually  carrying out acts of husbandry in relation to the land. If a farmer is proposing to enter into such an arrangement it is important that the terms of the agreement between the landlord and the ‘share’ or ‘contract’ farmer are adhered to and the Accounts reflect the obligations of the parties eg in relation to buying seed or fertiliser.

It is also important that detailed records are maintained of the landowner’s involvement in decisions affecting the farming operation and that this is not simply left to the ‘share’ or ‘contract’ farmer. This might take the form of a farm ‘diary’ and can be produced to HMRC if and when required eg after the death of the landowner.

Whether a landowner is farming or not is also important in relation to another type of IHT relief – Business Property Relief (BPR). This is because APR is only available on the agricultural value of land or buildings. If, for example, a farmer owns land or barns with potential development value, then APR will only apply to the agricultural value of such property, not the ‘hope’ value which could be very considerable if, for example, the land is likely to go for housing or barns are ripe for conversion into residential accommodation.  For example, while the agricultural value will probably be in the region of £15,000 per acre, the hope value could be as much as £1 million per acre or even more. If the landowner is farming, then 100% BBR can be claimed on the hope value, whatever that value might be but, if, for example, the land is let out, then BPR will not be available. In the latter circumstances, if the landowner dies owning the land or barns with development potential, then (subject to spouse exemption which, in any case, is only likely to defer the problem to second death) IHT will be payable on the hope value at 40% which could, in an extreme case, force the farm to be sold. 

Conversely, if the landowner is farming then 100% BPR can be claimed on the development value if the farmer dies and this enhanced value will be used as the ‘base cost’ for CGT purposes on any future sale of the land for development thereby minimising any CGT charge on the disposal. It should be noted that even if the landowner has no intention of developing the land or selling it for development, this will not stop HMRC from valuing any ‘hope value’ or assessing it to IHT on his death.

Accordingly, it is very important that all farmers know exactly who owns any farmhouses, land and farm buildings and understands whether, and to what extent, any real property will qualify for APR or BPR.  Steve Meredith who recently joined us has specialised in agricultural work and advising farmers about succession planning and Wills for some 20 years and is very experienced in balancing family needs against tax considerations so that farmers get the best of both worlds. 

For a free consultation please contact Steve at SMeredith@horsey lightly.com  or on 01685 580858.

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What is Conveyancing?

Andrew Wilson (Trainee Legal Executive in Residential Conveyancing), explains all!

 


Conveyancing is the legal and administrative process carried out when a house or flat is purchased or sold.

Upon instructing a solicitor to act on your behalf, there will be various anti-money laundering and identity checks to be carried out before any work can be carried out. Once these compliance checks have been carried out, the conveyancing process begins.

Searches

The solicitors acting for the purchaser of the property will carry out many searches and investigations on the property and legal documents to ensure that the buyer obtains a good and marketable title upon their purchase. The aim here is to ensure that the purchaser does not have difficulties selling the property in the future.

This process will often also include raising ‘enquiries’ with the seller’s solicitors which will involve resolving legal issues or seeking clarification on unclear arrangements.

This is often the longest stage in any conveyancing transaction as it involves a lot of ‘back and forth’ between the solicitors and a lot of information is required from third parties. For example, local authorities are relied upon to provide information regarding planning and building regulations documents, and management information companies are required to provide many details in leasehold transactions.

Prior to exchange of contracts, there is no agreement in place and either party may withdraw from the transaction without any repercussions.

Exchanging Contracts

Exchanging contracts is the arrangement of the buyer and seller of a property entering into a binding legal agreement.

The buyer and seller will often sign a separate, identical contract that they will leave in the hands of their solicitors, undated, in readiness for exchange of contracts in order for their presence not to be required in the solicitors’ offices on the day, which in most cases would be most inconvenient.

All investigations must have been made prior to exchange of contracts and any legal issues will need to be resolved.

The completion date, or ‘moving date’ is fixed at this stage by agreement of all parties in the transaction (or chain of transactions where a buyer of a property is reliant on the sale of their own). Completion is usually at least five working days after exchange of contracts due to mortgage lender requirements, however, in reality completion can be weeks or even months following exchange of contracts if agreed by the parties.

There are significant financial penalties if either party withdraws from the transaction after exchange of contracts has taken place.

Completion

Completion is the date that the purchase monies are paid from the buyer’s solicitors to the seller’s solicitors and the property is transferred from the buyer to the seller. It is also on this date that most buyers will collect the keys to the property and begin the moving process into their new home.

Following completion, the solicitors acting on behalf of the buyer will arrange for their purchase to be registered at the Land Registry and it is at this point that the legal title is formally transferred.

 To seek legal assistance or obtain further information about the above please contact Andrew Wilson of our Residential Conveyancing Department on 01635 580858

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Which survey do I need? - Purchasing a Property

by Andrew Wilson - Trainee Legal Executive, Residential Conveyancing Department

 

Once you have found your next home, whether it be a house or a flat, you should always consider carrying out a survey before you sign the contract and commit to your purchase.

No purchaser would want to move in to their property and find out too late that the roof is in need of repair, or perhaps that the windows are reaching the end of their life span, or the walls are showing signs of damp. A survey can help avoid the hassle and expense of costly repairs and if not, at least provide you with peace of mind.

You may think that this applies only to freehold houses, but it is just as important to carry out a survey on flats and other leasehold properties. Defects with the building will need to be addressed and paid for by the residents by way of a service charge so your annual or monthly costs may increase more and more beyond the already steadily increasing service charges in blocks of flats all over the country.

If you are purchasing with a mortgage the lender will often carry out a valuation report, so why should you have to worry about instructing a surveyor yourself? In reality, a valuation report is not a survey at all so try not to confuse the two. In most cases the valuer will not even visit the property.

So which survey should you consider carrying out? There are a number of options to choose from.

RICS Condition Report

This type of survey is on the lower end of the scale cost-wise and will highlight urgent defects as well as potential legal issues which, as your solicitors, we would be able to address with the seller’s solicitors.

Each element of the property is given a risk rating from 1 to 3:-

1 – No repairs are currently needed.

2 – Less serious or urgent defects are in need of repair or replacement.

3 – This rating is for defects that are serious and need to be investigated, repaired or replaced urgently.

This survey is aimed at newer homes and relatively conventional properties.

RICS Homebuyer Report

This survey report provides all of the features of a Condition Report as well as additional advice on repairs, defects that may affect the property and ongoing maintenance advice.

This report offers a market valuation as an optional extra which also includes a rebuilding cost for the purposes of insurance.

This survey is suitable for conventional properties which are in a reasonable condition.

RICS Building Survey

This is the most comprehensive report that provides an extremely detailed analysis of the property’s condition. Advice will be given on repairs, defects and maintenance options.

This Survey is essential if you are planning major works or if you are purchasing an older or larger property.

 To seek legal assistance or obtain further information about the above, please contact Andrew Wilson in our Residential Conveyancing Department on 01635 580858

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Are you facing the challenge of divorce and dealing with autistic children or an autistic partner?

by Alison Whistler - Family Department solicitor

  

 It’s World Autism Awareness Week from 1st – 7th April. The saying goes “If you’ve met one person with autism, you’ve met one person with autism”. I’ve always found that really helpful to remember when advising clients who have children with Autism or Aspergers because their child’s needs will be specific to that child. It’s not helpful to assume they will be like the Dustin Hoffman character in the movie “Rain man” or The Governess from “The Chase”, as they will have their own behaviours and personalities which need to be carefully factored into discussions surrounding the divorce process, so as not to cause unnecessary upset to the child.

I have, over the past 25 years of my family law career, encountered autism in a number of the cases that I have dealt with and, the experience of each case has helped me to help other clients who have this additional challenge to overcome as part of the divorce and separation process.

In some situations, having an autistic child or children may have put an extra strain on the marriage which has led to the relationship breaking down. In other cases, there may be very clear signs that the other parent has autistic behaviours (not always officially diagnosed), which makes co-parenting or meeting the emotional needs of a partner in a relationship a very real challenge.

Whether autism is a factor or not, in a divorce case it doesn’t really matter to me as long as I’m aware of it and can incorporate it into each part of the process. There are lots of issues that are challenging in my job as a divorce lawyer; autism is just one of them. The legal process is generally always the same; it’s just the people, their personalities and behaviours that make every case I deal with different. By adapting the advice I give to clients to their specific situation, a much better outcome for everyone can be achieved. 


 To seek legal assistance or obtain further information about the above please contact Alison Whistler of our Family Department on 01635 580858 

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Social Media

by Ben Castle - Family Department solicitor

 

Recently, we have experienced a number of cases where the information provided to us by our clients has not matched the image they provide to the public; whilst this would seem largely irrelevant to matrimonial proceedings, what information we allow the wider world to see about us can be contradictory to points to be raised in considering the division of matrimonial assets, and divorce as a whole.

 Take the instance of divorce, for example.  A common issue for practitioners is trying to prove that a spouse has received the divorce papers in the first place.  Whilst this can be remedied in a rather straightforward manner when the parties are both living in England and wales, the problem can be more difficult to resolve when one party is another part of the world; organising the service of legal papers in foreign jurisdictions can be extremely time consuming and expensive.  When the author experienced a case where a spouse living in Indonesia denied receiving the petition, he was rather pleased to discover that the same spouse felt it appropriate to document the papers on her public Facebook account and noted the date received.  Printouts of her profile page and a short statement to the court were all that was necessary to prove receipt and the divorce continued.

 That is not where the usefulness of social media ends – where a spouse argues that following separation, they do not intend to cohabit with a new partner, practitioners are potentially provided with a conundrum of how to refute the assertion.  Granted the existence of a new relationship is not a definitive proof of future living arrangements, but in the absence of a new relationship, an argument that one party intends to live with a new partner tends to raise eyebrows!  However, setting out your relationship status on social media will immediately attract questions of your new relationship. 

 Individuals also need to consider other aspects of their life; elements of social media can be used to convey details of our professional qualifications and skills, job roles and corporate associations.  These details are not missed by practitioners who will question an individual’s links in an attempt to establish and determine whether further, undisclosed, income streams exist, but also professional links that indicate that further assets may be available for consideration as part of a settlement.

 So what can an individual do to protect themselves from suspicion?  The first step is to be open and honest with your solicitor; setting out a person’s position must be consistent when entering into negotiations and inconsistencies may prejudice arguments you may wish to raise.  Secondly, do examine what information you are providing to the world; is seems an obvious point, but if you exaggerate online, people may believe your statements ; remember, “you said it not me”.

  To seek legal assistance or obtain further information about the above please contact Ben Castle of our Family Department on 01635 580858

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What happens when a Trustee loses capacity?

The procedure for dealing with the removal and replacement of a Trustee who has lost or, is losing, mental capacity by Stephen Meredith - Private Client Department.

This is not straightforward and considerable care needs to be taken to get it right. The following will need to be considered:


• Whether the Trust Deed or Will contains an express power of removal
• Removal pursuant to S36 (1) Trustee Act 1925 (‘TA 1925’) either with or without Court approval depending on whether the incapacitated trustee also has a beneficial interest in the property (S36(9) TA 1925)
• Appointment of Additional Trustee pursuant to S36(6A-6D) as inserted by S8 of the Trustee Delegation Act 1999 (‘TDA 1999’)
• Removal by the Court pursuant to S41 TA 1925

Removal by Express Power

Consideration of the terms of the Trust Deed or Will is always the starting place. However, while the appointment of new trustees is nearly always included, it is increasingly rare for modern trusts to contain an express power to remove a trustee. For example, the Kessler standard precedents do not contain such a power.

Removal under S36(1) TA 1925 with or without Court Approval

This section contains a power to remove a trustee who is incapable of acting and to replace them with a new trustee but S36(9) TA 1925 contains an important restriction on this power. S36(9) TA 1925 requires the leave of the Office of the Public Guardian (OPG) to be sought if the trustee who lacks capacity ‘…is also entitled in possession to some beneficial interest in the trust property.’ A ‘beneficial interest’ can include an ‘interest-in-possession’ or ‘life interest’ but not an interest under a discretionary trust.

Accordingly in the classic situation of a married couple jointly owning their home ‘as trustees’ if one of them loses capacity, the other of them cannot invoke s36(1) to remove the incapacitated spouse without leave of the OPG as that spouse owns a half share of the property outright.  However, all is not lost as S36(6A-D) TA 1925 may assist if the property is to be sold (see further below).

Appointment of Additional Trustee for Purposes of Overreaching and Giving a Valid Receipt for the Payment of Capital Monies

The ‘two trustee rules’ require that capital monies arising from the sale of land must be paid to at least 2 trustees (Law of Property Act 1925 S27(2).  S7 TDA 1999 specifically provides that this requirement is NOT satisfied where monies are paid to a ‘relevant attorney’. A ‘relevant attorney’ includes an attorney who is acting ‘both as a trustee and as attorney for one or more other trustees…’ Therefore, returning to the classic case of a married couple who own their home jointly, if one of them loses capacity, the other cannot sell the house acting as both ‘trustee and attorney’ as there is only one person to give a receipt for capital monies. We have already seen that, in these circumstances, S36(1) TA 1925 will not assist to remove the incapacitated spouse without the prior approval of the OPG which will entail time and expense.

However S8 TDA 1999 (as now enshrined in S36(6A-D) TA 1925 comes to the assistance by enabling an attorney under an enduring power (EPA) created after 1 March 2000 to appoint an additional trustee in order to satisfy the 2 trustee rule. For example, in the classic scenario described above, the spouse who has capacity can appoint an additional trustee eg a child or professional to satisfy the 2 trustee rule. It is important to note that in this scenario the incapacitated spouse has not been removed as a trustee (which would require Court approval) but will continue as a trustee, albeit that the spouse holding the EPA will need to sign on their behalf (S1(1)TDA 1925).

Removal by the Court

For various reasons, it may not always be possible to make use of either an express power or the S36 power to remove a trustee who has lost capacity or appears unwilling or unable to act in the administration of the trust. In these circumstances S41(1) expressly permits the court, ‘whenever it is expedient to appoint a new trustee or new trustees.….in substitution for a trustee who….lacks capacity to exercise his functions as trustee….’

The need to invoke this Section may arise where there is a dispute between the trustees as to whether or not a trustee has lost capacity and should be removed or who he should be replaced by. If there is doubt about capacity then an application pursuant to S41 TA 1925 is safer than using the S36 power,  since if the requirements of S36(1) are not met, then the replacement of the’ incapacitated’ trustee would be invalid as would any subsequent decisions of the trustees which could lead to claims being made against the trust.

Summary

In short the rules relating to the removal of incapacitated trustees are not straightforward and great care should be taken in applying the correct legislation which in turn will depend upon the particular circumstances of each trust. 


To seek legal assistance or obtain further information about the above please contact Steve Meredith of our Private Client team at SMeredith@horseylightly.com or on 01635 580858

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