Taxation and trusts; The new Recovery Loan Scheme and more.

• What is a residence for SDLT purposes?
• Proposals to reform Land Registry in England and Wales
• The importance of being precise (to avoid having to go to Court)
• The new Recovery Loan Scheme - now available

 

 

What is a residence for SDLT purposes?

(AF1, RO3)

A couple lost their appeal against a FTT decision denying them a refund of SDLT, with the Upper Tribunal confirming that the SDLT rules do not follow CGT rules in relation to what should be considered as a residential property. (Hyman and Others v HMRC, 2021 UKUT 0068 TCC).

Mr and Mrs Hyman paid Stamp Duty Land Tax (SDLT) of £95,550 at the time of purchase of their property (a residence with 3.5 acres of land) on the basis that the property they purchased was wholly residential. They then applied for a refund of part of the tax paid on the grounds that, in fact, the property had non-residential elements so that it should be regarded as mixed-use and so entitled to the lower rates of SDLT which apply to non-residential and mixed-use properties. The difference in the actual tax would have been about £35,000.

HMRC claimed there was no evidence of mixed-use and declined the refund. The couple appealed to the First-tier Tribunal (FTT) in 2018 and their appeal was dismissed in 2019. The couple then took the case to the Upper Tribunal (UT) and the case was heard by videolink on 3 March 2021.

We are more familiar with taxpayers arguing that any land/gardens surrounding a residence should be properly treated as being a part of the residence so that the principal private residence (PPR) exemption for capital gains tax (CGT) should be available when the property is sold. The present case was, in effect, an argument to the contrary.

The land which Mr and Mrs Hyman purchased included a large cultivated garden around the house, plus a large dilapidated barn, a further garden and a meadow with hedges and a bridleway. They argued that the barn, meadow and bridleway were not part of the garden or grounds of the house, on the basis that land can be part of 'the garden or grounds of' the house only if the land is 'needed for the reasonable enjoyment of the [house] having regard to the size and nature of the [house]'. They based their argument on their interpretation of s.116 of Finance Act 2003. This defines residential property for the purpose of SDLT as including “land which is or forms part of the garden or grounds”. The argument that the land must be needed for reasonable enjoyment of the house is familiar from the CGT rules relating to the PPR relief in section 222(3) of the TCG Act 1992, but it transpired that it also featured in one of HMRC’s guidance notes issued prior to 2019 dealing with SDLT in disadvantaged areas, although a subsequent guidance issued in 2019 made no such connection.

The Judge in the UT acknowledged that the two sets of HMRC guidance were conflicting. However, in any event, HMRC guidance is not binding and the legislation, i.e. section 116 FA2003, is clear and unambiguous and merely refers to “grounds” which need to be given their wide ordinary meaning. It is clearly different from section 222(3) of the 1992 Act.

The appeal also dealt with two other applications on similar grounds (Dr and Mrs Goodfellow and the Pensfold (property holding company)) and so the decision applies to those as well.

An interesting case with at least two conclusions: first, that the same subject may be defined differently depending on the context and the tax in question (so nothing can ever be assumed to follow from one another); and, second, that HMRC guidance should not necessarily be relied upon, especially when it seems to conflict with literal interpretation of the legislation.

 

 

Proposals to reform Land Registry in England and Wales

(AF1, RO3)

On 25 March 2021 the Government published its full response to the Law Commission’s recommendations on reforming the land registration system in England and Wales and to tackle fraud in land transactions.

The Law Commission’s project to update the Land Registration Act 2002 started in 2014, resulted in a consultation in 2016 and a full report with recommendations and a draft Bill published in 2018. Their stated objectives were to “iron out the kinks in the law, help prevent fraud and make conveyancing faster, easier and cheaper for everyone”.

Recommendations that tackle fraud include:

• enabling HM Land Registry to set the reasonable steps that conveyancers must undertake to verify the identity of their clients, to help root out fraudsters;
• imposing a duty of care on conveyancers with respect to identity checks, based on the directions issued by HM Land Registry;
• if a conveyancer fails to meet his or her duty with respect to identity checks, ensuring that HM Land Registry has a right of recourse against the conveyancer to recover the amount HM Land Registry paid for the loss caused by the fraud.

Other recommendations include:

• preventing the register from being changed once a mistake has been on the register for ten years, to make the register more accurate and final;
• requiring evidence of interests that people want to protect with a unilateral notice at an earlier stage, preventing disputes at the Tribunal;
• bringing mines and minerals onto the register;
• creating a new power to introduce electronic conveyancing that does not require completion and registration to happen simultaneously, to facilitate electronic conveyancing;
• beefing up the powers of the Land Registration Division of the First-tier Tribunal (Property Chamber) – including an express statutory power to determine where a boundary lies, so that parties do not have to re-litigate the same issue.

Following an interim response in 2019, the Government has now published its full response.

The Law Commission made 53 recommendations in total, 40 of which the Government accepts, including a small number on the basis that they are modified prior to implementation, for example, to consider the appropriate legislative mechanism to allow for greater flexibility to bring into effect mandatory electronic conveyancing. This is necessary given that, since the recommendations were published, some progress has already been made in relation to e-conveyancing. Namely, HM Land Registry has ended the need for paper-based transactions by accepting electronically signed transfers and other deeds for registration and it continues to work with customers to develop new digital services that enable property professionals and citizens to lodge applications electronically and online.

The Government rejected three recommendations which include:

1. to provide transparency for property owners (there will be separate consultation on this),
2. to register mines and minerals, and
3. some technical recommendations dealing with removal of notices.

There are also ten recommendations where the Government has been unable to reach clear conclusions.  

Full details of the response can be found here.

The Government will consider implementation of the accepted recommendations alongside wider land registration policy development and will consider implementing the recommendations it has accepted as parliamentary time permits but may need to re-examine the benefits of implementation, and consult on a revised Bill, prior to any implementation.

Some of the statistics included in the Government response are interesting and the Government recognises that land registration underpins the economy. There are currently more than 25 million registered titles covering over 87% of land and property valued at approximately £7 trillion. The Registry enables over £1 to £1.5 trillion worth of personal and commercial lending to be secured against property across England and Wales. Given these numbers, it is clearly essential that the land registration system is accurate and secure. Unfortunately, fraud in this area is not uncommon.

 

 

The importance of being precise (to avoid having to go to Court) (AF1, JO2, RO3)

In the recent case of Morrell v Morrell, 2021 EWHC 117 (Ch) the Court agreed to rectify a deed of variation on the grounds that it did not achieve the settlor’s intentions.

This concerned a deed of variation of the will of Mrs G. Morrell’s, who died in 2017 leaving her estate to her two sons, David and Philip, in equal shares. Both were also appointed as executors. Each half share was thought to be worth about £450,000. Philip decided, after taking advice, to vary his legacy so that his half share was to be settled in trust for members of his family, with Philip and his wife Helen as trustees. A deed of variation was duly executed in 2018. So far, so “standard” and often recommended inheritance tax (IHT) planning strategy. Philip was advised by his financial adviser Mr S as well as his solicitor who actually prepared the deed. So, what could go so wrong that they had to go to Court to rectify the deed?

From the correspondence that came to light during the Court case it transpired that there were numerous, and unfortunately often conflicting, references to how the trust was to be set up. The first reference was to settling £300,000 for the children and £150,000 for Philip and his wife. The second note referred to £100,000 for each child and £150,000 for Philip and his wife without any reference to the trust. Some time later there was an email from Philip to his solicitor that the money should go into trust for the children with no mention of Philip and his wife also benefitting. Later on, there are notes from Mr S and a paraplanner that the whole sum was to go into a discretionary trust for the whole family. Then there are some conflicting notes from the solicitor and Mr S as to the nature of the trust. While Mr S was adamant that the whole sum was to go into a discretionary trust for the family including Philip and his wife, he also referred to certain sums being intended for the children and some for Philip and his wife. As the Judge commented: “This is a rather odd way to describe a discretionary trust”, but giving evidence Mr S explained that clients would typically earmark sums out of the fund for particular beneficiaries on the basis that it would operate if there was no reason to change it, or, as he put it, all other things being equal. In his view it did not negate the idea that the trustees would have complete discretion over who received what.

Well, to cut the long story short, there then followed a series of email and phone call communications between Mr S, the solicitor and the clients (not helped by the fact that some emails were encrypted and so the solicitor could not open them) with the subsequent recollection of the events being on occasion different as between the solicitor and Mr S.

The bottom line is that Philip and his wife executed a deed of variation which created a discretionary trust, but under which the beneficiaries were only their children. By the time Mr S and his “more technical colleague” saw a copy of the deed and realised that it was wrong it was too late. He asked the solicitor if it was possible to “amend” it, but the solicitor correctly advised him that “the deed of variation could not be cancelled or amended!”

As the Judge pointed out, whichever professional was responsible for the failure of the client's instructions to be correctly recorded (and to be fair neither was blameless), the fact remains that Philip's intentions were not in fact implemented. He and his wife were not beneficiaries, when he had so intended.

Which is when consideration was given to the question of possible rectification of the deed of variation and the subsequent application to the Court for the same.

As is currently (during the pandemic) the norm, the trial was held remotely, using the MS Teams videoconferencing platform and the Judge, having considered all the evidence, ordered the rectification of the deed to include Philip and his wife as the beneficiaries along with their children.

You can read the full case details here.

As the Judge pointed out, whether the Court makes an order for the rectification of a written instrument is not a matter of right, but of discretion by the Court. A number of factors may be relevant, and indeed as far as deeds of variation are concerned there is a set of requirements that must be satisfied for rectification to be ordered. These are:

• Convincing proof of the evidence of a different intention from that expressed in the document itself;
• Operative mistake in the wording of the written document, such that it does not give effect to the settlor's intention;
• But it is not enough to show that the settlor did not intend what was recorded; it must also be shown what he didintend;
• There must be an issue capable of being contested between the parties affected by the mistake, notwithstanding that all relevant parties consent.

Fortunately, in this case the Judge was satisfied that all the conditions were satisfied. But, to get to the point that the clients wanted to be, an application to the Court and a Court hearing were needed (at some considerable expense). All of which could have been avoided if only the professionals involved in the case had paid more attention to the words used in their correspondence.

 

 

The new Recovery Loan Scheme - now available

(AF2, JO3)

The Recovery Loan Scheme (RLS), which was announced at the March 2021 Budget and runs until 31 December 2021, will be administered by the British Business Bank, with loans available through banks and a network of other accredited commercial lenders.

Under the scheme, businesses (with any size of turnover) can access loans varying in size from £25,000, up to a maximum of £10 million (£30 million per group), from 6 April 2021.

To qualify, the business must:

• have been impacted by COVID-19;
• be carrying out trading activity in the UK;
• have a viable business proposition – a lender may disregard (at its discretion) any concerns over short-term to medium-term business performance due to the uncertainty and impact of COVID-19. 

A lender can provide up to £10 million (£30 million per group) as one of the following facilities: 

• Term loan;
• Overdraft;
• Invoice finance;
• Asset finance.

Minimum facility sizes vary, starting at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts.

For term loans and asset finance facilities, the term is from three months up to six years. For overdrafts and invoice finance facilities the term is from three months up to three years.

The Government will provide an 80% guarantee for all loans. For those borrowing up to £250,000 the lender won’t require any form of personal guarantee. For those borrowing more than £250,000, the lender has the discretion to decide whether to take personal guarantees. However, above £250,000, the maximum amount that can be covered under is capped at a maximum of 20% of the outstanding balance of the facility after the proceeds of business assets have been applied. No personal guarantees can be held over principal private residences.

Interest rates (including finance-related fees) have been capped at 14.99% per annum, and are expected to be much lower than that in the vast majority of cases. Ministers are urging lenders to ensure they keep rates down.

The RLS can be used as an additional loan on top of support received from the emergency schemes – such as the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme – put into place last year, and which are now closed to new applications. However, the amount borrowed under an existing scheme may in certain circumstances limit the amount that can be borrowed under the RLS.

The application period for the Bounce Back Loan, Coronavirus Business Interruption Loan Scheme and Coronavirus Large Business Interruption Loan Scheme ended on 31 March 2021, and the Future Fund scheme closed to new applicants on 31 January 2021.

Although the application deadline for the RLS is currently 31 December 2021, this deadline will be reviewed by the Government nearer the time.

More information about the scheme can be found here:

• RLS for businesses and advisers — how businesses can apply for the scheme.
• RLS: current accredited lenders — list of lenders already providing finance through the RLS.