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Welcometo the September edition of WHIB.
As we look forward to the first Autumn Statement in a post-Brexit landscape, in this issue we look at the special duties involved in an investment adviser’s
fiduciary relationship with their client. We also examine a case which arose from the bursting of the dotcom bubble which sets out trustees’ obligations with regard to investments and the appointment of investment advisers.
We end our series focussing on the older client by examining the financing of care in later years and we look at how discretionary trusts can be useful for clients other than apparent aristocratic users such as the Duke of Westminster.
Discretionary trusts are an important tool in tax planning and our overview of Clarke Willmott’s tax team introduces our experts who advise across the whole range of taxes from corporation tax to inheritance tax.
Finally, our financial services litigation team provide a summary of the Insurance Act 2015, which came into force last month.
As always if there is a particular topic that you would like us to cover, or if you have any other feedback, please do let us know.
Anthony FairweatherPartner0345 209 [email protected]
Wealth, Health & Inheritance Briefing
Wealth, Health & Inheritance Briefing September 2016
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Mr Mansouri’s complicated financial affairs
Mr Mansouri was formerly Assistant Foreign Minister for the Kingdom of Saudi Arabia and a wealthy man. When he died in 2010, leaving a number of surviving relatives, it was unclear to the administrator of his estate what had happened to that wealth. It appeared, however, that a number of transfers of Mr Mansouri’s assets had been made to his niece during his lifetime. It also appeared that Mr Mansouri had made a number of investments through Acropolis Capital Partners Limited (ACP) and Acropolis Capital Management Limited (ACM) and that Mr Nabil Chartouni, a director of ACM, had advised Mr Mansouri over financial matters and had arranged the gifts. ACP and ACM refused to account to Mr Mansouri’s administrator about the assets owned and lifetime gifts made. As a result the administrator sought a court declaration that ACP and ACM were Mr Mansouri’s fiduciaries or agents and thus under a duty to account.
After a detailed consideration of the evidence, the court found that ACP and ACM undertook and managed investments on behalf of Mr Mansouri and that “the circumstances gave rise to the requisite relationship of trust and confidence on which a fiduciary relationship is founded.” As such ACP and ACM were under a duty to account and provide records to Mr Mansouri (and the administrator of his estate) in relation to assets and transactions for the period when they were acting in a fiduciary capacity.
What is a fiduciary?
As stated in the case report, fiduciary relationships arise in a range of business relationships and occur “where a substantial degree of control over the property or affairs of one person is given to another person.” A fiduciary relationship always involves a degree of trust and usually involves the provision of advice and information from one party to the other. Those providing professional services, such as solicitors, accountants and investment advisers, have a fiduciary relationship with their clients as do trustees with the trust’s beneficiaries.
Duties and obligations arising in a fiduciary relationship
To a limited extent these may be fact specific as the fiduciary duties may vary depending on the contractual obligations that may also arise between the parties.
As the Law Commission has commented,“Fiduciary duties cannot be understood in isolation. Instead they are better viewed as “legal polyfilla”, molding themselves flexibly around other legal structures, and sometimes filling the gaps.”
Generally, however, a fiduciary relationship will give rise to the following duties:
Continues on page 2
Investment advisers and fiduciary relationshipsFollowing a recent High Court case we look at the nature of the relationship between investment advisers and their clients and the duties and obligations that flow from this.
B i r m i n g h a m • B r i s t o l • C a r d i f f • L o n d o n • M a n c h e s t e r • S o u t h a m p t o n • Ta u n t o n
02 Wealth, Health & Inheritance Briefing September 2016
• A duty of confidentiality: not to disclose information about clients’ affairs.
• A duty not to profit from the relationship: trustees, for example, cannot profit from the trust assets, although many trust deeds will temper the obligation to some extent by, for example, allowing a trustee who is also a director of a company in which the trust holds shares to retain his director’s remuneration.
• A duty of no conflict and undivided loyalty: a fiduciary should not allow his personal interests, or those of another client, to conflict with the best interests of the client. He must be loyal to the client and make available to him all the information that is relevant to the client’s affairs. In the context of an investment adviser this will usually involve regular
accounting to the client as to the performance of his investments, a matter which would normally also be covered in any client agreement.
In practice, the common law rules laid down by the nature of the fiduciary relationship will be bolstered and supported by professional regulators such as the Solicitors Regulation Authority and the Financial Conduct Authority, firms’ own compliance officers and departments and the use of internal structuring such as the imposition of Chinese walls.
For further information, please contact: Stuart Thorne Partner 0345 209 1105 [email protected]
Investment advisers and fiduciary relationships - continued
Although it seems a long time ago, and it has been eclipsed by subsequent events (not least the financial crisis), most people will remember the dotcom bubble in the late 1990s and the way that it burst in the early 2000s.
A recent High Court case arose directly out of the investment conditions prevalent in those turbulent times and involved an alleged breach of trust by three solicitor trustees. We look at the case, and in particular what the judge had to say about the trust’s investment strategy, the trustees’ relationship with the investment advisers and how the judge determined whether a breach of trust had occurred.
The trust and the claim
The trust in question arose out of the estate of Jack Daniel, a farmer who died in 1999, estranged from his wife and with two children, Glyn, aged 13 and Amy, aged 16. Two partners in a firm of solicitors were appointed as executors and trustees, and the estate was left in trust for Glyn and Amy with the children becoming entitled to the capital at the age of 25. A third partner at the firm of solicitors took a leading role in running the trust for some years, becoming a trustee in 2004.
In 2000 Mr Daniel’s farm was sold and the net proceeds of approximately £3.3 million invested by Taylor Young Investment Management Limited (TY), a firm appointed by the trustees and with which the solicitors’ firm had an ongoing relationship.
It would appear that at the time the dotcom bubble was bursting, TY continued to favour technology and IT stocks which (perhaps unsurprisingly) proved an unsuccessful strategy. As a result, Glyn and Amy claimed against the trustees for compensation of £1.4 m for alleged losses on the trust funds in the period from 2000 to 2002. It was alleged that the trustees had failed to formulate and implement a suitable investment strategy, had not reviewed investments and should not have relied on TY’s advice and recommendations. It was also alleged that the trustees had wrongly delegated to TY and to the non-trustee solicitor.
The court’s decision
The expert acting on behalf of Glyn and Amy asserted that the trust was overweight in equities, with the amount in equities ranging between 82.4% and 100% of the invested trust funds during the relevant period. The experts for both parties considered the trust’s portfolio to have inadequate
diversification, too high a risk profile and to be over-invested in the technology and IT sector.
The judge reviewed the trustees’ actions and their relationship and communications with TY in detail. He emphasised that it was the trustees’ duty to act both prudently and as a prudent man of business would act if he were acting for others for whom he felt morally bound to provide. It was crucial, the judge determined, to decide whether no trustee could reasonably have decided to act in the same way as these particular trustees.
The trustees had an established relationship with TY and had chosen them for reasons that seemed sound to the trustees. They understood that TY carried out extensive research and considered the investment recommendations put forward by TY critically, but admitted that they would not have considered it right “to question specific advice when firmly given.” Becoming dismayed with the investment performance, the trustees had terminated the appointment of TY as advisers in 2002 when the trust was moved to the solicitors’ own in-house investment managers.
The judge found that the high level of equity investment in the trust was an impermissibly high risk strategy for the trustees to have adopted. The trustees should have:
• devised a realistic investment strategy at the outset
• conducted periodic reviews which specifically considered whether the investment strategy was still appropriate given the trust’s attitude to risk and
• ensured that the investment approach was more balanced and diversified.
The beneficiaries’ claim, however, was based on the performance of the investments over a relatively short period of time within a longer period of investment. In addition, the trustees were investing at a time when equity investments had shown a good return and the trustees had relied on professional advice which they did not follow unthinkingly. The judge believed that the trustees were not “cavalier, self-interested or unthinking.” They were required to exercise supervision and control over the strategy and pattern of investments but they were not required “personally to make, or to be involved in making, each individual investment decision.”
In light of the reasoning and approach of the trustees, and the firm advice provided by TY, the court held that the decisions the trustees made were not decisions which no reasonable trustee acting prudently could have made and the claim by the beneficiaries failed.
In addition, the judge held that, even if a breach of trust had been substantiated, given the fact that the trustees had worked hard and consistently over a long period to the best of their abilities, and in reliance on what they reasonably believed to be competent professional advice, he would have exercised his discretion under s61 Trustee Act 1925 to excuse the trustees from personal liability.
For further information please contact: Fiona Debney Partner 0345 209 1135 [email protected]
The dotcom bubble and an alleged breach of trust
In the final article in our series about older clients we look at what happens if your client moves into residential care and the finance rules affecting the funding of their care fees.Who pays?
This will depend on several factors, including: whether your client needs nursing care, care meeting their social needs because of advancing age, or a combination of both of these. It will also depend on the level of their savings and income.
If your client has complex medical needs, such that they require full-time nursing care, then they may be eligible for NHS Continuing Healthcare and their care home fees will be met in full by the NHS. Clients will need to ask for a preliminary assessment as to whether they might qualify under this scheme as this funding is generally reserved for those with complicated medical needs. If your client does not qualify, but is receiving care in a home registered to provide nursing care, and is assessed as requiring care from a registered nurse, then your client should qualify for NHS Funded Nursing Care. In 2016 the standard rate payable is £156.25 per week and it is paid directly to the care home.
If your client is not receiving nursing care then they may have to pay all their own fees. This will be the case if they have capital in excess of £23,250. Certain capital is disregarded when assessing this amount including the older person’s home for the first twelve weeks of their stay, or permanently if it is occupied by the resident’s spouse or by another relative aged over 60. One spouse is not liable to maintain the other and investment bonds are disregarded.
When your client moves into care they should be entitled to claim Attendance Allowance, which is not means tested.
Is your client the beneficiary of a trust?
The income from a life interest trust will be taken into account on a financial assessment but a discretionary trust will be ignored, unless the trustees exercise their discretion to appoint income and/or capital to the older person.
The financing of your client’s care
03 Wealth, Health & Inheritance Briefing September 2016
F o l l o w u s o n Tw i t t e r @ C l a r k e W i l l m o t t @ C W C o P @ C W P r i v a t e C l i e n t
If your client’s partner has died leaving them a life interest in a share of the house then the value of that share will be ignored unless your client’s share of the property produces income because it is let, or the property has been sold and your client is receiving the income from their share of the proceeds, in which case this income will be taken into account.
Has your client given assets away in the hope of qualifying for more help?
If your client is entitled to help towards their care fees, the local authority in which your client lives will be liable to fund this. Each local authority sets a maximum contribution towards care fees so your client will receive funding up to the level that the local authority is prepared to pay. If your client has given assets away, and the primary motivation behind the gift is to qualify for greater help towards care fees, then the Local Authority can take the view that the older person has intentionally deprived themselves of assets and assess them as if they still owned the asset in question.
What is proposed for the future?
The Dilnot Commission recommended reform of the care fees funding system and a cap on the amount that people should be required to pay towards their care fees was set at £72,000. This new system was originally intended to come into effect this year but it has now been postponed until 2020. If the economy takes a significant downturn before 2020 then it is possible that the new regulations will be deferred again. In the interim, the inheritance tax nil rate band remains frozen at £325,000, ostensibly to help fund these changes.
For further information, please contact:Anne Minihane Partner 0345 209 1391 [email protected]
04 Wealth, Health & Inheritance Briefing September 2016
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Saving inheritance tax the aristocratic way
The final consensus seems to be that the family used a series of discretionary trusts to manage their tax liabilities. So what are discretionary trusts, how can they save tax and can they help people other than the aristocracy?
What is a discretionary trust?
A discretionary trust is a trust under which no beneficiary has a fixed entitlement. There are a range of beneficiaries and any one of them can receive benefits, in the form of capital and/or income from the trust, depending on the decision of the trustees. None of the beneficiaries has a right to receive benefits, just the hope of so doing. Distribution of benefits from the trust is entirely at the trustees’ discretion and the trustees could decide to roll up income rather than distributing it.
How can a discretionary trust save tax?
As no individual has any fixed entitlement under the trust, there is no IHT payable when any one of the beneficiaries dies; instead IHT is payable (at a maximum rate of 6%) on every ten year anniversary of the trust’s creation and when capital leaves the trust (an exit charge). This has the big advantage that there is no large 40% charge at an unknown time in the future but smaller charges at pre-determined dates. If a beneficiary dies prematurely this can be particularly beneficial as the ten yearly IHT charges payable during their lifetime are highly unlikely to equate to the 40% charge that would have been payable had the trust assets been taxed as part of that beneficiary’s estate.
Can discretionary trusts benefit non-aristocrats?
Definitely. The same technique can be employed by anyone whose estate is likely to be liable to IHT. If your client’s Will divides their estate into discretionary trusts for the benefit of each of their children and their families there will be no charge to IHT on their children’s deaths, but instead the trusts will pay ten yearly and exit charges.
There are also non-tax advantages as the assets in the trust are protected from third party claims, for example, on divorce or bankruptcy, and they cannot be used towards payment of care fees unless the trustees decide that trust assets should be used for this purpose. The money in the trusts forms a “pot” for each branch of the family, with trusted advisers and family members ensuring that the pot is dealt with in a way that reflects your client’s wishes.
Discretionary trusts also have a number of uses in lifetime planning. They can be used, for example, to receive lifetime gifts of cash or assets valued up to the IHT nil rate band (currently £325,000) without any immediate charge to IHT. After a period of seven years has passed from the date of the gift, the assets given to the trust are no longer subject to IHT in your client’s estate. The use of a discretionary trust, with a range of possible beneficiaries, ensures that flexibility is retained over who benefits from the assets given to it and when. This can be particularly useful if your client’s family is young, not used to dealing with larger sums of money, or if it is wished to retain a degree of control over the trust assets.
For further information please contact: Liz Smithers Partner 0345 209 1115 [email protected]
The untimely death of Gerald, 6th Duke of Westminster (the beneficiary of a reputed family fortune of £9 billion, partly comprising prime London property) has been followed by much speculation about the inheritance tax (IHT) that might or might not be payable and analysis of how the family fortune is protected from the ravages of a 40% IHT charge on the death of each Duke.
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Meet our tax team
As a result we can advise on issues across the tax spectrum including corporation tax, income tax, national insurance, VAT, stamp duty land tax, capital gains tax and inheritance tax.
We advise corporations, partnerships, trusts, farmers and individuals and our expert in international tax, Gillian Kennedy-Smith, advises on both UK and international trust and estate planning.
We advise on the tax implications of a course of action, tax compliance and all types of tax planning and also draft the supporting documentation.
Here are our team members:
David Maddock Partner 0345 209 1205 [email protected]
As our agricultural specialist, David advises farmers and landowners about the availability of agricultural, business and heritage property relief from inheritance tax and hold over, roll over and entrepreneurs’ relief from capital gains tax.
Fiona Debney Partner 0345 209 1135 [email protected]
Fiona is recognised for her considerable experience in dealing with estate planning and estate administration. She works closely with independent financial advisers and is a specialist in entrepreneurial tax planning for individuals.
Carol Cummins Consultant 0345 209 1275 [email protected]
Carol is a certified accountant and member of the Chartered Institute of Taxation. She is also a member of the Society of Trust and Estate Practitioners (STEP) and has represented the Wales and West region at national level. She specialises in estate planning and advises on capital gains tax, inheritance tax and income tax issues for individuals, trustees and executors. Carol has presented, and appeared in several national media pieces, on FATCA (the Foreign Account Tax Compliance Act).
Niall Murphy Partner 0345 209 1723 [email protected]
Niall heads our business tax team and has extensive experience of providing practical and pro-active tax advice to businesses. Niall’s expertise includes corporate advice, banking and company financing, property, employment related advice, share schemes and tax litigation.
Andrew Campbell Consultant 0345 209 1281 [email protected]
Andrew has specialised in stamp duty land tax since it was introduced in 2003. He has been a Council Member of the Stamp Taxes Practitioners Group for ten years and has represented the STPG in numerous consultations with HMRC since its inception. For eight years he chaired IBC’s annual SDLT conference. He advises regularly on SDLT and the Annual Tax on Enveloped Dwellings.
Sue McDonald Senior Associate 0345 209 1754 [email protected]
Sue is a former tax inspector with HMRC. She has also worked as a tax manager with a firm of chartered accountants dealing with a wide range of tax issues. Sue oversees the administration of trusts and personal tax work as well as giving advice on income tax and capital gains tax including the impact of non-resident capital gains tax.
Gillian Kennedy-Smith Senior Associate 0345 209 1095 [email protected]
Gilly specialises in both UK and offshore trust and estate planning. She is a STEP member and a specialist in UK tax planning using Wills and trusts to achieve tax efficient solutions for clients and their families. She also specialises in offshore trusts and estate planning advising regularly on how the location of assets, and domicile and residence can affect tax and succession planning.
Please do not hesitate to contact any of our tax team members if you think that they could help either you or your clients.
Clarke Willmott has a number of solicitors who are specialists in tax matters and our wider tax team includes other tax professionals such as qualified accountants, chartered tax advisers and former tax inspectors.
06 Wealth, Health & Inheritance Briefing September 2016
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Financial services litigation: The Insurance Act 2015
This is the most significant change to insurance legislation since the Marine Insurance Act 1906. The government has described the New Act as “the biggest reform to insurance contract law in more than a century”.
The New Act principally governs the relationship between insurers and their insured, and brings long awaited reform to the ability of an insurer to refuse cover for claims against an insured defendant. A refusal means a claimant without access to an insurance pot and the insured without protection. In particular, this article addresses the effect the New Act may have on those who are seeking to make recoveries from professionals. The New Act is of particular importance in circumstances where the insured professional may not have sufficient assets to meet a claim where insurance cover is refused.
Where a professional firm has the benefit of professional indemnity insurance, a claimant has a significant degree of comfort that there will be resources to meet their claim. This position can be threatened if the insurer is able to withdraw or refuse cover for the claim against the insured. The New Act seeks to remove some of the more draconian options which are available to insurers to avoid insurance contracts.
The New Act addresses two key scenarios which have provided insurers with the ability to avoid insurance contracts in their entirety:
• failure on the part of an insured to provide all relevant information to the insurer prior to entering into a breach of contract; and
• breach of a warranty in the insurance contract
One of the main criticisms of the previous law was that an insurer was entitled to avoid the entire insurance contract if it could be shown that the insured failed to disclose all “material” information prior to entering into the insurance contract. Where the insurer would have written the insurance anyway, but with a higher premium, one might think that the insured would simply have to pay the difference between the value of the premiums, but that was not the previous law. In those circumstances, the insurer would be entitled to avoid the policy and leave the insured, uninsured and the claimant to pursue the defendant personally. A lose, lose situation for those involved in the legal dispute.
The New Act changes the previous, quite unfair, position and means that, unless there is fraud, the insurer will only be able to avoid the policy
completely if the insured acted deliberately or recklessly and the insurer can show that it would not have entered into that policy on the same terms if it had known the full facts. Where the insurer is not able to avoid the policy entirely, the New Act provides for proportionate remedies to apply which reflect what the insurer would have done if it had known about the undisclosed information prior to entering into the contract.
The situation is similar in relation to breaches of warranty. A warranty is a written term of an insurance contract in which the insured promises that certain facts are true. For example, a professional firm may have a warranty that all work of junior professionals will be approved by a senior professional.
Previously, an insurer could refuse cover for a claim if there had been a breach of a warranty even where the breach was immaterial and unrelated to the claim in question. Under the New Act, any breach of warranty merely suspends cover rather than discharging it completely. Using the example of the warranty given above, under the previous regime, evidence that some work had not been approved by a senior professional could result in the insurer legitimately avoiding cover for all claims, even those where the requisite approval had been obtained. Under the New Act, the work which had not been approved would not be covered but other work would be.
The New Act will therefore improve the position of claimants seeking to obtain recoveries from an insured’s policy as it will be more difficult for an insurer to avoid a policy completely.
For further information about the Insurance Act 2015, please click here or contact:
Philippa Hann Partner 0345 209 1450 [email protected]
John Mackinnon Associate 0345 209 1430 [email protected]
OfficesBirmingham Office 138 Edmund Street, Birmingham B3 2ES t: 0345 209 1000
Bristol Office 1 Georges Square, Bath Street, Bristol BS1 6BA t: 0345 209 1000
Cardiff Office 2nd Floor, Emperor House, Scott Harbour, Pierhead Street, Cardiff, CF10 4PH t: 0345 209 1000
London Office 1 Chancery Lane, London WC2A 1LF t: 0345 209 1000
Manchester Office 19 Spring Gardens, Manchester M2 1FB t: 0345 209 1000
Southampton Office Burlington House, Botleigh Grange Business Park, Hedge End, Southampton SO30 2AF t: 0345 209 1000
Taunton Office Blackbrook Gate, Blackbrook Park Avenue, Taunton TA1 2PG t: 0345 209 1000
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Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC344818. It is authorised and regulated by the Solicitors Regulation Authority (SRA number 510689), whose rules can be found at http://www.sra.org.uk/handbook/. Its registered office is 138 Edmund Street, Birmingham, West Midlands, B3 2ES. Any reference to a ‘partner’ is to a member of Clarke Willmott LLP or an employee or consultant who is a lawyer with equivalent standing and qualifications and is not a reference to a partner in a partnership. The articles in this briefing are not intended to be definitive statements of the law but instead provide general guidance.
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The Insurance Act 2015 (“the New Act”) came into force on 12 August 2016.
