Category: Articles

Power of Attorney and managed investments – why it pays to get professional help

Posted on by Wellers

Since being introduced in 2007 it has become apparent that the Lasting Power of Attorney (Successor to the Enduring Power of Attorney) is an important document to assist in the management of an individual’s financial affairs and medical needs.

However, a part of the Lasting Power of Attorney (LPA) that is often overlooked is Section 7: Preferences and Instructions.  Using this section, the Donor of the power can communicate to their Attorneys details of things they would like them to do, i.e. preferences, or things they must do, i.e. instructions.  By way of an example, a preference may be that the Donor wishes to remain at home and receive domiciliary care; this is something that they would like to happen, but which may not be achievable if their care needs are very severe.  An instruction may be that the Attorney must prepare a set of accounts annually; this is something that an Attorney can do, and will be in breach of their duties if they fail to do so.

Some care must be taken when wording Preferences and Instructions.  If the Office of the Public Guardian feels that the directions given are too restrictive or incompatible with the powers granted by the LPA, they may refuse to register the document until the problematic clause has been removed.

Managing investments

One particularly common instruction, and one that is essential for any Property and Affairs LPA, is the clause that allows Attorneys to invest the Donor’s assets with a discretionary fund manager, or to continue where such an arrangement is already in place, as opposed to investments that would be managed by the Attorney personally.

It is usual for funds to be invested such a scheme, allowing an Independent Financial Adviser to act quickly on behalf of an investor to buy or sell shares subject to the whims of the market.  However, as this would essentially represent an Attorney delegating their powers, the LPA does not authorise investment in this type of arrangement without additional wording.  Where this wording does not appear, it may be that the fund manager will not accept the LPA, and an Attorney does not have the full range of powers available to ensure that they are able to act in the Donor’s best interests and secure the best return on their investments. This could be critical if there is a downturn in the stock markets or investment trends, which potentially offer greater returns start to evolve and you find yourself powerless to act. In particular, it is quite likely that the risk level selected for a person’s investment portfolios might need to change or at least be reviewed once they reach the point of not having capacity.

A Donor should be mindful of this and review their LPAs to ensure that they are fit for purpose; if amendments need to be made it will be far easier to achieve this while the Donor has mental capacity, and before the LPA is needed.

These hidden aspects of preparing a Lasting Power of Attorney can easily catch out those who are not aware and is one of the reasons why it pays to have LPAs prepared by a qualified lawyer.

Please call us on 020 8464 4242 for our Bromley office or 020 7481 2422 for our London office to talk to a qualified professional who can help you with your Powers of Attorney.

Penalty Clauses in Commercial Contracts

Posted on by Joe Reeves

It is a well-established principle of English law that, where one party is in breach of contract, the aim of damages is to compensate the innocent party for the loss it has suffered as a result of the breach. Unlike in other jurisdictions, particularly the US, English common law does not recognise the concept of punitive or special damages.

Commonly, in commercial contracts, parties will seek to agree terms setting out the financial extent of liability on either party in the event of default. Such terms are known as liquidated damages clauses and are often used in oil and gas, manufacturing and construction contracts, when performance of the parties’ obligations is often set within tight timescales and failure to do so can have consequences on the ongoing contract. So, for instance, parties to a construction contract may agree that, if one party fails to deliver materials on time such that the project is delayed, it will pay a fixed sum of money per day, until delivery is made.   It can be beneficial to use liquidated damages clauses, for various reasons.

Benefits of liquidated damages clauses are:

  • They provide certainty – the parties will know the extent of their liability in the event of default.
  • Ease of Enforcement – there will be a specific clause for the innocent party to rely on, making enforcement much easier.
  • Limitation of liability – the parties will know the limit of their liability. This might be beneficial for a party in default if, for instance, the actual loss caused by its breach is higher than the sum imposed by the liquidated damages clause.   This can be viewed as a benefit or a disadvantage, depending on whose side it is considered from.
  • Preserving the ongoing commercial relationship – where, notwithstanding the breach, the parties need to continue to work together to complete the contract, litigious proceedings are a distraction at best and are expensive and commercially very damaging. Where there is an ongoing commercial relationship between the parties, a liquidated damages clause allows them to deal with the breach quickly and effectively, so they can resume the performance of the remaining obligations of the contract.

As opposed to claims for unliquidated damages, which are often fraught with issues over causation, proof of loss and remoteness of damage, liquidated damages clauses do not carry such legal difficulties.

However, following the principle stated above, the measure of liquidated damages must be such that it is a reasonable assessment of loss and intended to have the effect of compensating the innocent party, rather than punishing the party in breach, or of simply acting as a deterrent to any breach.

Nowhere has this principle come into play more evidently than in relation to the issue of penalty clauses. Broadly speaking, a penalty clause is a contractual provision which levies an excessive monetary penalty on a party in breach of contract which is out of all proportion to the loss suffered by the innocent party.   Penalty clauses are generally unenforceable in English law.   In considering the issue down through the years, the Courts have differentiated between a sum representing a genuine pre-estimate of damages (an enforceable liquidated damages clause) and a sum which is out of all proportion to any damages likely to be suffered by the innocent party (an unenforceable penalty clause).

 

The history of the law in this area is best exemplified in the case of Dunlop Pneumatic Tyre Co Ltd – v – New City Garage [1915], in which New City Garage breached a contract with Dunlop to sell tyres at an agreed price, as well as selling Dunlop tyres to certain black-listed customers. Dunlop sued and sought to enforce a provision in the contract which provided that a fixed sum would be payable in the event of any breach of the agreement. The House of Lords dismissed Dunlop’s claim on the basis that the fixed sums were penalties, not genuine pre-estimates of loss.   In reaching its decision, the Court was no doubt influenced by the fact that the contract provided for a fixed price to be paid in the event of any breach, no matter the nature of that breach.   Such a clause rendered it more difficult to argue that the fixed sum was a genuine pre-estimate of loss. The Court, in reaching its decision, set out the following factors for consideration:

  • The sum required to be paid was an “extravagant and unconscionable” deterrent, in light of the loss likely to be suffered by the innocent party:
    • It exceeded the maximum possible loss
    • Different breaches on the part of New City Garage gave rise to the same penalty
    • It was not a genuine pre-estimate of loss, rather it was a sum clearly in excess of the loss likely to be suffered and as a result a deterrent and so unenforceable

Over the years however, there has been a shift in the Court’s approach. The Courts have slowly but surely began to accept that there were circumstances where parties could agree in their interests to have a commercial solution to a dispute which could render an agreed fixed remedy commercially justifiable.  The shift in the legal landscape culminated in the cases of Cavendish Square – v- Makdessi [2015] and ParkingEye Ltd – v – Beavis [2015], which were heard jointly in the Supreme Court.

The decisions in these cases mark a radical change in the Court’s approach to dealing with liquidated damages clauses.

The first question to consider is whether the contract imposes a primary obligation or a secondary obligation. A primary obligation is a stand-alone contractual obligation, whereas a secondary obligation is only triggered as a consequence of breach of contract and is intended to provide an agreed contractual remedy, for instance, a secondary obligation to pay a fixed sum in the event of breach of a primary obligation.   The question of whether a clause is a penalty clause (and therefore unenforceable) only arises in relation to a breach of a primary obligations, when the Court may seek to review and regulate the remedy imposed by the secondary obligation.

The Court departed from the “genuine pre-estimate” rule in Dunlop.   Rather, they recognised that where an innocent party could demonstrate that it was using a clause in a contract to protect a legitimate interest and the penalty is not exorbitant or unconscionable, it does not have to be a genuine pre-estimate of loss.   The Court held that the true test is “whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.   Therefore, the correct analysis to be applied is now as follows:

  • Is the disputed contractual term a primary or secondary obligation?
  • If it is the latter, does the innocent party have a legitimate interest to protect?
  • If not, the clause will be a penalty clause and unenforceable. If so, is the remedy imposed by the secondary obligation out of all proportion to the interest to the innocent party in the contract being performed? Again, if it is, it will be a penalty clause and unenforceable.

It should be noted that the Makdessi case was complex and often it will not be easy to determine whether a clause in a contract is a penalty clause.   The wording of the clause itself must be analysed, as well as the expectations and interests of the parties when they entered into the contract, in order to form an informed view of the position. Furthermore, care should also be taken when drafting commercial agreements to ensure that obligations and remedies within them can be justified, should there subsequently be a dispute over their terms.

This article is not intended and should not be relied upon for legal advice. Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.

CGT and Shares in Estates Valuation Trap

Posted on by Wellers

In the UK, there are quite generous exemptions from Inheritance Tax (IHT) which apply to business assets. One problem with making use of such exemptions is the effect this may have on the subsequent value of the relevant assets for Capital Gains Tax (CGT) purposes. Under S274 of the Taxation of Chargeable Gains Act 1992, the ‘base cost’ value of such assets for future CGT purposes is the IHT value, provided that value has been ‘ascertained’.

This can be especially important when assets are aggregated for IHT purposes. For example, if a deceased person owned 15 per cent of an unquoted company’s shares in his own name and had an indirect interest (say through a trust in which he held a life interest) in another 40 per cent, the IHT valuation would be on the basis of having a controlling (greater than 50 per cent) interest. If the company is a trading company, Business Property Relief (BPR) would apply and in the case of a controlling interest, BPR is given at 100 per cent.

The Capital Taxes Office will not in such circumstances wish to enter into negotiations about the value of these shares and will simply regard the value transferred as nil. The value, therefore, will not have been ‘ascertained’, which may lead to a later dispute about the real value of the shares at the date of death, when the value may well be much harder to ascertain or at least agree.

One possible way around this dilemma is for the executors to submit a valuation of the shares, preferably with the benefit of a valuation by an appropriate professional. This is likely to be ignored by HM Revenue and Customs when dealing with the estate taxation, as 100 per cent BPR will apply. On a subsequent disposal of the shares, that valuation – probably unchallenged – can be used to help to justify the base cost in the CGT computation. […]

Divorce and Foreign Nationality

Posted on by Wellers

Approximately one in six marriages in the European Union is between persons of different nationalities. Not surprisingly, approximately one in six divorces also involves spouses of different nationalities.

This can make for some complexity on divorce as to which country’s law should apply to the divorce proceedings. This is eased to some extent by the fact that some jurisdictions will apply the law of the nation of the person being divorced, rather than their own law, when appropriate. For divorce proceedings commencing in this country, UK law is applied no matter what the nationalities of the divorcing couple are.

The UK has opted out of an EU proposal that seeks to set a list of criteria for deciding which country’s law should apply on divorce, the main criterion being the country in which the couple had its last home. This will no doubt come as a relief to some, as the UK’s approach to financial settlements is among the most generous in the world. Also, prenuptial agreements are not binding in the UK, as they are in many European countries – most of which also exclude from the pool of assets to be divided on divorce any assets acquired through inheritance. However, following a decision of the Court of Appeal in 2009, ‘prenups’ now must be considered by the court where they have been entered into freely and without undue influence. Post-nuptial agreements are normally enforceable.

By and large, where there is doubt about which country’s law should apply, the divorce will be dealt with under the law of the country in which the divorce proceedings were first commenced. This explains why the UK is a favoured place to commence proceedings in ‘big money’ cases.

A 2011 case confirmed the principle that where the question of in which country the children of the marriage should be raised is concerned, the needs of each child must be considered separately: the children are not to be considered ‘as one unit’.
In recent years a number of cases have come before the courts involving foreign nationals or where there is a foreign residence element to the divorce. The British courts have been robust in their defence of their right to have jurisdiction in such cases. In 2012 the UK improved the ability of parents to enforce residence orders if their children have been taken to a foreign country, when the provisions of the 1996 Hague Convention came into effect.
A 2013 case confirmed that where a foreign court has no outstanding matters before it with regard to the residence of a child, the UK court does not need the foreign court to formally renounce jurisdiction if the child concerned has become habitually resident in the UK.
More recent cases have confirmed the UK as a jurisdiction in which a fair hearing and robust enforcement of court rulings apply: in a 2015 case, a husband who refused entirely to compy with court orders concening his worldwide assets was ordered to be imprisoned for contempt of court.
If you are facing a relationship break-up with a foreign element, contact us for advice, inlcuding revising your will to reflect your new circumstances. […]

Tax Issues for Owners of Two Homes

Posted on by Wellers

Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends.

Owning two houses does have significant Capital Gains Tax (CGT) implications. When house prices are rising fast, many owners face CGT liabilities. CGT on property is very complex. Here are some of the main planning points, but this is just an outline guide. Always take professional advice before going ahead with any significant transaction.

Once you have two houses, you have two years to make an election regarding which is to be your ‘principal private residence’ (PPR). This is important since PPRs are exempt from CGT. In general, it is sensible to elect for the property that is expected to rise most in value to be the PPR. A married couple can have only one PPR.

If a house is sold which has been the PPR and was actually lived in at any time, the last three years of ownership are treated as private residence (this period is being reduced to 18 months for sales after April 2015), so if a house has been owned for ten years, lived in for six years and then rented out for four years, only one tenth of the gain will be chargeable. There are a number of other exemptions which apply for periods of non-residence for various reasons.

If your residence has extensive grounds (over 0.5 hectares), a chargeable gain may arise on the land. There is an exemption, where the grounds are ‘required for the reasonable enjoyment of the property’. Where a large landholding is being divided into lots and sold for development, beware of selling the house first and retaining the land, since CGT may then arise when the land is sold.

If you rent out part of your private residence, or use it for commercial purposes, it will normally become chargeable, although (at least) the first £40,000 of the gain will be exempt if the letting was for residential purposes.

Since transfers between spouses are exempt from CGT, where a chargeable gain is expected it can, in some circumstances, make sense to transfer an interest to your spouse before sale. This will make use of both CGT exemptions.

HMRC are likely to challenge a ‘principal private residence’ election for a second property where it is sold reasonably soon after acquisition and there is a gain chargeable to CGT. In such cases, a demonstration of actual residence will be critical for a claim to succeed.

One common circumstance in which this occurs is when a home is inherited and subsequently sold.

In the 2015 Budget, measures were introduced which will adversely affect the owners of homes in the UK and abroad who are resident outside the UK and who sell their UK home at a profit.

From 2017, the allowable interest on mortgages on ‘buy to let’ properties is to be restricted to the basic rate of tax.

In addition, higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The additional rate is be 3 per cent more than the ‘basic’ SDLT rate.

The Government has published guidance on tax on selling property. Such decisions should always be undertaken with the benefit of professional advice.



Source: Private Client Library – Articles

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