Correcting Your Credit Rating

Most people require credit at some time, whether it is in the form of a credit card, a loan or an overdraft. However careful you are, it is possible to find yourself blacklisted for credit purposes.

When you apply for credit, the lender will apply to either Experian or Equifax, the two Credit Reference Agencies (CRAs) that provide financial data to lenders, for information to help them make a decision. CRAs hold a regularly updated database of information about consumer credit applications, court judgments and so on.

When a lender checks with a CRA, following a customer's request for credit, it is logged on that person's file. A large number of applications from one person in a short time may indicate fraud or excessive borrowing.

Under the Data Protection Act 1998 and the Consumer Credit Act 1974 you have the right to know what information about you is held by a CRA. The statutory credit reference report costs £2. You can see details of who has searched for information about you and request information as often as you wish without a record of this being seen by a lender.

If you are refused credit, the lender is not obliged to tell you why but they should tell you if information supplied by a CRA was material in the decision to refuse credit. The lender should give you the name and address of the agency.

If you think the information is inaccurate, you can make a complaint to the CRA, who must then contact their information provider. Meanwhile, your file should be marked as "disputed" so that prospective lenders realise that the information may not be reliable. Agencies have 28 days to answer complaints.

Usually, people only contact a CRA if they run into difficulties when applying for credit. However, you may wish to know what information is stored, even if you have never had any problems.

Difficulties can occur because at present lenders are allowed to take into consideration information about people with the same surname living at the same address, even if their financial affairs are completely unconnected to the individual seeking credit. For example, if you have children living at home who have debts, it could affect your own credit worthiness.

Capital Gains Tax for Owners of Two Homes

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, 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.

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

Avoiding Inheritance Tax with Discounted Gift Schemes

Inheritance tax (IHT) is payable at 40 per cent on the net value of a person’s estate above £325,000 (the current nil rate band as of 2013/14). It affects an increasing number of people owing to the rise in house prices in recent years. One straightforward method of avoiding IHT is through discounted gifts.

Discounted gifts can be made by a donor setting up a discretionary trust (this is usually done with a single premium investment bond) with a flexible power of appointment.

For IHT purposes, the valuation of assets gifted is based on the ‘loss to the estate’ as a result of the transfer of the property and is calculated on the value when the assets are transferred into the trust. HM Revenue and Customs (HMRC) will estimate the amount that is likely to be returned to the donor through the income they draw, based on their age and health. With discounted gift schemes, the valuation HMRC then place on the transfer will be less than the amount actually invested, creating a discount. This discounted amount is the valuation of the transfer of assets for IHT purposes, creating an immediate potential tax saving.

Discounted gifts are Potentially Exempt Transfers (PETs), meaning that if the donor survives seven years after making the gift, the trust property normally drops out of the estate altogether and becomes exempt from IHT. Any growth in value is also exempt from IHT liability.

As well as the IHT saving, this type of arrangement has the advantage of providing regular income payments for the donor during his or her lifetime. Also, because the assets are no longer within the estate, the trust beneficiaries can receive the trust funds on the testator’s death and will not need to wait for probate.

The downside, however, is that such schemes are not very flexible. The donor will lose all rights to the capital invested once the trust has been drawn up and will not benefit from any investment growth, although they will be able to receive a regular income.

Discounted gift schemes are best suited to people who have some certainty about their financial status. They are also more advantageous where the donor is confident of surviving seven years, in order to utilise fully the tax saving. As with any tax planning device, especially where trusts are being created, it is important to seek professional advice as to whether it is the best option, given your individual circumstances.

Business Assets and Divorce

Divorce is seldom an easy business, but the problems are compounded when there is a family business involved. The division of the spoils has traditionally been the subject of a great deal of argument, but recent cases have at least clarified the thinking of the highest judges in the land. The leading case, which was decided in the Lords, involved a Mr and Mrs White, who were farmers. The ruling established the principle that there has to be a good reason for the division of assets to be unequal.

Unequal splits of joint business assets can be proper in some circumstances. For example, in a case in which the husband’s business did not have sufficient liquidity (ability to generate cash) to finance an equal split, Mr Justice Coleridge awarded the wife a 39 per cent share of the total assets, which included the family home. Because of the financial circumstances of the business, the balance of her settlement was ordered to be paid over a period of years. The judge commented that the “…old taboos against selling the goose that lays the golden eggs have been largely laid to rest…but if it is necessary to sell her, it is essential that her egg-laying abilities are damaged as little as possible in the process.”

In a more recent case, a husband who argued that his ex-wife’s settlement should be reduced, because she had taken up with a new partner and had a luxurious lifestyle, failed in his attempt. Similarly, a husband's attempts to persuade the court that the settlement required for his daughter should be reduced was rejected when it was considered that she would have to change schools, which was not in her interest. The needs of the child, not the father, are paramount in such cases.

One important factor in the division of 'marital assets' generally is the relative contributions of the two parties to the creation of the assets. This need not be direct, as a 'stay-at-home' spouse can be awarded a substantial proportion of the assets if they were instrumental (ie by supporting the 'wealth creator') in the creation of the family's wealth. 

Where there are no 'surplus assets', the courts will look first to the housing needs of the parent who looks after the children, with any additional assets being fairly apportioned by reference to the needs of each party and their ability to provide for their needs.

Following a recent decision of the Supreme Court, it would appear that where a pre- or post-nuptial agreement has been entered into, in appropriate circumstances, business assets may be divided in accordance with the agreement.

A recent court decision that where assets are held in a company (which is is law a legally separate person from the shareholders themselves), the court will 'raise the veil of incorporation' to allow the company's assets to be treated as directly available has been overturned on appeal. However, a case in which assets were placed in a trust was decided differently: the trust assets were deemed to be 'under the control' of the ex-husband, and thus available for division.

Buying a House and Consumer Protection

With the appointment of an Ombudsman for Estate Agents (OEA), the laying down in statute of the duties of estate agents and the passing of the Consumers, Estate Agents and Redress Act 2007 (CEARA), a property purchaser might reasonably conclude that their interests are strongly protected under the law. This view is likely to be bolstered by an awareness of the existence of the National Association of Estate Agents’ (NAEA) own disciplinary and redress scheme. However, the assumption that a buyer’s interests are well protected is not as well founded as you might think.

The estate agent’s main duty is to the vendor of the property, so the regulations under which they operate relate mainly to their relationship with the vendor. They are bound not to discriminate against purchasers who do not wish to buy other services they offer and to declare a personal interest to any buyer. It is important to note that even when the sales particulars of a property are inaccurate, the right of redress may be limited. Recently, the court ruled that an agent was not liable for providing false information to the effect that a property included a substantial area of land which was not in fact registered in the vendor’s name. The estate agent had simply accepted without enquiry that the area of land was part of the property and included it in the sale particulars. The court considered that any purchaser would have made sure that a proper search of the title was done and in any event the offer for sale was ‘subject to contract’ – placing the onus on the purchaser to make sure their enquiries were carried out carefully!

The Ombudsman service deals with claims against estate agents, but its powers are limited and the maximum award that can be made is £25,000. In practice, most awards are a small fraction of that amount. Members of the NAEA must belong to the OEA redress scheme.

In 2010, protection was given to buyers who buy 'off plan', with the launch of the Consumer Code for Home Builders.

Cohabitees and Death - Who Can Claim?

Are You a Sophisticated Investor?

In March 2005, the rules relating to approaching people regarding financial promotions were relaxed so that so called ‘sophisticated investors’ and high net worth individuals (HNWIs) could be more easily approached with a view to making investments in unlisted securities. The purpose of the relaxation is to remove impediments to business angels and others seeking finance for small- to medium-sized businesses and to aid the seeking of informal venture capital generally.

It is possible to ‘self-certify’ yourself as a HNWI or a sophisticated investor. To self-certify as a HNWI you have to earn at least £100,000 per year or have net assets (excluding your property, pension rights and so on) of at least £250,000.

To self-certify as a sophisticated investor you must:

• have been a member of a business angels network for at least six months; or
• have made at least one investment in an unlisted security in the previous two years; or
• have worked in a professional capacity in the provision of finance to small- or medium-sized businesses in the last two years or in the provision of private equity; or
• be or have been within the last two years a director of a company with a turnover of at least £1m.

A promoter will need to have a ‘reasonable belief’ that the self-certification has occurred. The self-certification has to be in writing, but a promoter will be able to rely on a verbal assurance that a person has self-certified as a sophisticated investor or HNWI. When accepted as a HNWI or sophisticated investor, the protections available for investors as regards the promotion of securities by a person authorised under the Financial Services Act are removed. Appropriate ‘risk warnings’ must still be included in all promotional material given to potential investors. Whether this will prove to be sufficient protection for ‘self-certifiers’, or whether it will open the floodgates to the marketing of low-quality high-risk investments to them, remains to be seen.

Changing Wills For Benefit

A will expresses the final wishes of the deceased person and it is commonly thought that a will is irrevocable after death. However, provided everyone agrees, it is normally possible to vary a will provided that the application is made within two years of the death.

A Deed of Family Arrangement, or DFA, (also known as a Deed of Variation) is a legal document which can be used to 'rewrite' provisions of a will. While these were originally introduced to protect dependents from being unfairly deprived, they are now mainly used to reduce Inheritance Tax.

To be effective, a DFA must be made in writing and signed by all of the beneficiaries who would lose entitlement to the affected part of the deceased person’s estate. If this affects any person under age eighteen, it may require the formal approval of the court.

Assessing Mental Capacity - Guidance

One of the conditions which must be satisfied for a will to be valid is that the person making it must be of sound mind. With an ageing population, cases involving disputes over a testator’s mental capacity are becoming more common – it is estimated that up to two million people in the UK suffer from some form of dementia or brain injury.

Case law developments in this area and legislation in the form of the Mental Capacity Act 2005 have led the Law Society and the British Medical Association to develop new guidelines to assist doctors and lawyers to assess mental capacity. It is a useful guide for anyone who has to care for or is responsible for someone whose mental capacity is in doubt.

The guide can be purchased from the Law Society or from a number of online booksellers although, at £39.95, you might prefer to wait until a copy finds its way to your local reference library. For free information see the Department of Health website.

Asset Valuation Problems - Chattels

When dealing with an estate, an increasing problem for executors is the valuation of assets in the form of the chattels of the deceased. In probate terminology, chattels are the ‘everyday’ assets such as furniture and ordinary possessions, as opposed to houses, investments and the like. These latter assets are relatively easy to value as estate agents and other specialist valuers can be called upon and in the case of listed investments, their market values at any point in time are readily available.

One difficulty is that an increase in wealth and estate values generally has brought an increasing number of estates into the Inheritance Tax (IHT) net. Where the value of the estate is well below the IHT threshold (£325,000 for 2011/12), even placing a relatively optimistic valuation on the chattels would probably not create an IHT liability. Where IHT must be paid, however, a realistic and justifiable open market value must be ascertained.

A second aspect of the rise in living standards is that it is more normal than it was in the past for people to have a substantial value in chattels. A side issue arising here is that many households may have an insured value for ‘contents’ which is well below the actual value of their household contents.

In general terms, when valuing assets for probate purposes, the appropriate valuation is the ‘open market value’ – the value for which they could be sold if a bargain were made between a willing buyer and a willing seller. Specialised assets, such as works of art, stamp, book and coin collections and so on, should be valued by a professional valuer if likely to be of significant value. Cars can be valued by reference to a trade guide and boats by a yacht broker.

Any items specifically mentioned in the will should be separately valued and, as a rule of thumb, individual items worth more than £500 should be assessed individually. Items which are widely traded (such as musical instruments) can, in some cases, be valued by reference to the prevailing prices on Internet auctions.

Another problem that is becoming more common occurs when there are a number of chattels, some of which may be valuable and some of which are not, and the relative value of each is not easy for the executors to know. Where the executor is likely to have the contents of the house cleared, it is possible for quite valuable chattels to be disposed of for little value or even thrown out.

When chattels are being distributed (say where there are three children, each entitled to a third of the chattels), it is also important for values to be known, because the distributions made will need to be equal unless agreed otherwise by the beneficiaries. Since many assets are in the form of sets (china and furniture for example), some horse-trading may need to be done and having an idea of the values of the different chattels will prove helpful.

Current Laws on Electrical Work

Since 1st January 2005, all electrical work carried out in dwellings has had to comply with Part P of the Building Regulations and be carried out by a person who is competent to do the work.

All work which involves adding a new circuit to a dwelling needs either to be notified to building control, which will then inspect the work, or to be carried out by a competent person who is registered under the Part P Self-Certification Scheme.

Small jobs such as replacing a socket-outlet or a light switch on an existing circuit do not need to be notified to a building control body although higher-risk work involving installation of extra power points or changes to circuits in kitchens, bathrooms or  the addition of outdoor electrical fittings must be notified.

Persons registered with Part P Self-Certification Schemes are fully qualified electrical contractors with the ability to check a circuit for safety. They will be able to issue Building Regulations certificates of compliance.

The term ‘dwelling’ includes houses, maisonettes and flats. It also applies to electrical installations in business premises that share an electricity supply with dwellings, such as shops and public houses with a flat above, and to the common parts of buildings such as hallways and shared amenities in blocks of flats. Part P also applies to electrical installations in outbuildings such as detached garages, sheds and greenhouses and to electrical installations located on land around dwellings, such as garden lighting.

For further information see the Government Planning Portal.

Charity Trustees - Guidance

The regime governing charities has been progressively tightened up over the years, making the sort of scandals that were once not uncommon much more of a rarity. This means that trustees now have to adopt a more professional attitude to the management of a charity’s affairs than was necessary in the past.

However, the Charities Act 2006 also contains provisions which will assist many charities by providing clarity on matters in which trustees are paid by charities or have commercial links with them

The Charity Commission has published guidance for the trustees of charities. This states that they must:

• have and accept ultimate responsibility for directing the affairs of the charity and ensure that it is, and remains, solvent and well-run and that it delivers the charitable outcomes for which it has been set up;
• ensure that the charity complies with charity law and with the requirements of the Charity Commission as regulator – in particular to ensure that the charity prepares reports on what it has achieved and annual returns and accounts as required by law;
• ensure that the charity does not breach any of the requirements or rules set out in its governing document and that it remains true to the charitable purpose and objects set out therein;
• comply with the requirements of other legislation and other regulators (if any) which govern the activities of the charity;
• act with integrity and avoid any personal conflicts of interest or misuse of charity funds or assets;
• use charitable funds and assets reasonably and only in furtherance of the charity’s objects;
• avoid undertaking activities that might place the charity’s endowment, funds, assets or reputation at undue risk;
• take special care when investing the funds of the charity, or when borrowing funds for the charity to use;
• use reasonable care and skill in their work as trustees, using their individual skills and experience as needed to ensure that the charity is well-run and efficient; and
• consider getting external professional advice on all matters where there may be material risk to the charity, or where the trustees may be in breach of their duties.

For more detail see the Charity Commission website and, in particular the FAQs about running a charity.

In February 2011, the Charity Commission published guidance for charity trustees based on a new ‘risk assessment’  led approach.

The Charity Commission also has a comprehensive range of downloads for charity trustees and prospective trustees.

Dealing With an Insolvent Estate

One of the rules that applies to the administration of estates is that whilst a person appointed as executor under a will can refuse to accept the appointment, once an executor ‘intermeddles’ in the estate, in principle he or she cannot then ‘resign’ from the responsibility.

It is relatively easy inadvertently to carry out an act which demonstrates one’s acceptance of the rôle of executor. This normally causes few problems, but when the estate being administered is insolvent, matters can get very complicated indeed.

When the liabilities of the deceased exceed the available assets, the personal representatives of the insolvent estate have a duty to administer it in the best interests of the creditors, not the beneficiaries. Debts must be cleared before any legacies are paid. If this rule is breached, the executors may be required to refund the value of any legacies paid from the estate. Payments made to the executor by an insolvent estate may also have to be repaid, with interest.

One possible solution to this problem is for the executor to seek an Insolvency Administration Order (IAO), under which the estate administration is passed to a qualified insolvency practitioner.

The practical effect of an IAO is that the estate is administered in a way that is very similar to a bankruptcy. Any legal proceedings against the estate are stayed and the personal representatives are protected from personal claims. The IAO is deemed to commence at the date of death, and a statement of affairs must be prepared and a creditors’ meeting held.

The assets of the deceased are collected in and distributed according to the priorities set out in insolvency law. The beneficiaries of the estate rank last in order of right to be paid.

Divorce and Foreign Residence: Children

When a marriage breaks up, it is usual for the couple to separate physically as well as legally and in some cases the physical separation can be considerable. With the increase in international travel and residence abroad, marriages between persons of different nationalities are becoming increasingly common.

When a couple divorces and one of them wishes to return to their country of origin, this can cause particular problems where there are children. Strictly, it is a criminal offence for a divorced or separated person to take a child under the age of 16 abroad contrary to the wishes of their spouse, unless they have a residence order in respect of the child. This is taken very seriously by the courts. In a recent case a man had his daughter removed to the Middle East and claimed he then did not know her whereabouts, thus failing to comply with an order of the court to return the child to the UK. The court imposed a custodial sentence and then reimposed when it had been served, for contempt of court.

Recently, a number of cases have tested the limits of the previously established rule as regards taking children abroad, which was that permission should only be denied when there was a strong reason for so doing. This rule appears to be less strictly applied than before.

When a parent wishes to relocate children within the UK, problems can arise if the other parent objects to the move. In a recent case, an application by a mother to move her children to the Orkney Islands from the North East was objected to by her ex-husband. Evidence was given of the mixed views of the proposed move held by the children, who were between nine and 14 years old.

The Court of Appeal supported the family court’s ruling that the move should not proceed.

A second case, involving a man who sent his daughter abroad and refused to return her in defiance of a court order to do so, led to his being jailed for contempt of court. In late 2012, the child was returned to the UK.

In another case the principle was confirmed 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’.

Regrettably, there are no hard and fast rules about what the courts will or will not think is acceptable in the event that a move (especially one to a quite different locality) is proposed, with each case being decided on its own facts.

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 Abduction 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.

Divorce and Foreign Nationality

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 Abduction 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.

If you are facing a relationship break-up with a foreign element, contact us for advice.

Cohabitation Agreements - Protection for Unmarried Couples

One of the most common myths in English law is that there is such a thing as a ‘common law marriage’. It simply doesn’t exist and this misapprehension has led the Law Commission to suggest proposals giving additional rights to cohabiting couples. However,  a proposed revision of the law appears to be many years away if it takes place at all. Currently, cohabitees will continue to have few rights. When a marriage or civil partnership breaks up or one partner dies, the rights of the respective partners are relatively clear. When the relationship of a couple who have been living together breaks up or one of them dies, the difference between a legally-recognised partnership and an informal one becomes all too obvious.

For example, in a case involving two barristers who had lived together, long and expensive court proceedings were necessary to decide the appropriate apportionment of the two properties they owned, both of which were held in the name of one partner.

On the death of an unmarried partner not only do the intestacy laws make no provision for the surviving partner to inherit from the estate of their partner, but also the surviving partner does not benefit from the exemption from Inheritance Tax that would apply if the deceased’s estate passed to a spouse or civil partner.

Indeed, in order to receive anything at all, the surviving partner may well have to go to court to show that they co-owned assets which in some cases may have been paid for by both partners but were owned in one name only. The surviving partner may also have to show that they qualify for financial provision to be made out of the estate under the Inheritance (Provision for Family and Dependants) Act 1975, which is designed to protect the dependants of people who die without leaving adequate financial provision for them. In any event, the surviving partner may face severe financial pressure whilst a claim is ongoing, even if it is ultimately successful.

For example, consider a case involving a woman who had lived with her alcoholic partner for nearly three decades before moving out, shortly before he died, because she feared for her safety. He left no will. Had they been married, the situation would have been simple. However, in this case the woman was forced to go to court to prove her entitlement to financial provision, which was resisted by her late partner’s family.

What Can be Done to Prevent Such Problems?

One easy and inexpensive solution is to make a cohabitation agreement. This is a contract, between two people who live together, which sets out their agreement on the division of their combined assets. It is sensible when cohabiting with anyone, without the protection afforded by marriage or civil partnership, to enter into a cohabitation agreement so that ‘who owns what’ is clear. This is not only important if a relationship breaks down, but also if one partner dies.

What Should the Agreement Contain?

Like any contract, it should state who it is between, how long it is intended to last and that it is intended to be legally binding. If there are assets (e.g. your home) which are to be dealt with in a particular way, these should be specifically mentioned and details provided as to how they are to be dealt with on death or on break-up of the relationship. It is not uncommon for a couple to sell one of their properties when they move in together, with the property they live in being retained in the name of the original purchaser. In such cases, it is sensible to decide if the non-owning spouse’s contribution is to be treated, for example, as a loan or if they are entitled to a percentage of the property value.

The ownership of all significant assets – bank accounts, insurances, specific valuables etc. – should be considered. Details of income and expense sharing arrangements should be included if possible and if there is the intention that one partner should support the other, this should also be mentioned, as should any financial arrangements regarding family members.

It is obvious that a cohabitation agreement is normally best considered in tandem with your will. There are tax planning and other issues to consider – for example, you might think about writing any death in service benefits or insurances in trust for your partner.

Divorce and Money

When it comes to dealing with money and divorce, it is important to know what has to be taken into account and the powers available to arrive at fair decisions.

For most couples, the basic problem is how to finance two separate households from income and assets which previously provided for only one.

The first consideration of the courts is the welfare of any children, although in most cases they have little power to order maintenance for children because that function is currently performed by the Department for Work and Pensions although since October 2008, parents can make their own financial arrangements and the Child Maintenance Options website offers information on this. See also our articles on divorce and child custody and divorce and child maintenance.

The Matrimonial Causes Act 1973 sets out the factors to be considered by the courts in deciding questions about money. The courts will consider:

1. on the one hand, the income, earning capacity, property and other financial resources available and, on the other hand, the financial needs, obligations and responsibilities, which each  of the parties to the marriage has or is likely to have in the foreseeable future;
2. the standard of living enjoyed by the family prior to the breakdown of the marriage;
3. the age and health of each party to the marriage and the duration of the marriage;
4. the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including looking after the home or caring for the family;
5. the value to each of the parties to the marriage of any  benefit (for example, a pension) which, by reason of the dissolution or annulment of the marriage, a party will lose the chance of acquiring.

Essentially, the courts, or the solicitors or mediators negotiating in anticipation of obtaining a court order, will apply these factors to the family assets which are available to be split between a divorcing couple. It is a process of listing all sources of finance to discover how big a cake is available to be cut up and then achieving a fair and reasonable division.

The court has virtually unlimited powers to transfer and divide assets between spouses and usually does this by using the following types of order, for one or other of the spouses, or for the child(ren), together known as ancillary relief:

• an order for maintenance pending suit;
• a periodical payments order;
• a secured provision order;
• a lump sum order;
• a property adjustment order; and
• for a spouse only, a pension sharing/attachment order.

In exercising its powers, the court has an obligation to consider whether to make an arrangement which will bring about a ‘clean break’ between the parties as soon as is reasonably possible. In most cases this does occur.

Recent case law has made significant changes to the approach of the courts when ruling on the division of assets on divorce. In general, 'matrimonial property' (wealth generated during the marriage) is regarded as warranting an approximately equal  division and non-matrimonial property (which is brought into the marriage or created independently after it ceases) and belonging mainly to the prerson introducing or creating it.

A landmark case in 2010, however, changed the landscape in 'big money' cases in which a pre-nuptial agreement is made. In it, the Supreme Court ruled that a 'pre-nup' agreed between a German heiress and her ex -merchant banker husband should stand. In the view of the court, both the ex-spouses were sophisticated adults who should be bound by what they agreed in advance would happen if their marriage failed.

The thing that surprises most clients is that the courts will not take conduct into account except in the most extreme circumstances and if it would be unjust to ignore it. The courts are mainly concerned with practical money matters.

CGT and Shares in Estates Valuation Trap

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.

Compensation for Loss of a Chance

Most claims for damages are claims for damages or losses which have actually happened. For example, if a lorry mounted the pavement and smashed a garden wall, the claim would be for the cost of restoring the wall to its former condition. The law relating to compensation for losses in the UK is based on  the principle of restoring the person who has suffered the wrong being restored to the position they would have been in had the wrong not happened. There is no concept of ‘punitive damages’ such as exists in the USA, where higher levels of compensation than are needed for mere restoration may be paid as a form of punishment in some cases.

However, there is another type of loss that can occur – where the loss is the loss of the chance of making a gain or avoiding a loss. This type of action normally arises when someone who owes a duty of care to someone else fails in that duty, resulting in the claimant losing the chance to make the gain. For example, in a case in which a firm failed to take action against insurers (who had denied liability for the insurance claim) on behalf of a client, so that the claim fell outside the time limit for bringing the claim and could not therefore be brought, the value of the claim against the firm was calculated as being based on the value of the claim and the likelihood  (‘chance’) that it would have been successful.

The claim for the loss of a chance is based on the value of the gain that would have accrued or the loss avoided and the probability of the gain or loss arising. For example, where a gain of £300,000 would have accrued and the probability of the gain arising is assessed, by the court, at 25 per cent, the claim should be settled at £75,000. If a further event, with a probability of 50 per cent, had to occur for the gain to have arisen, the claim should settle at £37,500 (£300,000 x  50% x 25%).

Where, on the other hand, there are alternative outcomes (for example, where there is a 25 per cent probability of a £300,000 gain or a 75 per cent probability of a £100,000 gain), then the claim would be for the values of the respective losses of a chance added together. In this example, the claim should settle at £150,000 (£300,000 x 25% + £100,000 x 75%). In real life the gain would have been £300,000 or £100,000 and the settlement reflects the relative likelihood of each.

Where the loss of a chance represents the loss of a greater sum than was actually received, or suffering a greater loss than should have been suffered, it gets a little more complicated. In this case, the compensation is calculated based on the probability of the greater sum being received and the difference between the sum that was received and the the sum that should have been received. For example, where £300,000 would have been received with a 50 per cent probability, but £100,000 was actually received, the claim would be for £100,000 (50% x [£300,000 - £100,000]).

Accessing Your Own Land

Prior to the introduction of revised procedures (set out in regulations under Section 68 of the Countryside and Rights of Way Act 2000, which came into effect in July 2002), people who had to cross common land in order to reach their homes were sometimes denied the right of access to their own property, due to an anomaly in the law. In order to gain access, it was necessary for them to obtain an 'easement' from the owner of the common land. This could be very expensive for the person needing the right of access.

Under the revised rules, the right of easement is now statutory and, provided the relevant conditions are met and procedures complied with, the owners of the common land cannot object. In return they will be paid as follows:

• 0.25% of the value of the premises if these came into being before 1 January 1906;
• 0.5% of the value of the premises, if they came into being between 1 January 1906 and 1 December 1930; and
• 2% of the value of the premises if they came into being on or after 1 December 1930.

Once payment has been made, the right of access will continue in perpetuity.

A Guide to the Adoption Process

The most important requirements for adoption are that the adopter must be over 21 years of age, the child to be adopted must be under the age of 18 and joint applications to adopt can only be made by married couples and civil partners. Unmarried couples can adopt, but only one person can become the adopter.

People who do not already know the child they wish to adopt usually use an adoption agency. As a first step, the agency will arrange for a social worker to visit and make a home study assessment. As well as assessing the family, they will also take two references and obtain medical information from a GP. After this assessment is made, an adoption panel will make a recommendation and, if the initial application is approved, the process of matching a child to the family begins. If the adoption has not been carried out through an agency, it is necessary to inform the local council of the intention to adopt a child three months before placing the application with the court.

The next stage in the process of legally adopting a child is carried out through the courts. In most cases, applications for adoption orders are made through specialised Adoption Centres. These are courts that have specialist judges and adoption officers who are experienced in the process.

Once the official application has been made, the judge has a number of options. He or she may order that a reporting officer be appointed. This will happen if the current parent or guardian of the child agrees, or appears to agree, to the adoption. The reporting officer will produce a report on matters that may help the court to make a decision on the adoption application. If the parent or guardian does not agree, then a children's guardian is appointed by the court to protect the interests of the child. The children’s guardian will make a report to the court advising on the interests of the child and will represent the child in court. The local authority or adoption agency may also be required to provide a report. This will include details about the family and the child.

About four weeks after the application for adoption, the judge may arrange a hearing called a 'first directions hearing'. At this meeting the judge will consider, amongst other matters, whether the application contains all the correct documentation and when and where the final hearing will take place.

Once an adoption order is granted by the court, the effect is to break all legal ties between the child and his or her birth family, or current guardian, and transfer those ties to the adoptive parents.

The Directgov website provides guidance on adoption and the adoption process.

Buying Abroad - Considerations

After another cold, wet summer and with dull economic prospects at home, you might be thinking of buying a property abroad or even making a permanent move to foreign climes.

If so, as well as it being essential to take independent and high quality legal advice, there are several other considerations you should be taking into account.

Finances
It may be cheaper to get a mortgage in the local currency than in Sterling. Interest rates in the UK are traditionally higher than in most other countries. However, a foreign-currency mortgage carries an exchange rate risk which may be considerable. In August 2007, the Euro was worth 68p. In August 2008 it was worth about 79p and in August 2009, 86p. A €150,000 mortgage financed in August 2007 at 5 per cent would cost over £800 more annually at the exchange rate applying one year later and a further £500 a year later. The good news for purchasers is that the increase in the value of the asset offsets the increased cost of servicing local debt.

If the pound falls, the Sterling value of the foreign asset rises. Conversely, if the pound strengthens, the Sterling value of your foreign property falls.

Income Tax
You will need to consider the income tax implications carefully. If you remain UK resident, you will pay UK tax on your world income – no matter where you earn it. If you are not UK resident, you will normally pay tax only on income arising in the UK and will be able to claim double taxation relief. If you have rental or other income abroad, you may well have to prepare and submit a local tax return. The rules for deduction of expenses also differ widely from one country to another, so local professional assistance may be needed to deal with tax compliance.

Inheritance Tax (IHT)
In the UK, liability to IHT is based on your domicile. If you are domiciled in the UK, your world assets are included in your estate for IHT purposes. However, you may well also have an IHT liability in the country in which you have your second home. This is an area which requires very careful planning.

Capital Gains Tax
A UK resident who makes a chargeable gain in a tax year is liable for UK Capital Gains Tax on the gain. Second homes abroad do not qualify for the principal private residence exemption. Furthermore, in most countries such a gain will also be subject to local tax.

VAT
In many countries, VAT must be charged on rental income. The VAT registration threshold in most EU countries is much lower than in the UK and penalties for non-compliance tend to be high.

Wealth Taxes
Wealth taxes (specifically, taxes on the value of property) are common. In the USA, for example, the equivalent of local rates is generally charged based on the current market value of properties in the area – so, if a neighbour sells at a good price, your property taxes may well go up.

Transaction Costs
The main additional costs abroad are agent’s and notary’s fees, which are typically much higher than in the UK, and stamp duty, which can also be much higher. In some countries, these can add up to 15 per cent to the cost of a property.

Other Considerations
There are many stories about disasters resulting from problems with the legal title to a property, from the failure by builders or contractors to complete property bought ‘off plan’ or where planning laws mean the loss of the property or its amenity value. However, more prosaic problems, such as intermittent electricity or water supplies, can also be an issue. Having high-quality, independent, local professional advice is essential if one is to avoid such catastrophes.

Taxes - check that there are not tax penalties attaching to non-resident or 'holiday' ownership. In 2012, France introduced a tax on homes of non-residents.

Also, if you are retiring, note that residence in many countries will disqualify you from increases in the state pension.

Lastly, one important aspect which is often overlooked is the local inheritance law. Although the Uk has opted out of  the  EU proposals to decide which country's inheritance law will apply when a citizen of one country dies when resident in another, it is almost always worthwhile having a local will if you live or hold substantial assets abroad, but in some countries the laws governing who may inherit are far less flexible than here. One way of circumventing the difficulties this may cause might be to own a property through a company, but in some countries this will produce a tax penalty.

Civil Partnerships - What they Mean for You

The first civil partnerships were formed on 21 December 2005, after the Civil Partnerships Act 2004 came into effect on 5 December 2005. Same-sex marriages contracted abroad, however, have been recognised as valid civil partnerships from 5 December 2005. Whilst the legal formalities may differ from those of marriage, the practicalities make them almost identical, including the granting of the full range of paternity and child care rights enjoyed by married couples.

A civil partnership can be terminated only by death, legal dissolution or annulment and dissolution is allowed, as in marriage, only on the grounds of irretrievable breakdown. One difference between civil partnerships and marriage is that adultery is not a ground for irretrievable breakdown in the former, but is in the latter. On the breakdown of a civil partnership, the normal claims for financial relief – such as division of assets and maintenance payments – apply as in a marriage and with the first breakups of civil partnerships already taking place, it is clear that the courts are taking the same approach to dissolutions of civil partnerships as they do in the breakdowns of marriages.

Civil partners have the equivalent rights of a spouse on the death of their civil partner, so the same sort of thinking needs to be applied towards making a will and Inheritance Tax planning as should be done by married couples. A civil partnership, like a marriage, invalidates an earlier will.

More recently, the Government has announced that same-sex couples are to be allowed to hold civil partnership ceremonies in churches and other places of worship in England and Wales.

In 2012 the first 'high net worth' dissolution of a civil partnership occured. The decision of the court confirmed that the same principles on the sharing of assets apply when a civil partnership ends as apply when a marriage ends.

Child Custody Explained

Child Maintenance Explained

The Child Maintenance and Enforcement Commission (CMEC) – a statutory non-departmental public body – was established in 2008 to take on the work of the Child Support Agency. At the same time, the Child Maintenance and Other Payments Act 2008 (CMOPA) removed the obligation for new claimants who are on benefits to use the CSA. Unsurprisingly, statistics based on the first quarterly figures since this change was made show that the number of new cases being brought to the CSA has declined.

In October 2008, the obligation for existing CSA clients claiming benefits to continue to use the Agency was removed. All parents can now choose the child maintenance arrangements that best suit their individual circumstances. This could be a private arrangement or the statutory maintenance arrangements. A new Child Maintenance Options Service has been established to provide information and support to help parents reach a decision.

Since April 2010, all child maintenance has been fully disregarded when calculating out-of-work benefits.

In November 2008, the CMEC took over responsibility for the work of the CSA. In 2012, this was closed and the responsibility was transferred to the Department of Work and Pensions (DWP).

During 2009/2010, new enforcement powers were introduced under the CMOPA to ensure that parents meet their child maintenance responsibilities. These include allowing the CMEC to seize the passport and/or driving licence of parents who fail to pay, without the need to involve the courts as is currently the case. Work and Pensions Secretary James Purnell says that the Government is keen to support parents in these tough times, but for those who choose not to support their own children, “we will not stand by and do nothing. If a parent refuses to pay up then we will stop them travelling abroad or even using their car.” The Commission can also seize money from bank accounts, where a parent has failed in their financial obligations toward their child, without having to go through the courts. The CMEC will also be able to apply for a curfew or to recover money from a dead person’s estate.

The Child Support Agency has a child maintenance calculator on its website.

In late 2012, a new child maintenance scheme was introduced, claimed to be fairer and faster than the current system. It includes annual reviews of maintenance assessment, an increase in the ‘flat rate’ child maintenance deduction from state benefits and the removal of the necessity for parents who share child care equally to pay maintenance through the statutory scheme. Couples wishing to make their own agreement can use the 'family-based arrangement form' available from the Child Maintenance Options website.

The new system bases the maintenance payable on a flat rate per child with the rate varying depending on:

• the gross income of the payee;
• the number of nights the child spends with each parent on average; and
• other factors related to the family circumstances.

For more information see the see the CSA website ,which includes a child maintenance calculator.