Author: Wellers

Shareholders are obviously liable to pay Income Tax on their dividends, but what if a declared dividend is not – and, in reality, never will be – paid? A tax tribunal pondered that issue in a case concerning an otherwise successful property management company that was saddled with crushing debt servicing costs.

The company was trading well and making good operating profits. Its interest costs in respect of bank loans were, however, so debilitating as to place its business at risk. It was anxious to attract new external equity investors and its sole director took the view that a record of strong dividend declarations would assist in that task.

The company gave a binding undertaking to the bank that it would not make dividend payments to its two shareholders above certain limits. However, with the knowledge of the bank, it formally declared dividends that were well above those limits. The majority of those dividends were never paid, and the relevant funds were instead allocated to inaccessible shareholder accounts with the intention that they would in due course be written back into subsequent company accounts.

HM Revenue and Customs took the view that the shareholders were liable to Income Tax on the declared dividends, as opposed to the much smaller sums that they had actually received. On that basis, back tax demands and late payment penalties, totalling in excess of £60,000, were raised against them.

In upholding their appeal against those demands, the First-tier Tribunal (FTT) noted that the facts of the case were most unusual. It was clear that the shareholders had no immediate right to enforce payment of those parts of the declared dividends that exceeded the agreed limits and that any such payment was deferred until further notice or until mutually agreed.

Had the shareholders been paid dividends beyond the agreed limits, the bank would have been within its rights to suspend all further borrowing and to immediately call in all the company’s indebtedness. In the worst-case scenario, that would have led to a forced sale and foreclosure of the company’s property portfolio.

The FTT concluded that the dividends which were declared, but retained as unpaid and inaccessible, did not give rise to an enforceable right to receive them as income in the relevant tax years or, in the end, at all. The tax demands were overturned and the penalties thereby fell away.

When spouses each make valuable contributions to a long marriage, the general rule is that marital assets should be divided equally in the event of divorce. As an unusual High Court ruling concerning the validity of a French marriage contract showed, however, the sharing principle can be displaced by agreement.

The case concerned a couple who married in France when they were just starting out on their highly successful business careers. Their marriage lasted for over 25 years, yielding three children. Before they tied the knot, however, they signed a French marriage contract which provided that their respective assets would be treated as separate were their marriage to come to an end.

They moved to Britain soon after the wedding and it was here that the wife petitioned for divorce. She asserted that the marital assets should be divided equally between them. The husband, however, pointed to the marriage contract and argued that, by agreement, the sharing principle had no application to the case.

The wife contended that she signed the contract as a necessary stepping-stone to marriage and to give a clear and reassuring message that she was not interested in the husband’s family assets. She said that they pooled their resources during the marriage in line with a shared vision that they would be as one. Her understanding was that the contract merely excluded inherited resources from division.

The Court found, however, that the marriage contract was freely entered into by both wife and husband and that they each had a full appreciation of its implications. The contract was of a type very common in France and had been drafted by the firm of notaries used by the wife’s family.

Nobody had suggested that it was the husband or his family who were pressing for the contract. The wife was extremely intelligent, and the Court had no doubt that the notary would have explained to her the ramifications of the contract in detail. The wife’s claim for financial relief therefore stood to be assessed on the basis of her reasonable needs, rather than the sharing principle.

The Court found that the wife was entitled to exit the marriage with assets worth over £9.4 million, plus her interest in a French property. Her provision amounted to 38.9 per cent of the overall marital assets, which were worth more than £24 million. In the light of the marriage contract and other relevant circumstances, the Court found that the resulting division of assets was correct and appropriate.

When making a will, it is vital to remember your obligations to family members and others who depend upon you financially. As a High Court ruling showed, however, your duty is to make reasonable provision for them – no more.

The case concerned a matriarch who died just short of her 100th birthday. By her will, she directed the sale of her home, which was worth about £875,000. She instructed that the proceeds of sale should be split into six equal parts before being divided, in various proportions, between her six children and six grandchildren.

Her eldest daughter was apportioned 70 per cent of one of the parts. She was also bequeathed one sixth of the modest residue of her mother’s estate. Her inheritance was, overall, worth about £109,000. However, she asserted that the will did not make reasonable provision for her. She launched proceedings under the Inheritance (Provision for Family and Dependants) Act 1975, seeking an increased share of her mother’s estate.

In rejecting her claim, however, the Court found her to be an unsatisfactory witness. Her evidence contained substantially exaggerated statements about the level of care she had provided to her mother in her old age. Having initially asserted that she gave up work at her mother’s request in order to look after her, she subsequently accepted that she did so voluntarily for her own reasons.

Just because her mother had unwillingly provided her with rent-free accommodation for a number of years did not mean that she was under an obligation to do so. Her mother was not responsible for meeting her needs, whether by providing her with somewhere to live or otherwise. She had no greater obligations or responsibilities towards her daughter than towards any of her other children and their families.

The fathers of those who are given up for adoption as babies are often not identified on their birth certificates and that can be a painful barrier to their formation of cultural and family identities in later life. As a High Court ruling showed, however, there is a great deal that the law can do to help them.

The case concerned a woman in her 40s who was born in Portsmouth. Her mother was 18 when she gave birth to her and her father was a Royal Navy engineer who was born in Jamaica. Her father played no part in raising her and her mother was physically, emotionally and financially unable to cope alone. She was seven months old when she was given up for adoption.

She was aged 19 when her father contacted social services, asking to have contact with her. Their relationship started with exchanges of letters and photographs, but face-to-face contact led to the blossoming of a loving father-daughter bond. He fully accepted her as his child, and she was comfortably integrated into his family in Jamaica. His name, however, remained absent from her birth certificate.

Some years after his death, she sought a court order formally recognising him as her father. Her eventual aim was to have her birth certificate amended so as to officially confirm his paternity. Putting the record straight, she said, would benefit her and her two children in that it would establish their Jamaican heritage and ancestry. It would also ease her path to obtaining Jamaican citizenship.

Granting a declaration of parentage under Section 55A of the Family Law Act 1986, the Court noted that DNA testing of her father’s other biological children confirmed that they were her half-siblings to a 99.9375 per cent degree of probability. In the light of that and other evidence, the Court was satisfied to the point of being sure that she had correctly identified her father.

The Court did not itself have the power to amend her birth certificate to include her father’s name. It directed, however, that the Registrar General for Births and Deaths be informed of its decision. Given the declaration of parentage, the relevant amendment should follow without difficulty.

Large houses set amidst rolling acres are an abiding feature of English rural life – but should such properties necessarily be viewed as wholly residential? In answering that question in a landowner’s favour, the First-tier Tribunal (FTT) relieved him of a substantial Stamp Duty Land Tax (SDLT) demand.

The landowner and his wife purchased a house and 39 acres of land for £2.5 million. He paid £114,500 in SDLT on the transaction on the basis that the property was in mixed use. HM Revenue and Customs (HMRC), however, took the view that the property was entirely residential and assessed him for an additional £98,000 in SDLT.

Upholding the landowner’s challenge to that assessment, the FTT noted that 20 acres of the land were fenced off, invisible from the house and leased out for grazing sheep. That arrangement long pre-dated the couple’s purchase of the property. A further 8.5 acres of woodland were managed by the Woodland Trust.

It was somewhat hyperbolic to describe the house as surrounded by its own rolling pasture and indigenous woodland. It was, in truth, a barn conversion, not a large manor house at the heart of a traditional rural estate. Given its character, it was more than adequately served by its 12 adjoining acres, which included a landscaped garden, a lake and various outhouses.

The FTT found that the land occupied under the grazing lease and by the Woodland Trust did not form part of the garden or grounds of the house as defined by Section 116 of the Finance Act 2003. It was, therefore, wrong to treat them as residential property for the purposes of SDLT.

Those who delay making a will until they are at death’s door create a very real risk of conflict amongst their loved ones after they are gone. That was sadly so in the case of an elderly man who was in hospital, suffering from advanced bladder cancer, when he finally got round to instructing a solicitor.

By his will, which he signed less than two weeks before he died, the man left all that he owned to his wife. The document’s validity was challenged in court by his eldest son, who asserted that he was so confused at the time that he lacked the mental capacity required to make a legally enforceable will.

Ruling on the matter, the High Court noted that medical records in the days before he executed the will referred to him as confused and agitated. No medical opinion had been sought in relation to his capacity and understanding before he signed the document. One of his daughters testified that he had lost his mental acumen and that, in her opinion, he was in no fit state to make a will.

On the other hand, other members of his family who visited him in hospital had no doubt about his capacity. Expert evidence indicated that a change in medication had brought about a marked improvement in his condition by the time he signed the will. His accountant, who served as one of the witnesses to the will, had no concern at all that he was not fully aware of what he was doing.

The decisive evidence, however, came from the solicitor who drafted the will. He had known the man for over 40 years and had discussed the contents and implications of the will privately with him before he signed it. The document was read to him twice before he stated that it was exactly what he wanted. The Court rejected any suggestion that the solicitor had conducted himself unprofessionally.

Whilst the man was clearly unwell, the Court was entirely persuaded by the solicitor’s evidence that he had the required mental capacity to make a valid will. Rejecting the daughter’s evidence to the contrary, it found that she was motivated solely by the prospect of personal financial gain and not by any desire to tell the truth.

In upholding the will’s validity and admitting it to proof in solemn form, the Court was satisfied that the man knew and approved the contents of the document. His son’s further allegation that he had been subjected to undue influence was hopelessly misconceived in that it was supported by not one shred of evidence.

There can be few things more wounding or worrying than to be on the receiving end of a poison-pen letter campaign. However, as a High Court ruling showed, the law provides an effective means by which victims of such behaviour can achieve both public vindication and appropriate compensation.

In the background to the case was a history of friction and grievance between a rural landowner and a couple who were his longstanding tenant farmers. He held the tenants responsible for originating and circulating some anonymous poison-pen letters which surfaced over a two-year period in the village where he lived, and which made grave and salacious allegations against him.

After he launched harassment and libel proceedings, the tenants vigorously denied that the letters originated with them. They contended that the anonymous material came to them from somewhere else and that they gave it little or no further currency. Whilst not conceding the claim, they chose not to formally acknowledge or defend it on the basis that they wished for the stressful litigation to be brought to an end.

Following a hearing, the Court found that, as no formally pleaded defence had been filed, the landowner was entitled to a default judgment on his claim. There was no basis for inferring that the defamatory allegations made against him in the letters were, or were claimed to be, true. In order to vindicate his reputation, the tenants were ordered to pay him £8,000 in libel damages and £12,000 in harassment damages.

An injunction was issued against them with a view to restraining further publication of the same or similar allegations. Their daughter, who was alleged to have been involved in the publication of one letter, was ordered to pay £2,000 in libel damages. She too denied the allegation but had not formally defended the claim.

It is quite common for divorcees to claim that they have been placed under undue pressure to strike an unfavourable financial deal. In a big money case, however, a judge ruled that a wife was no lamb to the slaughter but voluntarily signed up to a compromise with her ex-husband which was toasted with champagne.

The German couple, aged in their 70s, enjoyed an immensely high standard of living during their marriage of over 30 years. Following their divorce in Germany, there was a meeting at a hotel during which both signed a settlement agreement by which the husband was to make substantial financial and other provision for the wife.

She, however, went on to swiftly repudiate the agreement and launched proceedings in England – where she resided – seeking financial relief against the husband under the Matrimonial and Family Proceedings Act 1984. She asserted that he and the couple’s son had placed her under massive pressure to enter into the agreement, which she had not signed of her own free will.

Rejecting those allegations, however, the judge found that she was the driving force behind the meeting taking place and that she could not be viewed as a supplicant cowed into submission by a bullying ex-husband and son. Far from being upset, disappointed or distressed at the meeting, her mood was one of relief. She willingly engaged in the champagne toast and considered at the time that she had achieved a good result. She signed the agreement voluntarily, with her eyes open.

Her subsequent repudiation of the deal was an act of foolishness that only served to weaken her position. The terms of the agreement were, in any event, not unfair and the provision it made for her future fell very much within the bracket of awards that she might have obtained from an English court.

Despite her repudiation of the agreement, the judge was confident that the husband – who had professed his wish to do the right thing by her – would comply with its terms. In order to secure her position, however, the provisions of the agreement were encapsulated in an order of the court. The judge hoped that his ruling would mark an end to the years of strife that had riven the family.

Those dissatisfied with HM Revenue and Customs (HMRC) decisions must exercise any right of appeal within tight legal time limits and should consult a solicitor as a matter of urgency. The point was powerfully made by the case of a businessman who failed to act promptly and was left nursing a six-figure bill.

Following an investigation, HMRC issued a seven-figure demand against a company in respect of alleged errors in its VAT returns. An inaccuracy penalty was also raised, and the company subsequently entered liquidation. The businessman was issued with a personal liability notice (PLN) on the basis that he was the company’s sole director and shareholder.

He had 30 days in which to lodge an appeal to the First-tier Tribunal (FTT) against the PLN, which, after amendment, came to almost £875,000. However, he did not notify the FTT that he wished to challenge the bill until more than 38 months after that deadline expired.

In seeking to explain the delay, he asserted that he had reached an agreement in principle with HMRC and thus believed that there was no need for a formal appeal. He argued that the PLN was invalid and that HMRC had contributed as much as he had to the muddled handling of his case. He said that HMRC had itself recognised that the PLN was excessive and that he was likely to be forced into bankruptcy were he required to pay the full amount.

Refusing to entertain his late appeal, however, the FTT found that the main reason for the delay was either his wilful disregard of the deadline – in the hope that the matter would simply go away if he ignored it – inattention, or an assumption that everything would be sorted out satisfactorily without further involvement on his part. None of that could be viewed as a good reason for the delay.

The FTT acknowledged that the dismissal of the appeal on grounds of delay would cause very great prejudice to the businessman. On the other side of the balance, however, was the need to ensure that statutory deadlines are respected. If the appeal were permitted to proceed, HMRC would be required to devote resources to re-examining matters it had long considered closed.

Engaging a professional to draft your will and give advice has many advantages that may not be apparent at the time. In a case on point, a lawyer’s prudence in arranging a medical assessment of an elderly client proved decisive in the Court of Appeal’s decision to uphold the validity of his final will.

Following the death of an elderly farmer and businessman, his estate was valued at almost £2 million. By his first two wills, he left business assets to two of his children and farmland to his third. After the third child died suddenly, however, he instructed a solicitor to draft a new will which made significantly different bequests.

He had been experiencing problems with his memory for some time and the death of his child had a devastating impact on him. The solicitor was concerned to ensure that he had the mental capacity required to make a valid will and, with that in mind, she asked the man’s GP to carry out an assessment.

After doing so, the GP noted that he was fully orientated and gave no appearance of being confused or distressed. He was able to go through the will, bit by bit, with very little prompting. After an inheritance dispute developed within the family, however, a judge found that the will was invalid for want of testamentary capacity.

Reversing that decision, the Court noted that the case raised important issues about the proper weight to be attached to the evidence of a drafting solicitor and a medical practitioner’s assessment of capacity. The man was astute enough to realise that it might be sensible to change his will following his child’s death and the document he signed was rational on its face.

The solicitor had prudently enlisted the GP’s assistance and was entitled to, and did, rely on his medical assessment. Neither of them was required to question the man as to his reasons for changing his will. The Court concluded that, had proper weight been given to their evidence, it would not have been open to the judge to find that the will was invalid.