BEWARE CHARITIES!

 

BLOG 232 

BEWARE CHARITIES?

 

I advise clients not to leave a gift of residue to a charity their Wills.  By all means leave a specific sum to charity but if you want to make a charitable gift of residue, set up your own charitable trust and leave the gift to that trust in your Will.  You can tell the trustees that you would like them to pay the amount to a specified charity but leave it to their discretion whether or not to do so.

The reason is that charities seem to be very litigious.  I wrote in an earlier Blog  about Woodland Trust.

 Mrs Smith left to her family an amount equal to her IHT nil rate band and the balance to several charities one of which was The Woodland Trust.  Happily, because of the transferable nil-rate band (under which a surviving spouse can use the deceased’s spouse’s unutilised nil-rate band) that meant the family would get £650,000.  “No way!” said The Woodland Trust.  “When Mrs Smith made her Will, the transferable nil-rate band did not exist so she must have intended to leave only £325,000 to her family and the rest to us”.  Fortunately, both the judge and the Court of Appeal disagreed.  It was clear to them that Mrs Smith’s objective was to pay no IHT.  She intended to give her family as much as possible but not so as to trigger IHT.  What was left could go to The Woodland Trust and other charities, as a gift to charity is exempt from IHT.  Because of the transferable nil-rate band, what was left was the excess over £650,000.

 Now we have Beasant v Royal Commonwealth Society for the Blind (known as Sightsavers).  Mrs Arkell gave to her friend, Ms Beasant “the largest sum of cash which could be given … without any inheritance tax becoming due in respect of the transfer of value of my estate which I am deemed to make immediately before my death”.  She then made some specific gifts and left the residue of her estate to charities, one of which was Sightsavers.  Mr Beasant thought that he was going to get £325,000.  Sightsavers thought otherwise.  Later provisions in the Will gave specific gifts to other people which exceeded £325,000.  Accordingly, nothing could be given to Mr Beasant without triggering IHT.  The High Court agreed.

It agreed in spite of the fact that the Will-drafter had told Ms Arkell that she could give £325,000 to Mr Beasant free of tax but had also told her that the later gifts would trigger some IHT on her estate.  “Tough luck”, said the judge, “a Will has to be construed like a contract”.  The Courts’ role is to interpret the wording used in the Will, not to determine what the testator intended.  A Court can look at her intention only to the extent that the Will is ambiguous and her intention will clear up that ambiguity.  In this case, Mr Beasant’s barrister said that what created ambiguity was the order of the gifts in the Will.  “Not enough”, said the judge, “you have to show that the words actually used in the Will are ambiguous, and in this case they are not”.

Not only are charities litigious but they tend to use large, and expensive, firms of Solicitors, so if they win, the family could find themselves landed with massive costs.

Some charities say that they are not money-grabbing thugs in suing an estate.  They have a legal duty to do so.  No they don’t!  They have a legal duty to act in the best interests of their beneficiaries.  The Charity Commission has made clear that a charity is entitled to turn away a donation if it thinks that accepting money from someone that the public is likely to regard as unsavoury is likely to damage their reputation.  The same must apply to bequests.  A charity need not look to obtain its “pound of flesh” if litigating to seek to do so risks damaging its reputation.

I used to be a donor to The Woodland Trust, but not now.  I might have left them a bequest in my Will, but not now.  I suspect I am not the only one to be deterred from charitable giving by the long list of cases (Woodland Trust and Sightsavers are only the tip of the iceberg) in which a charity has opposed the testator’s family to try to get the last ounce of flesh from a testator’s generosity.

Deterring future donations for a small sum in hand cannot possibly be in the long-term best interests of a charity’s beneficiaries.

The issue is complicated by the IHT tax-break where a person gives 10% of the part of his estate over the nil-rate band to charity.  The effect of this is that the government will contribute 64% of every £1 given to charity, which is clearly attractive to the charitably minded.  It is particularly attractive where a person makes a significant specific gift to charity, as increasing that gift to 10% of the estate can actually reduce the tax on the remainder of the estate.  What I am myself planning to do is gift a fixed amount to charity and leave with my Will a letter to my residuary beneficiary saying, “You could reduce the IHT bill if you were to enter into a Deed of Arrangement to increase the gift to charity to 10% of the taxable estate”.  I am not sure though.  I would not put it past a charity to contest the wording of the Deed of Arrangement!

 

 ROBERT MAAS

 

POOR MR SOTO...

 

BLOG 231

POOR MR SOTO …

  

… Let down by his accountant (it appears) and let down again by the First-tier Tribunal.

 

Mr & Mrs Soto ran a nursing home.  Mr Soto’s first language is not English.  He is also deaf and has health problems.  Their accountant advised them to incorporate the business.  They had no idea what this involved but trusted the accountant implicitly.  They told him to go ahead.  Unfortunately, he does not seem to have explained to them how a company operates.  They simply carried on as before, making all the receipts and payments through their personal business account.  During the period under enquiry, Mr & Mrs Soto also bought an investment property which they intended to hold personally.  As the expenses in relation to this property were paid out of their joint business account, the accountant incorporated it into the company’s books.  The result was that the company’s accounts showed a large overdrawn loan account.

 

HMRC wanted not only the tax but, of course, penalties.  They claimed that the company had deliberately submitted false information.  The Tribunal judge pointed out that “The definitive assessment of what amounts to deliberate behaviour was provided by the Supreme Court in HMRC v Tooth which has confirmed that HMRC must demonstrate an intention to mislead HMRC.  The Supreme Court did not definitively determine whether a taxpayer who was reckless as to whether HMRC were misled would also qualify as deliberate behaviour”.  At her previous role of 25 years with a Big Four firm of accountants, the judge had commented on the Tooth decision.  “In particular, the Court held against HMRC and confirmed that a deliberate inaccuracy is a statement which, when made, was deliberately inaccurate.  It is therefore not a statement which was made deliberately and which was in fact inaccurate.  There must, in other words, be an element of intentionality”.

 

The Supreme Court actually said, “Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”.  An inaccuracy in a document is a statement which is inaccurate.  Thus, the required intentionality is attached both to the making of the statement and to its being inaccurate”.

 

Back to poor Mr & Mrs Soto.  The Tribunal held that his “failure to actively engage with his responsibilities as a director of a limited company and his blind and unequivocal reliance on his accountant was reckless …  Becoming a director of a limited company brings with it a range of financial duties which it is important to understand.  Mr Soto made no effort to understand what incorporation meant for the business or for him …  To absolve that responsibility, which rests with him, because he relied on Dashia & Co would create a loophole for unscrupulousness because no one would then ever be responsible to taxpayers generally for gross and obvious mistakes in accounts …  On that basis the Tribunal considers that a penalty on the basis of deliberate behaviour is made out”.

 

I hope that I am not the only one who finds this seriously disquieting.  The legislation does not refer to recklessness.  In another Supreme Court case, decided in 2021, Burnett & Grant v International Company of Hanover Ltd, where the Appellant submitted that “wilful” may include recklessness, the Court said, “First, the starting point is the natural meaning of “deliberate” act.  This connotes consciously performing an act intending its consequences.  It involves a different state of mind to recklessness …  Secondly, while the natural meaning of wilful includes deliberate, wilful is capable of having a wider meaning, depending on the context …  Fourthly, Mr McBrearly has not been able to show us any case in which “deliberate” had been held to include recklessness” and later, “I reject the argument that “deliberate acts include recklessness””.

 

Of course, a Tribunal judge cannot be expected to know everything that the Supreme Court says.  But it is a huge leap from a Supreme Court statement that “deliberate must involve an element of intentionality”, to a conclusion that deliberate does not have to involve any element of intentionality if the act can be labelled reckless.

 

I am also worried that the Tribunal did not acknowledge that the legislation itself distinguishes between acts of an agent and that of his principal.  It is only the latter that can be penalised.  The Tribunal seems to me to defy Parliament as well as the Supreme Court in holding Mr Soto responsible for errors by his accountant by regarding him as reckless.  His recklessness (if it is such; I suspect that 80% of directors of small companies, like Mr Soto, have no idea of their statutory responsibility but rely on their accountants, and I find it hard to equate following normal practice with recklessness) relates to not understanding his duties, and it is not that lack of understanding which leads to the loss of tax – and for a penalty to arise, the inaccuracy must lead to the loss of tax.

 

ROBERT MAAS