Private ClientFILE December 2008

In-House News

Bankruptcy and the Family Home

With the economy in poor shape and personal debt still at high levels, the outlook is less than rosy for people who are facing insolvency. Even after the changes made by the Enterprise Act 2002, bankruptcy is still a difficult experience for most bankrupts. This is especially true where the family home is the main asset of the bankrupt’s estate.

The trustee in bankruptcy will normally seek a possession order over the property so that it can be sold to satisfy the claims of creditors.

When deciding whether the possession order is to be granted, the court is obliged to consider:

• the interests of the creditors;
• the conduct of any spouse or civil partner (current or past) in contributing to the bankruptcy;
• the needs and financial resources (if any) of the current or former spouse or civil partner and any children; and
• the other applicable circumstances of the case.

Where an application for a possession order is made more than a year after the property has vested in the trustee in bankruptcy, the court will normally regard the interests of the creditors as paramount. The 12 month delay between the bankruptcy and the application may give a false sense of security, but does at least allow time for alternative living arrangements to be made if a sale is probable.

An application to resist the possession and sale can be made if there are exceptional circumstances, but consequences for the family arising from the bankruptcy will only very rarely be considered as exceptional circumstances.

Where a delay in paying creditors is unlikely to cause them any prejudice, a case may be able to be made out that the circumstances are exceptional enough to justify the defeat of an application for possession. An example might be when there is a great deal of equity in the property, such that the debts plus interest thereon are likely to be paid in full on an eventual sale. Such an argument might apply where the creditor is HM Revenue and Customs, for example.

Serious illness in the family (not that of the bankrupt personally, except where this creates a need for a family member to remain in the house to look after the bankrupt) may also be regarded as an exceptional factor.

There are a number of other factors that may also constitute exceptional circumstances. If you are faced with a possession application, it is important to take legal advice promptly as there may be other solutions (such as a relative purchasing the trustee in bankruptcy’s interest in the property) which can be explored.

However, the best approach is to take advice as soon as you get into financial difficulty. Normally, the earlier such issues are addressed, the greater the likelihood of a satisfactory outcome – possibly avoiding bankruptcy altogether.

Boundary Dispute Highlights Need for Clarity

A recent boundary dispute has illustrated the desirability of ensuring that when a property is sold, the description of it in the conveyance is as clear as possible.

The dispute was over a farmhouse and adjacent fields, which were at one time under common ownership. In 1988 they were sold separately, the farmhouse being sold first and then the fields. The original owner had built a fence between the farmhouse and the fields. Regrettably, the plan, which was marked ‘for information only’, showed the fence as lying within the boundary of the property attaching to the farmhouse. The written description of the property conveyed with the farmhouse was inadequate, but the vendor (who at that time still owned the fields) had covenanted to maintain the fence. This made no sense if the fence were no longer on the vendor’s property.

The subsequent owner of the fields sought to have a declaration made by the court that her land included the land on which the fence stood and to have the copies of the plans filed at the Land Registry altered to show the fence as part of her property, not the farmhouse land. The Court of Appeal agreed that the fence stood on her land and that the boundary shown in the plan should be altered to show her ownership of the disputed land.

The plan of a property is normally only indicative and the extent of the true title is contained in the description of the property. It is therefore very important that conveyances contain accurate and comprehensive descriptions of the property being conveyed and also that documents of title are examined and compared with the filed plan to ensure that any anomalies can be resolved.

We can assist you to ensure that your interests are protected in any property transaction.

Court Adopts Broad Brush Valuation of Business on Divorce

On divorce, the valuation of a family business is often a highly emotional and contentious issue, so it was unsurprising when the divorce of a couple after 15 years of marriage led to an acrimonious dispute over the value of their successful restaurant business.

The ex-husband valued the total assets (including the business, which he had run for 33 years) at £4.2 million. His ex-wife placed a valuation on the assets of £7.6 million, valuing the business at £5.3 million. She sought 50 per cent of the net assets plus school fees for the children. Her ex-husband offered 42 per cent of the net assets (£1.7 million), although this offer was later reduced.

Both produced expert witnesses to back up their respective valuations of the business, which was the main point of dissent. The experts differed, but the main point of contention was whether the valuation should be based on a multiple of six times ‘maintainable earnings’ or nine times.

The judge relied on evidence of transactions in similar circumstances and ruled that the multiplier should be 6.5. He commented that the valuations of experts were of ‘doubtful utility’ because they are a matter of opinion and experts’ opinions differ. He therefore adopted a broad brush approach. Since there were insufficient resources for a ‘clean break’ arrangement to be financed, he ordered that the wife should receive £1.45 million plus periodical payments of £60,000 annually, child maintenance of £20,000 per annum and the cost of the school fees.

Brethertons’ view:

“Few aspects of the financial arrangements in a divorce can be as contentious as the value of a family business and it is by no means uncommon for quite unrealistic values to be put forward. In many cases, the best overall result is achieved by the use of a single joint expert and sensible negotiation.”

Non-Disclosure Did Not Affect Settlement

In divorce proceedings, it is usual to make a full disclosure of assets and future financial prospects when agreeing the financial settlement. Failing to do so can cause a legal battle, as a recent case illustrates.

It involved a couple who had met at university and married. Both worked for a time, but the wife stopped working when the couple had children, who were aged 10 and 8 at the time of the divorce.

The husband was a stockbroker. Because of the nature of his earnings and the fact that the majority of the couple’s assets were tied up in the family home, a clean break was not achievable. Neither the husband nor the wife had any material assets when they were married, so the question of whether assets were ‘matrimonial’ or ‘non-matrimonial’ assets did not arise.

The court therefore ordered the ex-husband to pay his ex-wife £75,000 per year, plus the children’s school fees and extras, and gave the family home to her with the provision that if it were sold, 24 per cent of the gross sale proceeds would belong to her ex-husband.

Normally, that would have been the end of the story. In this case, however, within a fortnight of the financial provision order being made, the man left his employment for a new job which left him better off.

As a result of this, his ex-wife sought to have the order set aside, her main argument being that he had not disclosed that he was in negotiation for a new position that would make him materially better off. Had she known of it, she would not have agreed to the financial settlement.

The question for the court, therefore, was whether or not the ex-husband was under an obligation to disclose his negotiations. He admitted that he had not, but held that he was under no obligation to do so. He argued that the new job was not a ‘done deal’ and that the negotiations did not affect what he thought was a fair offer to his ex-wife. Furthermore, he considered that disclosure might have been harmful had the job offer not materialised.

In addition, he had originally offered her a percentage of his income (34 per cent up to £350,000 and 10 per cent of any excess). It was she who demanded a fixed sum.

The court ruled that the ex-husband had breached his duty to disclose material information. The question which then needed to be considered was whether the absence of full and frank disclosure led the court to make an order substantially different from that which it would otherwise have made. On this issue, the court ruled that the job offer had not affected the proposed financial settlement – there were still uncertainties in the contract. In addition, had the ex-husband stayed in his previous job, his earnings would also have risen and the difference between what he would have earned in his old job and his earnings in the new job were not substantial enough to set aside the original financial arrangements.

Brethertons' view:

“To fail to make a full disclosure in such circumstances is a risky strategy, but in this case it did not backfire. Achieving a just result normally depends on sensible negotiation based on sound legal advice and experience. We can advise you on all family law matters.”

Right of Way – Law, Not Intention, Determines Outcome

Where an easement (the ability to use someone else’s land in some way) is granted, it is usual for its terms to state any restrictions which may apply to its use.

Recently, a case came to court where a property was conveyed with a right of way over a pathway over the adjacent property such that access could be obtained to the road from the rear of the property.

The right of way stated that the occupiers of the property had the right of use of the pathway at all times for the purpose of access to or egress from the property for ‘all reasonable use necessary for the proper enjoyment of the property’. Unfortunately for their neighbour, this involved access early in the morning and late at night by visitors. The neighbours took the view that this use was more than was needed ‘for the proper enjoyment of the property’ and sought a ruling to restrict the use of the path.

The judge agreed, ruling that the original purpose of the right of way was to allow access to the rear of the property when access to the front was impracticable. In reaching this decision, he considered two documents which purported to come from the local council (which had sold both properties under the ‘right to buy’ legislation). These stated that the right of way was restricted in various ways. One of these documents, however, was written after the properties had been sold.

On appeal to the Court of Appeal, the decision was reversed. The understanding of the parties at the time of the grant of the right of way was not in point, what mattered was the law which applied. The legal documentation clearly stated that the grant of the right of way applied at all times for the reasonable use of the property. If there had been the intention to limit the right, it should have been contained in the deeds.

Brethertons’ view:

“There is no substitute for including any necessary clauses in the original documentation. This involves the vendor and the purchaser thinking through the possible issues and ensuring that any necessary rights or limitations of rights are dealt with at the time.”


Business Assets and IHT – Latest Cases

Business Property Relief (BPR) is a very advantageous relief for Inheritance Tax (IHT) purposes because where BPR applies, the assets concerned are transferred as if they are of zero value, thus attracting 100 per cent relief from IHT.

Needless to say, there are quite strict rules regarding what is and what is not ‘qualifying business property’ for BPR. Also, there is a rule which stipulates that for BPR to apply, the business concerned (but not necessarily the assets transferred) must have been owned for at least two years.

In a case heard by the Special Commissioners of Taxes, who hear cases involving difficult or complex applications of tax law, the question was raised as to whether BPR could be claimed where there was a reduction in value of the relevant business property, without the business itself or an interest in the business being transferred. In the case in question, a transfer was made in favour of a family trust of farmland and two cottages that were owned by the business but not used for business purposes. The Special Commissioners could see no reason why BPR should be denied in the circumstances.

In another case, the question was whether the sub-letting of fields was a business for the purposes of BPR. The Special Commissioners decided in this instance that the arrangement did not qualify because the business was primarily concerned with the holding of investments, which is not a ‘qualifying business purpose’.

These cases show the importance of considering carefully the detailed provisions of tax law when considering the transfer of business assets. The rules for qualifying for BPR are complex, but not particularly onerous. We can advise on all aspects of IHT planning and preservation of family wealth.     

Lasting Powers of Attorney – A Year On

On 1 October 2007, Lasting Powers of Attorney (LPAs) replaced Enduring Powers of Attorney (EPAs). Since that date, it has no longer been possible to create a new EPA, although those already in existence remain valid.

Both forms of attorney are designed to allow people who can no longer manage their own affairs to appoint others to do so for them. The main difference between the EPA and the LPA, from the donor’s perspective, is that an EPA relates solely to financial matters whereas an LPA can include what is called a Personal Welfare LPA. This allows the attorney to make decisions regarding the health of the person appointing them and, when permissible, to refuse medical treatment on their behalf. This form of LPA can only be acted on by the attorney when the donor no longer has mental capacity.

Under an EPA, the attorney can act on behalf of the donor without applying to register the power with the Court of Protection. If it does become necessary to obtain the approval of the Court, the attorney can act unilaterally on behalf of the person appointing them. Many EPAs were registered very shortly after being created, which raised doubts about the fitness of the person making the appointment. An LPA must be registered with the Court of Protection before it can be put into effect.

An LPA requires that a certificate is obtained from a professional who has known the person making it for at least two years, stating that the person making the LPA understands its purpose and scope and that no duress or undue pressure has been put on them to persuade them to make it. The person supplying the certificate must be someone other than the appointed attorney.

Acting as an attorney under an LPA is more complex and time-consuming than acting under an EPA. However, the creation of an LPA is a very practical solution to the problems that can arise if someone is no longer able to deal with their own affairs.

No Will, But Not Intestate

To die intestate means to die without leaving a will and an intestate estate is distributed according to the intestacy rules. These are more complex than many people realise, but they do operate overall to leave the estate to surviving family members.

Generally, where no will can be produced, the estate will be dealt with as an intestate estate – but not always. In a recent case, the widow and daughter of a man claimed that he had died intestate. However, two neighbours who had helped the daughter go through her late father’s papers recalled seeing a copy of a will, which gave bequests in favour of charities. The neighbours stood to receive no benefit from the estate. The man’s solicitor also recalled drawing up the will.

The court concluded that it was improbable that both the neighbours and the solicitor would independently make the same allegation when they had no personal interest in the outcome. In the circumstances, the court ruled that the deceased had made a will which was in favour of the charities.

This case was unusual in that it is not common for a will to be imputed when none can be produced. It was also unusual for there not to be a copy of the will held independently by the solicitor, a relative or in a bank deposit box.

When preparing your will, it is sensible to ensure that a copy is held so that if the original is lost or destroyed, the estate can be administered efficiently in accordance with your wishes and without unnecessary costs.