Welcome to Private Matters, our bimonthly update keeping you informed about the issues that affect our private clients. Whatever the subject, at Mishcon de Reya we guard fiercely our clients' interests, making their problems our own, so that they can feel confident we will solve them quickly and professionally.
This month's edition focuses on trusts and succession disputes, immigration, tax, art, and family.
Lucian Freud: the unknown beneficiaries
Another high-profile family feud has concluded in the High Court with the anticipated judgment in the matter of Diana Rawstron and Rose Pearce v Freud . The dispute concerned the estate of the late Lucian Freud, one of the best known artists of the 20th century, who built up a fortune estimated at around £100 million.
In his Will, Freud left a legacy of £2.5million and a property to his long-term assistant, David Dawson. Clause 6 of the Will left the residue of his estate to his daughter, Rose Pearce, and solicitor, Diana Rawstron. The claimants, Diana Rawstron and Rose Pearce, argued that clause 6 of the Will made an absolute gift of the residuary estate (around £42 million) to them, subject to a fully secret trust, the existence and details of which was entirely separate from the Will. The claimants declined to provide details of any trust other than to confirm that the defendant, Paul Freud, was not a beneficiary. The defendant argued that clause 6 should be read as leaving the residue to the claimant on a half-secret trust.
It is not uncommon for testators to make a provision in a Will for assets to be placed into a trust. If the terms of the trust are included in the Will, they will become known after death when the Will becomes public.
Alternatively, a testator may create a secret trust in a Will. There are two types of secret trust:
- A "half-secret trust" where the Will states that assets are being left to a donee on trust, but the terms of the trust are communicated to the donee outside of the Will; and
- A "fully secret trust" where the Will purports to make an absolute gift to a donee. No trust is mentioned in the Will, but all of the arrangements in respect of the trust are communicated to the donee outside of the Will.
Paul Freud argued that clause 6 of the Will sought to create a half-secret trust and intended to test the requirements for such a trust and explore whether any of the residue would fall to intestacy.
The judge concluded that clause 6 left the claimants an absolute gift of the residue. The judge had to consider the following:
- The natural and ordinary meaning of the words in clause 6. Clause 6 made no reference to a trust and referred to the claimants as individuals and not trustees;
- The overall purpose of the will. The judge considered it likely that the purpose of the Will was to create a fully-secret trust;
- The other provisions of the Will. Other clauses made explicit reference to trustees and their powers. The judge concluded that the Will conferred the status of trustee and beneficiary on the claimants;
- The factual matrix at the time when the Will was made. The Will revoked an earlier Will made in 2004, in which clause 6 referred to a trust of the residue of the estate. The judge concluded that the new Will was intended to amend this provision; and
- Common sense. The judge noted that the claimant was an experienced solicitor who knew Freud for a number of years, so he gave significant weight to her evidence regarding his intentions.
For Paul Freud, this judgment means that his only recourse is to make an application for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975, though this is a notoriously challenging claim for adult children to bring. For those following the case, it seems that the intended beneficiaries of Freud's significant estate will remain unknown.
Changes to Tier 1 Immigration rules
The Home Office has now implemented long awaited changes to the Tier 1 (Investor) category, active since 6 November 2014. Any applications submitted on or before 5 November 2014 will be considered under the old rules.
From the 6 November 2014 the following changes to the Tier 1 (Investor) route will be in force:
- The minimum investment threshold has been raised from £1million to £2million.
- The full £2 million investment must be invested in the UK by way of UK Government bonds, share capital or loan capital in active and trading UK registered companies.
- Investors may no longer use cash on deposit or the value of their residential property as part of their investment.
- The rule requiring investments to be "topped up" has been removed for applicants applying under the new rules. Investors are no longer required to "top-up" investments if the market value of the portfolio falls below £2 million, provided that the purchase price of the portfolio was £2 million. If Investors sell part of their portfolio they need to purchase new investments within the same reporting period to ensure a portfolio purchase price of £2 million. Investors, under the rules in place before 6 November 2014, must still "top-up" any shortfall in investments.
- Investors must make their investment within 13 weeks of arriving in the UK. However, Investors will not be penalised for any delay in making the investment if the reasons for the delay are out of their control.
- New applicants will no longer be able to source investment funds by way of a loan.
- Entry Clearance Officers, UK Visas & Immigration case workers can refuse a Tier 1 (Investor) application if they have reasonable grounds to believe that:
- the applicant is not in control of the investment funds;
- the funds were obtained unlawfully (or by means which would be unlawful if they happened in the UK); or
- the character, conduct or associations of a party providing the funds mean that approving the application is not conducive to the public good.
- Please note that there have been no changes to the residence requirements and main applicants cannot be absent for more than 180 days in each 12 month period.
- The approved investments remain unchanged. However there will be a further consultation on this matter in due course.
- The £5 million and £10 million route still exists for Investors wishing to benefit from accelerated settlement.
There are transitional arrangements in place for any Investors already in the UK or who have made an application for a Tier 1 Investor visa prior to 6 November 2014. Any Investor who is under the rules in place before 6 November 2014 will not be affected by any of the changes above.
Russian CFC Rules Campaign
On 2 September 2014, the Ministry of Finance of the Russian Federation published the latest version of its proposals on CFCs (Controlled Foreign (i.e. non-Russian) Corporations). The final legislation is due to be passed shortly. The proposals apply to all types of entities, including trusts and foundations and Russian resident individuals. There are also information powers and provisions to deem some non-Russian entities tax resident in Russia.
These proposals have been floating around since March and are part of the Russian Federation’s attempt to obtain its fair share of Russian tax from those people and businesses in Russia using foreign entities to shelter profits abroad, or even reduce profits in Russia.
The proposals have attracted a lot of adverse comment from those living in Russia. Having chaired a session in St Petersburg last September on Russian transfer pricing, on behalf of the Russian Chamber of Tax Advisers, it would appear that more fundamental changes need to take place. For example, Russia seems to be the only place in the world where, instead of the taxpayer having to justify its transfer price, it is up to the taxman to prove it is wrong. Given that over 60% of global trade is within corporate groups, both sides can have difficulty in identifying that comparable, uncontrolled price.
Companies are CFCs if a family controls (loosely defined) more than 50% of the company. There are carve outs if the company is listed on a stock exchange, is a non-distributing entity, i.e. it cannot distribute its profit, or is resident in a white list country where the effective tax rate is over 15%. We still await the white list and stock exchange list, but I would expect the key to be whether Russia has an exchange of information agreement with the country concerned (as it does with the UK). There are many Russian residents who wish to control 100% of their empire outside Russia, but would like to do an IPO (Initial Public Offering) to cash in on part of it, and have therefore been undecided on what to do. Given that anything under a listed vehicle is CFC protected, this change might be the encouragement they need, and where better place to do an IPO than London?
Trusts and foundations are considered CFCs if they are influenced, or could be influenced, by a Russian resident.
The CFC charge is on the net annual distributable but undistributed income of the entity and is subject to €1m in 2015, reducing to €0.2m by 2017. Russian individuals will pay tax on those undistributed profits at a rate of 13% (a bargain compared to European rates), and companies at 20%.
Notification – Knowledge is power
Any interest over 25% in a non-Russian entity needs to be notified. The penalty for not doing so is approximately €1,000, which doubles if the interest is over 50%.
Foreign Companies – Now tax resident in Russia?
Additional tests of corporate residence are being proposed to bring non-Russian companies in to the Russian tax net. These include cases where the majority of board meetings are held in Russia, if the management of the company actually takes place in Russia, or if the chief officers of the company carry out their activities in Russia. The location of calls made and emails sent is likely be used as evidence.
There are other changes, especially in respect of the ownership of land in Russia, but these proposals are a good reason for Russian residents to undertake a strategic review of their businesses and portfolios. It may be that they could join an ever growing band of emigrants, but if they are heavily committed to Russia for family or other reasons, then a review of their non-Russian assets would be timely.
Art E-commerce – what you need to consider when developing an online presence
Art e-commerce is here to stay. To the purchaser, it's convenient and less daunting than buying in the auction room or gallery. To the gallery, auctioneer, or selling agent it is a global shop front, an opportunity to offer works for sale to a wider audience with limited costs and the potential for increased profit margins. But will it change the art market? Will it affect the way that we value art and track the rise and fall of art sales? How will standard procedures such as due diligence be nuanced to accommodate this medium?
Whether you are an auction house that operates public auctions with an option to bid online, or a solely online auction or gallery, you need to be aware of your obligations to those using your website, ensuring it and the way parties perform transactions through it complies with your legal obligations.
Registration of buyers and sellers is key- you as the auction or gallery will want peace of mind for both payment and for anti-money laundering purposes. You need to know who is consigning and where buyers are located.
Businesses with a presence in the UK that hold or use personal data belonging to individuals such as clients, subscribers or suppliers, must always be aware of their obligations as 'data controllers' under the Data Protection Act 1998 and must usually register on the Data Protection Public Register. Personal data must be kept secure, up to date and must not be transferred to countries outside the European Economic Area ('EEA') unless adequately protected.
The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the 'Regulations') - What will this mean for your business?
Following the implementation of the EU Directive of 2011/83/EU of the European Parliament and Council on consumer rights, regulations came into force on 13 June 2014 that now govern most contracts between a "trader" and a "consumer". The Directive provides unified consumer confidence across the EU, through harmonisation of the rules, including cancellation rights and obligations for purchases made at a distance or off-premises.
The position differs depending on if you are solely an online art-platform, gallery, auction or a live auction with a parallel on-line bidding capability. In certain circumstances, the most significant impact would be in respect of the cancellation policy, and unless an exception applies, the cancellation policy is 14 days commencing with the day after the date the contract was entered into.
Solely online art platforms, auctions or galleries are deemed to be 'public auctions' and are excluded from the right of cancellation. Though this is meant to provide the purchaser with the right to return artworks that they have not seen, it appears to exclude online art platforms, auctions or galleries that may offer an opportunity for viewing before purchase.
Though some art online platforms already offer a 14 or 28 day return policy, there is a disconnect with how the general art market sells and tracks value in work, with a mandatory right to return. Will the concept of a "burnt artwork" change given an increased likelihood of artworks being returned - due to concerns over the work's condition or authenticity or a simple case of buyer's remorse, for example - another concern is the associated costs, transportation and return of artworks. This is likely to present an opportunity for further dispute around the return of art work including; shipping, insurance, condition, and associated costs.
Reputation and Due diligence – Protecting your commercial identity
Having invested in an online presence, you should consider the ramifications if something goes wrong.
Art e-commerce offers considerable opportunities for art dealers and traders, however it is important to manage your online presence carefully to avoid throwing away your investment - keep an eye on your legal obligations to protect your business in order to reap the maximum commercial benefit.
You should always ask: Who is consigning to me? Do they have authority to sell the work? Where have they got the work from? Is the work as described? Are there gaps in its provenance? Could it be a fake or forgery? With greater distance comes the greater opportunity for problematic transactions.
What's happening for the young?
In October, the first 'WHY? -What’s Happening for the Young' festival took place at the Southbank Centre, supported by Mishcon de Reya.
Across four days, 1,000 children from across 44 schools participated in activities and talks, from a banner making session and a protest along the South Bank, to Jude Kelly, Artistic Director at the Southbank Centre, talking to Pianist James Rhodes about why everyone should have equal opportunities to enjoy and perform music, WHY? set out to make young people aware of their rights, to celebrate these rights, and to show children how to act on them. Other sessions were tailored for older children, addressing issues such as sex education and how to write a strong CV. This was a festival for children, about children, exploring issues they wanted to know more about.
Jude Kelly commented: "Children have rights to safety, to education and to play, but do they know about them? We need this festival to become an annual event that happens in other parts of the country. Children need to talk and adults need to hear children."
Mishcon de Reya, an organisation that has long campaigned for children's rights, ran sessions on how to become a lawyer, how to protect your reputation online and what employers look for. Barbara Reeves, a Partner in Mishcon de Reya's Family department, also hosted a Q&A session with Kate Thompson from the Tavistock Centre for Couple Relationships about resolving parental conflict, discussing the issues that arise when communication breaks down in a parental relationship.
Barbara said: "We have been discussing children's rights for many years at Mishcon, and one of those discussions led to the WHY? Festival. We hope this will raise awareness of children's rights and provides a forum where children and young people can engage in a debate about how they can be involved in events that shape their lives."
Watch the highlights from WHY? in our film below