2024 reflections and 2025 forecasts
Fallout from the 2024 Budget
Individuals, businesses and trustees are all adjusting to the new Labour Government’s first Budget. From a trusts and estates perspective, this is likely to cause an increase in certain types of disputes:
Estate and inheritance disputes
The changes to Agricultural Property Relief and Business Property Relief have grabbed the headlines, as individuals will face greater restrictions in passing down agricultural and business assets free from IHT. This may necessitate individuals restructuring their family-owned farms and businesses to ensure that there are assets available to settle the IHT bill.
In the agricultural context, this may give rise to disgruntled beneficiaries who were expecting to receive farmland or property in its entirety. This will be particularly problematic for beneficiaries who had been promised agricultural assets, and had relied on this promise to their detriment. For example, they may have worked on the land for little or no remuneration in reliance on the assurance that that they would receive the assets outright on death. The need for testators to restructure their estates, and potentially sell parts of family ran farms to cater for the increased IHT bill, may lead to a rise in proprietary estoppel claims from beneficiaries. Similarly, the reduction in the availability of Business Property Relief may trigger individuals to reevaluate their family businesses, perhaps through the restructuring of shareholdings between family members or the sale of shares to third parties. Again, this may likely give rise to disputes on death between members and directors of family businesses in the light of these restructurings.
"After April 2025, non-UK assets settled on trust by a non-UK domiciled settlor will no longer fall outside the scope of UK IHT."
Trust disputes
After April 2025, non-UK assets settled on trust by a non-UK domiciled settlor will no longer fall outside the scope of UK IHT. Instead, liability to the IHT relevant property regime will be linked to the settlor’s status as a long-term UK resident. Trustees must now keep a very close eye on the settlor’s tax residency position year on year, and we expect there to be a rise in cases where trustees will not have monitored (or been in a position to monitor) the residency of the settlor and the structures have inadvertently been opened up to avoidable IHT charges.
Separately, in a bid to act before Budget changes, and in particular the raising of Capital Gains Tax (CGT) rates, it is likely that a small portion of restructuring or appointments will not have taken effect in the manner intended, especially given the limited window to effect those transactions. This may well give rise to remedial action having to be taken, such as rectification applications, although it may be some time before these problems fully come to light.
"We are already seeing more and more family disputes playing out during an individual’s lifetime rather than after their death."
Disputes over Lasting Powers of Attorney (LPA)
The Powers of Attorney Act 2023 seeks to digitalise the LPA process and improve safeguards against fraud by implementing identity regulations. These regulations will apply to any person associated with the LPA process, including attorneys and certificate providers. Whilst implementing identity regulations is welcomed by practitioners, there are still concerns that its introduction will not eliminate LPA disputes in their entirety. A vast number of financial abuse cases do not involve a party using a fraudulent identity, but rather involve family members abusing their position. We anticipate that despite the introduction of new legislation, LPA disputes will continue to rise. This is particularly prevalent given the increase in the number of LPAs being registered due to an ageing and vulnerable population. We are already seeing more and more family disputes playing out during an individual’s lifetime rather than after their death.
A modern approach to capacity
The current test for testamentary capacity remains as set out in Banks v Goodfellow (1870). At that time, diseases we typically associate with old age, such as Dementia and Alzheimer’s, were rare given that the life expectancy of the general population is not what it is today. These diseases are now prevalent - according to Alzheimer’s Research UK, a person’s chance of developing dementia over the age of 80 is one in six. Notably, following the coming into force of the Mental Capacity Act 2005 in 2007, capacity to make almost all other decisions is covered by the test in s3 of that Act. Reform is needed, not least to ensure consistency in the law.
The Law Commission has addressed the need to reform the law around wills, and we await the outcome of its reform programme. As well as the tricky area of testamentary capacity, the most recent consultation covered the increasing prevalence of predatory marriage and a discussion around the extent to which electronic wills should be legislated for. Farrer & Co has been directly involved in the discussion, and in October 2023, while the consultation period was running, we co-hosted a panel discussion with STEP on the proposed reforms at the Law Society, to which industry experts were invited. Professor Nicholas Hopkins, Law Commissioner, joined Farrer & Co’s senior partner, Jeremy Gordon, who chaired the discussion panel.
The Law Commission has recently announced that its final Report and a draft Bill are due to be published in early 2025, so we hope to see further discussion and movement on these issues soon.
Offshore disputes
In respect of offshore trusts and estates, capacity often raises complex conflict of law questions. Capacity is decision-specific, and in England and Wales the test for capacity for testators, trustees, settlors, and protectors varies between common law and the Mental Capacity Act depending on the decision. However, there is often no statutory instrument relating to mental capacity in offshore jurisdictions, and the applicable case law can vary wildly subject to the location of an estate, the governing law of a trust or where the settlor and/or trustees are situated. This naturally creates disputes among individuals within a trust when there are questions surrounding capacity and gives rise to a conflict of laws between the relevant jurisdictions. Given that we are now seeing an increase in the ageing population, we expect to see disputes in offshore trusts rise as a result of powerholders living longer and unavoidably facing capacity issues.
Second marriages and blended families
Disputes occur in the traditional family dynamic but are more common in blended families, and we expect this to continue into 2025 given the increase in modern family structures.
Conflicts often arise on the death of an individual following their second marriage, in which they may have favoured either their own children over their second spouse, or perhaps disinherited their children and relied on their second spouse to provide for their children on death, which does not transpire. This gives rise to an increase in claims for greater financial provision under the Inheritance (Provision for Family and Dependants) Act 1975 and will validity challenges. Given the changing landscape in the typical family structure, it is usually advisable to be open and transparent with all the family to minimise any shock and upset following death.
Alternative dispute resolution (ADR)
Arbitration
Despite being heralded as the future of ADR, 2025 is unlikely to be the year that arbitration in contentious trusts disputes takes off, for a number of reasons:
- There is a lack of clarity as to whether beneficiaries can be bound by arbitration provisions in a trust deed, given they are not a party to that deed.
- Certain matters will need to involve the courts regardless, including cases where approval by the court on behalf of minor or unborn beneficiaries is required.
- The UK and several other key jurisdictions are yet to introduce specific legislation for trust arbitration.
- The cost savings of arbitration over court determination in contentious trusts disputes are not always readily apparent.
Early neutral evaluation
On the other hand, we expect early neutral evaluation or expert determination may well become the ADR of choice in 2025.
This involves a judge or expert offering a view on the respective parties’ cases and bringing them closer to an agreement by laying out the strengths and weaknesses of their claims. This is gathering momentum as it offers an expert view on the likely outcome without the time, expense and stress that a trial entails.
Contentious Trusts & Estates
Disputes involving trusts, wills and estates are a growing fact of life and require careful and expert handling. Our team has for many years been delivering a wide range of dispute services to high net worth families and those involved with the fiduciary wealth holding structures commonly created by and for such families.