The story in markets last week was all about the weakness of Sterling. The pound fell to a five month low against the Euro, confounding many who had expected Sterling to appreciate against the single currency by the end of the summer.

Significant falls against the US Dollar were also recorded, but certainly the movements against the Euro are what are making the headlines. This can be attributed mainly to remarks made by the Bank of England governor Mervyn King.

Mr King in an interview stated that the fall in Sterling was “helpful” in rebalancing the UK focus on exports. His view was that as the weaker pound would facilitate exports, it would also discourage imports, and, as such help rebalance the UK trade deficit whilst providing stimulus to the UK manufacturing sector.

It is difficult to argue with his logic in that respect, and upon hearing this foreign exchange markets took it to be a green light signal to sell the pound. After all if the Central Bank Governor is supportive of a weaker currency, then whilst not policy, it could almost be construed as a desire.

In any event Sterling fell sharply and remains weak on the opening this morning. We have a varied selection of economic data out this week so it will be interesting to see if the trend continues. Euro sellers should be happier anyway.

EXCLUDED PROPERTY TRUSTS

5 Meaning of estate
(1)For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that...
(b) the estate of a person immediately before his death does not include excluded property.

The exemption from Inheritance Tax afforded by s5(1)(b) IHTA as quoted above is obviously an extremely attractive and valuable one.

 For a period in the early part of this decade planning was widely used whereby the taxpayer would acquire an interest in an Excluded Property Trust and the value of that interest would immediately fall outside the charge to Inheritance Tax.  The planning was particularly popular in so-called “deathbed” scenarios where the taxpayer had a limited life expectancy such that more conventional Inheritance Tax planning ideas were not considered viable.

Whilst HMRC would not necessarily agree with the analysis that simply acquiring an interest in an Excluded Property Trust resulted in a decrease in the chargeable estate of the purchaser, they were sufficiently concerned by the wide use of the planning to change the legislation in Finance Act 2006. The changes were contained at subsections (3B) and (3C) of section 48 IHTA 1984 and the relevant subsections of section 48 now state:

48 Excluded property
(1)A reversionary interest is excluded property unless—
(a)it has at any time been acquired (whether by the person entitled to it or by a person previously entitled to it) for a consideration in money or money’s worth, or
(b)it is one to which either the settlor or his spouse is or has been beneficially entitled, or
(c)it is the interest expectant on the determination of a lease treated as a settlement by virtue of section 43(3) above...

 (3)Where property comprised in a settlement is situated outside the United Kingdom—
(a)the property (but not a reversionary interest in the property) is excluded property unless the settlor was domiciled in the United Kingdom at the time the settlement was made, and
(b)section 6(1) above applies to a reversionary interest in the property but does not otherwise apply in relation to the property.
but this subsection is subject to subsection (3B) below...

(3B) Property is not excluded property by virtue of subsection (3) or (3A) above if— (a) a person is, or has been, beneficially entitled to an interest in possession in the property at any time, (b) the person is, or was, at that time an individual domiciled in the United Kingdom, and (c) the entitlement arose directly or indirectly as a result of a disposition made on or after 5th December 2005 for a consideration in money or money’s worth. (3C) For the purposes of subsection (3B) above— (a) it is immaterial whether the consideration was given by the person or by anyone else, and (b) the cases in which an entitlement arose indirectly as a result of a disposition include any case where the entitlement arose under a will or the law relating to intestacy.

The result of the changes introduced by subsections (3B) and (3C) meant that the planning idea of simply acquiring an interest in an Excluded Property Trust would no longer result in that interest being treated as Excluded Property for calculating their chargeable estate. Therefore it appeared that this planning idea was no longer possible.
However, that does not mean that Excluded Property Trust planning is no longer viable. It is still possible for a taxpayer to become the holder of an interest in an Excluded Property Trust and for this interest to still qualify as Excluded Property.
By becoming the holder of an interest in an Excluded Property Trust but not falling foul of subsections (3B) and (3C) it is still possible to reduce the value of a person’s chargeable estate.

Example
The taxpayer (a widow) has a chargeable estate, after taking into account the Nil Rate Band and any other reliefs, of £2million made up of her main home and investments. If she were to re-arrange her estate such that £2million were held via an interest in an Excluded Property Trust and the value of the estate were matched by an equal debt owed to the Excluded Property Trust, the taxpayer’s Inheritance Tax Position would be as follows:

TOTAL CHARGEABLE ESTATE

£2,000,000

LESS: DEBT OWED TO EXCLUDED PROPERTY TRUST
    £(2,000,000)

   
ESTATE CHARGEABLE TO IHT

£0

In most cases the taxpayer’s chargeable estate will be made up of assets that the client cannot dispose of in order to obtain the interest in the Excluded Property Trust, however it is still possible to undertake the planning via the use of short-term borrowings.

Market Round-Up

UK

- The UK market continued to advance, ending the month of August 7.1% higher as the
trend of better than expected data continued.
- Rising UK business confidence, rising US consumer confidence and further encouraging
US housing data were among factors helping to lift the mood, although an air of
caution remained due to the size of the rally since March.
- The top gainer in the FTSE 100 for the week was RBS, rising 18.9%. Talks to sell their
Asian assets to Standard Chartered and speculation they may be looking at buying back
shares from the UK Government were key drivers.
- Although miners were hit by profit taking mid-week, Kazakmhys was the stand out
winner in the sector after reporting better than expected earnings in the first half of the
year. The stock was up 8%.
- BAE was the biggest faller in the FTSE 100, down 6.44% following the loss of a US
defence contract.

US

- US equities rose to a new high for the year in last Thursday’s trading, driven by strength
in the oil price, which lifted oil stocks, and by news that GDP shrank less than previously
anticipated in the second quarter, at an annualised rate of -1.0%. Analysts had expected
a decline of 1.5%.
- The Case-Shiller Index of house prices in 20 metropolitan cities rose 1.4% over June
versus expectations of just 0.2%. In addition, sales of newly built single family homes
rose for a fourth straight month in July, whilst the overall inventory of unsold homes fell
to a sixteen year low.
- The Conference Board’s Index of Consumer Sentiment rebounded in August to a
reading of 54.1, having fallen to 47.3 in July.
- The Dow and S&P declined on Friday, though the Nasdaq managed to gain 0.5% after
Dell beat Q2 earnings expectation, and Intel upped guidance on Q3 revenue due to
improved demand for its microprocessors and chipsets.

Fixed Interest

- The week began with the yield on two year gilts hitting an all time low of 0.822% after a
broad rise in bond prices due to weaker shares and renewed market jitters that the Bank
of England may cut the interest it pays on deposits.
- Gilts then struggled after upbeat US home sales gave investors cause for optimism.
Further downward downward pressure came when it came to light that the BoE paid
below market price in its latest reverse auction.
- Later in the week mixed data gave investors no clear direction. In the UK, figures on
business investment for the second quarter showed the sharpest quarterly fall since 1985
and led to concerns of a downward revision to Q2 GDP data. August retail sales figures
from the CBI showed an unexpected slight worsening, but firms were more optimistic
about the coming month than any time since July 2008. Housing data from the
Nationwide Building Society showed the biggest monthly price rise in two and a half
years.

Europe

- European equity indices booked another positive week, hitting 10 month highs.
Investors were buoyed by continued strong corporate results, both at home and
overseas, and optimism about the outlook for the global economy. The FTSE Europe
ex UK index rose 2.0%.
- A raft of upbeat economic data including better than anticipated industrial new orders in Europe, Germany’s IFO index of business climate which was upwardly revised, and
housing numbers in the US all pointed to a better outlook for the global economy and
helped boost risk appetite.
- Nokia’s announcement that they are to enter the highly competitive business of making laptops was taken well. Shares climbed 10.6% over the week.
- Nataxis shares soared almost 18% following news that its majority owner, statebacked BPCE, is to guarantee around J35 billion worth of toxic debt at the French
investment bank.
- Banco Santander announced that they are to buy-back up to J16.5 billion of assetbacked securities (commercial & residential).

Japan/Pacific Basin

- Japanese equities ended the week up 2.89% and also hit a 10 month high in the
process. Positive economic data released in the US improved investor sentiment on
hopes for a global economic recovery. The S&P/Case-Shiller home price index and
consumer confidence in August topped forecasts. Exporters climbed on the back the
news. Energy linked shares advanced as oil prices steadied around $74 a barrel.
- The Hang Seng closed down 0.50%. Investors took profits after recent strong
performance, however, they continued to worry over the government’s fine-tuning of
fiscal and monetary policy. Disappointing results from blue chips CNOOC and Esprit
fuelled concerns ahead of a flurry of results from other companies in the coming days.
- Indian shares finished the week 4.47% higher. Sales of previously owned US homes in
July, which recorded their fastest pace in nearly two years, and upbeat comments from
Ben Bernanke boosted stocks. Index heavyweight Tata Motors advanced after a Credit
Suisse upgrade and outsourcer Wipro climbed higher on a weaker Rupee.