In the latter half of 2003, I read a judgement in a case involving the level of a solicitor’s probate charges. The case (Jemma Trust Co Ltd v Liptrott and others) arose because a beneficiary of an English estate decided to complain about the probate charges. In essence, the solicitors charged two executry fees – one based on a percentage of the value of the deceased’s estate and another fee based on the firm’s time costs. In the lower court, the costs judge found in favour of the beneficiary saying that the solicitor could choose one method of charging, but not both. However, in the Court of Appeal the judges overruled this decision saying that provided the overall charges were “fair and reasonable” the dual charges were acceptable. As a result of this extraordinary judgement, and my own personal experience of the conduct and cost of executries, I decided to research this subject in some detail. If you are a lawyer or a banker you may not like what you read.

For many professionals, a nice “fat” executry is the chance to charge excessively with impunity. The story is told of a young apprentice lawyer charged with winding up his first estate. He has everything ready in record time and is looking forward to a pat on the back. He is somewhat surprised instead, to receive a scolding for not taking more time; “time is money” says his principal “and the financial interests of the beneficiaries are but a mere trifle as compared to ours”. Lawyers, who like to think that they have a professional monopoly on winding up estates, love to exaggerate the difficulties of executry law. Of course some cases can be complicated but from my own experience, most executries are reasonably straightforward.

The Duties of an Executor
The duties of an executor are twofold – firstly to collect up and distribute the deceased’s assets in accordance with the terms of the will and secondly to account to the Inland Revenue for the appropriate Inheritance Tax (IHT). (All wills written exclusively in favour of the surviving spouse are exempt from IHT anyway, so very rarely does the resulting executry prove to be a problem). There are two returns to complete and to obtain Probate (or Confirmation in Scotland) both of these must be submitted and agreed by the local court and the Inland Revenue.

Appointing an Executor
The trouble can start when you decide to make a will. Naturally, you will wish to speak to a lawyer and hopefully he or she will give you sensible advice to take account of your circumstances and wishes; e.g.
(1) to ensure that your spouse is protected (2) to provide for your children and any other favoured relations and friends and (3) to minimise IHT. No arguments so far. The lawyer will then turn to the matter of executors. Some lawyers will recommend their own professional firm to become your executor. In my opinion, this is a poor piece of advice because if you appoint a professional firm of lawyers to act as your executor, you are in effect giving them an immediate (and often unquantifiable) interest in your estate.

Obtaining Executry Fee Quotes
The will will almost always specify how executors are to be paid. Here is a typical clause:¬

“My executors shall have the power to appoint one or more of their own number or any person or persons to be solicitors or agents for carrying into effect the powers and purposes of this will or to allow such solicitors or agents their usual charges”.

I cannot imagine many customers accepting a tradesmen’s quote based on such an imprecise form of words as ………. “usual charges”! As an unpaid executor, you need to be absolutely clear from the outset exactly what these words mean; for example, do they mean fixed fees based on a percentage of the value of the estate, time costs, or, as in the case of Jemma Trust Company Limited, both? If you are at all unhappy with the answer you get, you should insist on obtaining at least one other professional firm’s quote.
It is customary nowadays for professional firms to get their clients to sign engagement letters requesting agreement to, amongst other things, their charges. My advice to executors is to only sign an engagement letter which gives you a clear idea of completion time and cost; don’t sign one which refers to a firm’s charge out rates without giving you an idea of total cost.

Traditionally, banks have also had a share of the executry “market”. Typically, however, they employ lawyers to run their executry departments. These used to be “in-house” but more and more the work is outsourced. For example, the Royal Bank of Scotland employ a national firm of lawyers called Irwin Mitchell. The Royal Bank’s brochure on “Wills and Executor Service” sounds very reassuring but, in reality, is a licence to print money. It advises you to appoint them as your executor because they are “strictly impartial”. On the question of fees, you need to be Albert Einstein to understand exactly how they charge but the gist of it is a fee of 1% of the gross estate plus “time costs”. This is outrageous! Not only are banks very expensive but they move with the speed of a vintage Rolls Royce driving through sand.

Does the legal profession really have a monopoly?
Courts (County Courts in England and Sheriff Courts in Scotland) are of course reserved for lawyers! So court employees are instructed not to talk to anyone who is neither an executor nor a solicitor. But this doesn’t stop other professionals helping executors (who aren’t lawyers) from doing absolutely everything a lawyer does in terms of completing the forms and agreeing the IHT payable. If you are an executor, you should perhaps think of seeking the help and advice of a Chartered Accountant – you will be agreeably surprised by how pragmatic they are; and they certainly understand IHT, executry accounts, the notion of a fixed fee quote and a deadline! (Chartered Accountants are able to give advice to executors and beneficiaries but the actual business of obtaining probate or Confirmation is still – for the moment – the preserve of executors named in the will and lawyers).

Can you Sack an Executor?
Properly drawn up wills, normally stipulate who the executors are. They will sometimes include a lawyer or the lawyer’s firm. If you find that you are an executor of a will (and not a “professional”), you owe it to the beneficiaries to ask the “professional” for advance notice of (1) their estimated fee and (2) their estimate of how long it will take.

If you are unsatisfied on one or other counts, you should seek an alternative quote. If this is more acceptable, you can ask the professional executor named in the will to “decline to act” in favour of another firm (they won’t want to act for nothing, so a reputable professional will normally sign such a letter).

Recommendations
What can you do in practice to avoid being traduced by professionals? Here is a checklist:¬
1. Consider very carefully who you choose as Executors. They can include members of the family and trusted friends. Review your executors regularly – we all get older and relationships change! Avoid choosing professionals to be your executor. Leave it to your trusted executors to choose a professional to handle the executry after you have “gone!” You do this by including in your will a clause giving your executors:-“Power to appoint one or more of their own number or any person or persons to be solicitors or agents for carrying into effect the powers and purposes of this will and to allow such solicitors or agents their fees, subject to my executors receiving in advance and in writing:¬
(i) a fee quote and
(ii) an estimate of how long the executry will take to conclude.
2. If you are an executor, don’t overrule the possibility of completing a simple executry yourself. The Capital Taxes Office of the Inland Revenue is helpful and you can phone them on 0845 3020 900. Alternatively, if there are complications (e.g. trusts) or the estate is large, obtain quotations from at least two different professional firms.
3. If you find yourself as co-executor with a professional, ask him or her to quote in advance and in writing for the work and to commit an agreed time scale (e.g. 6 months). Ask another professional firm to quote as well.
4. Only sign an engagement letter which gives you a clear idea of completion time and cost; don’t sign one which refers to a firm’s charge out rates without giving you an idea of total cost.

Conclusion
Professional executors can be remarkably pompous about their responsibilities. They often excuse the length of time it takes them to wind up estates on the grounds that they must wait and see if there are any unknown estate creditors that might appear “out of the woodwork”. They can behave patronisingly to their clients and all too frequently adopt the attitude that only they know what’s right for their client. (Lawyers and banks don’t much like accountants advising executors because they know that much of the “mystery” that surrounds an executry is to cover up lawyers’ exorbitant charges). By complete contrast, the relatives, beneficiaries and executors of the deceased can feel extremely isolated and vulnerable – it is all too easy to leave the lawyer just “to get on with it” but as an executor, you owe the beneficiaries and the deceased a duty of care. You discharge this duty by holding professionals accountable from the outset; if you don’t, you could end up suffering the same fate as a friend of mine; her husband’s executry should have cost less than £5,000 and taken less than six months to complete – three years later, she ended up by paying her lawyers £55,000 plus VAT.

Finally, another true story. As co-executor with a lawyer, I made a plea to him to try and moderate his firm’s fees as the grieving widow was spectacularly poor. I suggested, not entirely tongue in cheek, that he temporarily swap his lawyers hat for a compassionate one. He wrote to the widow thus ……… “of course, I have compassion for your situation but I am sure, having known you all these years, that you would not want this to be put forward to me as a reason for my firm carrying out professional work at less than a proper charge”.

Andrew Hamilton FCA CTA Cert PFS
December 2010

(The views and opinions of the author are entirely his own and do not represent the views and opinions of either the Institute of Chartered Accountants of England and Wales or the Institute of Taxation, both of which Mr Hamilton is a member)

1. In what form to buy the gold.
At least for British taxpayers, English gold coins are clearly the only choice. By contrast with non-British gold coins and with gold bullion, they are completely free from capital gains tax. Along with gold coins of all other countries, but not always with gold bars, they are also VAT exempt.

People who were to buy and sell gold in any form very frequently might become classed as traders, and therefore enter the income tax net. It is, however, unlikely that any of the sort of investors in gold that I have in mind will want to trade in it in this way. First reason: as I made clear in the last article, gold should be seen as a defensive, protective investment, rather than as something to be let go as soon as it rises in price. Second reason: there is a fairly wide gap between the buying and selling price, and, while this is of negligible importance over the long term, it means that gold bought for physical ownership is not really conducive to “churning”.

One can of course trade in gold without taking delivery, as, for instance, through the so-called exchange-traded funds (ETFs). I do not, however, recommend that. In the first place, I am not recommending gold on the basis that it is certain to go up in the short-term. As to that, I simply do not know, and indeed I am only mildly interested. The purpose of buying gold, as far as I am concerned, is strictly as a long-term, protective investment, principally as a hedge against the raging inflation which has seemed to me inevitable – and fairly soon — ever since governments worldwide have started the – dishonestly titled – “quantitative easing” policy. In the second place, it is never possible to know for certain that such funds actually do possess the physical assets that they claim to possess.

2. The choice in British gold coins.
There are three British gold coins: the sovereign, which of course originally represented £1, the half-sovereign and, as of fairly recently, the quarter-sovereign. Double-sovereigns (representing £2) and quintuple sovereigns (£5) have also been struck at various times, though not recently. The smaller the coin is, the higher is the premium over the price of the gold content (and all gold coins are at a higher premium over the gold-content than gold bars are). People making a substantial investment would therefore want it to be mainly in sovereigns rather than in either of the two smaller coins. The latter do, however, have the occasional advantage of enabling one to buy gold with less money than one sometimes might have conveniently available. They also they make nice presents at less cost than one might want to incur in some cases.

3. A little bit of historical background.
There is something genuinely romantic about sovereigns. They were first issued as long ago as in 1489, for King Henry VII. They were discontinued in 1604 and replaced with various other gold coins such as the guinea, until production was finally restored in 1817 – since when production has never ceased.

4. Where to buy it.
This is definitely an important matter, because, as a very recently, there are quite a number of fake gold coins around. Fakes are, for instance, quite common at eBay. I have no hesitation in recommending one dealer and one dealer only: –
John Haynes & Co.
Castle Court
6 St. Michaels Alley, The City
London EC3V 9DL
Telephone 020 7621 0358
They are principally jewellers, and, as the address indicates, they are in the City in London (four or five minutes’ walk from Bank underground station). For some years, they have been the only people I deal with. There are just three who work there, and they are extremely nice and utterly trustworthy. Those who want to make purchases can either go there with cash, or send a cheque for an amount to buy what is wanted once the cheque has been cleared, with a view to picking up the coins or having them sent. They deal in all the gold coins and also in gold bullion.

5. Where to store it.
Not, not in any of the normal places for investments-safe-custody, such as with dealers or in bank safe-deposit-boxes. Emphatically, such purchases should be kept at home — under the bed, in a teapot, buried in the ground, wherever. You do of course need to trust one or more trustworthy family-members or friends with the information on where it is kept. During the course of history, considerable quantities of gold have quite certainly been lost – in many cases for good – as a result of being “hidden away” and with the owner having then died or having even forgotten where he or she hid them!

The banking system is set for a rush of companies looking to renegotiate facilities, and those that leave it late may find themselves on the sharp end of some very difficult negotiations.

The banks face a huge increase in demand for refinancing in 2012 when £34bn of facilities will be up for renegotiation in what has been dubbed “the maturity spike”.

Following the credit crunch many facilities, from around 2009, were granted only on a three-year basis. This means that many deals will reach maturity at about the same time, 2012. In addition, many businesses have held back on capital investments during recession and have instead focused on reducing debt.

As the economy recovers they will have to start reinvesting and asking for more facilities, putting even more pressure on banks. And changes in banking regulations mean your local managers cannot be as open-handed with facilities as they were a few years ago.

But those who return to the banks will find the terms on which they took facilities out just a few years ago could well have changed dramatically.

This is not all. The basis on which lots of facilities were built has also changed: many term loans and overdrafts were secured against commercial property, but these values have declined over the past few years, as have the multiples on which banks are willing to advance cash on buildings. Don’t assume the old days of just turning up to your bank and being able to easily renegotiate your facility still hold. They are gone.

For companies that are canny enough to start moving now, and renegotiating terms before the spike and before those that choose to renegotiate at the last minute, the next few months may hold some opportunities. Most pundits argue that the time to pick up the phone to the bank, irrespective of when your facilities are due to mature, is when you have finished reading this article.

As well as being irreverent and funny, he occasionally gives one a glimpse into the rotten machinery of Government.  Here is a classic entry dated September 9^th 1983 where he recounts his first experiences as the new Minister for Employment.

Dept of Employment – Friday, 9^th September 1983

A lot of pointless activity in the Department, as officials start to drift back from their holidays…What [ministers] really like are full-scale meetings, preferably with so many in attendance that they have to be held in the small conference room.  A far more economic solution would be just one intelligent civil servant guiding the Minister through the paper in his own office.

We had one of the PES preliminaries today.  First time I’ve done one of these, and I was totally out of my depth.  I’m responsible for all these spastic, money-consuming Employment ‘measures’, so the idea was that I should sparkle knowledgeably as a prelim to putting in higher ‘bids’.  I heard them out in sulky silence. Was finally goaded by Fred Bayliss, the Assistant Secretary who appears to be our resident Chief Accountant.  He mumbled along, ‘… looks as if there is going to be a shortfall as our overall provision is £408 million and at present we are going to be pushed to get expenditure over £334 – 360 million.’

That’s not an effing ‘shortfall’ I thought, or at least not my idea of one.  It slowly sank in that he was rambling round for suggested ways of getting last-minute expenditure authorised so as to ‘approach more closely our provision.’  ‘Look, Fred, Ministers in this Department are members of a government which is dedicated to – whose raison d’etre – is the reduction of public expenditure. Surely it’s a matter for congratulation?’

Ah no, don’t you see – ‘It’s important to get as close as possible to last year’s provision in order to have a firm base from which to argue for increases this year…’

This was crazy.  Nightmare.  Kafka.

Is it like this with all Parly Secs, or just me? Icily I asked in what other Departments of State ‘is this kind of budgetary practice prevalent?’

‘All of them,’ they shouted triumphantly.

General laughter, of a tee-hee kind.

The Discussion

AH-C: I’d like firstly to take a look at what the big trading nations are doing to help their economies.

AH-C: Angus, let me start by asking you about a chart I saw the other day showing the Chinese Stock Market has fallen circa 60% in just under 3 years.  Given that China is now so important to the world economy, is its stock market sending out a warning?

AT: No I don’t think so.  The stock market in China is dominated by the natural instinct of the Chinese to gamble; it is a largely closed market and not really a barometer of economic conditions. China’s problem is excess liquidity, exacerbated by artificially low interest rates. Until interest rates are raised to a level which is above the level of inflation, its government will face having to tackle one speculative bubble after another; first the stock market, currently property and next, possibly, gold. The export driven fundamentals of its economy are not particularly affected by this yet; however, in time, China must both consume and import more.

AH-C: Thanks Angus. Now can we take a look at the USA, which as far as I can see, is the one major country that’s doing little to address its fiscal deficit? President Obama seems addicted to economic morphine (printing money) with no real plan to balance the books – are we nearing the point when the US dollar goes to hell in a handbasket?

AT: The fate of the US Dollar is inextricably linked to China; China exports its goods to the US and lends money to the US by buying US Treasury Bonds; the US uses the money to buy Chinese goods; just as companies like Jardine Matheson opened up Chinese exports to British markets in the nineteenth century by encouraging China to become dependant on opium, so the Chinese in the twenty first century have helped their exports of manufactured goods by getting America hooked on Chinese finance (80% of Chinese reserves are invested in US Treasury Bonds). It’s a bit unstable…..

MW: It’s certainly an unhealthy relationship but I’m not sure it’s unstable. China doesn’t have any option but to buy US Treasury Bonds.

AH-C: What about other countries’ bonds such as Japan or EC?

MW: These are a drop in the ocean and both the Yen and the Euro have huge issues of their own.

AH-C: What about gold?

MW: The gold market is small and thin, which means China cannot buy enough to make a difference and so the only way it can increase its exposure is by driving the price up.  This rather defeats the object of the exercise.

AH-C: What happens if the US Dollar collapses? I mean China surely won’t continue to buy US Treasury bonds if the value of the Dollar collapses?

AT: If Obama doesn’t take some action to address the US deficit, the dollar has to collapse – eventually. Look at how the Romans kept on printing money (by reducing the dinar from pure silver to a metal compound containing no silver) with the inevitable result.

AH: Yes but that took 400 years!

MW: That’s my point: this unhealthy relationship will last a lot longer than you think; beyond our lifetimes at least and if you are bearish about the Dollar, can you please take me through the merits of the Euro, the Yen and the Pound?    (Deafening silence!)

MW: Although the outlook for the Dollar is dire, the outlook for all other major currencies is even worse.

AT: I agree.

AH-C: If J.M Keynes was still alive, I am informed that he wouldn’t be advocating bigger deficits as a way of getting us out of recession.

MW: I’m going to have to trump you Alex. Robert Skidelsky, who knows more about Keynes than any of us, is adamant that Keynes would support the continuation of high deficits!

AH-C: Bowled middle stump!

AH-C: Moving on now to Europe. It is clear that European governments led by Mrs Merkel are trying to rein in expenditure. Whilst the manufacturing economies of Germany (and to a lesser extent France) are reasonably sound, their banking systems are not. They have lent huge sums of money to the Latin underbelly of Euro Europe in the belief that being Euro denominated made them safe loans. At least Euroland is trying to deal with its fiscal deficits; if they succeed, then arguably, the Euro will survive; Robbie what do you think?

RH: My view is simple, without political union, monetary union won’t work. I think we’ll see Club Med (Portugal, Italy, Greece and Spain) leave the Euro, leaving the Northern countries in a single currency of their own.

MW: Yes, I can’t see the citizens of Germany putting up with the situation for much longer. There is no way the Greek government can ever repay Germany the money it has borrowed. Germany might just as well give this money to Greece and possibly Spain and Italy as well!

AT: You have to say that Ireland is one of the few governments in Euroland which has properly embraced the business of cutting public expenditure. And of course you know why? The Irish understand that the price of a good party is a hangover – but they also know better than most that after the hangover comes another good party!

AH-C: I think there are still member states waiting to join the Euro – for example the Czech Republic and Poland – do you think they will join and if they do, does it matter?

MW: The EC would be insane to accept any new members without very good economic credentials. And there is zero chance of Britain joining.

AH-C: So we think the Euro is doomed?

MW: Yes, though when, I don’t know.

AT: I think so too, though don’t underestimate Brussels wish to try and keep the corpse breathing for as long as possible.

MW: The Euro project is domed without political union.

AH-C: We are led to think that it is only the British that are opposed to a single European currency. Sarah and I have just come back from a weekend in Berlin – believe me the Germans are no lovers of the Euro!

RH: The EU and the Euro were partly a reaction to two world wars. It isn’t clear as to whether young Brits know or care much about European history. I read in the Daily Mail (so it must be true!) that after asking children in an English primary school if they’d heard of Hitler, most of them thought he was a football manager.

AH-C: Can we now turn our thoughts to the UK? The new coalition’s budget was politically adroit but economically suspect; suspect because it’s deeds and not words that count. Has Cameron got the guts to make the cuts that appear to be necessary? Can the coalition survive in the face of strong and entrenched opposition?

RH: The coalition should be given credit for (a) recognizing the depth of the problem and (b) seeking to take the necessary steps to get Britain out of debt.

AT: And the currency markets are giving us credit too – the pound has had a decent run.

MW: The government has to stick to its guns. Do you remember Geoffrey Howe? His austerity budget of 1983 caused an outrage amongst Conservatives and economists alike; Howe was deeply unpopular at the time but, as it turned out, he was right and “they” were all wrong; an austerity budget at this time is what’s needed.

AH-C: I listened recently to a speech by Merryn Somerset Webb, editor of MoneyWeek, in which she likened the amount of money in circulation to water in a reservoir; topping up the reservoir with more water (cf printing more money) won’t necessarily result in more water flowing into peoples’ homes if they don’t turn their taps on (cf the extra money just stays within the banking system). So it is with money: if the money doesn’t get through to consumer expenditure, then it doesn’t matter how much money the Bank of England prints, the economy suffers and, in all likelihood and rather like Japan, there is deflation of prices. What do you think is going to happen here with inflation or deflation and interest rates?

AH: With massive job cuts round the corner, I don’t think inflation is going to be a problem. My guess is that interest rates will be staying low for at least another 18 months.

RH: Yes and no! I think much depends on the people’s reaction to the Coalition’s proposed public sector cuts. If the reaction is hostile – like the Greeks – then the government’s response may be more quantative easing. This in turn would be inflationary and if on top of this, Chinese workers start to demand higher wages (back to China again!), this will also result in higher prices. So I think inflation continues to be a real threat.

AH-C: OK, gentleman, let’s bring this altogether and talk about markets – Robbie, what are your thoughts?

RH: I continue to like “infrastructure”, emerging markets and stocks involved in “water” and “agriculture” (the world is short of these commodities).

AT: I think in this downturn, this is a classic time to look for companies with a good story, strong cashflows and safe earnings. For safe earnings I include “utilities” so long as they are regulated in a way that allows them to raise prices in line with inflation.

MW: I couldn’t agree with you more about it being a great time to invest in good companies. Personally, I am against bonds – the returns are awful and they are also at risk from inflation. At Independent, we have concentrated on two categories of company. The first category is cyclical companies with strong balance sheets such as Aggreko, the retailer Supergroup, engineering stocks such as Renishaw, recruitment companies and yes, the best house builders! The second category is defensive businesses with good yields such as the tobacco companies, pharmaceutical companies and non life insurers. I also like “utilities”, not least because a number of them are now selling at depressed valuations.

AH: I had noticed that the Persimmon share price has bounced back – given the recession, I’m amazed.

MW: Persimmon is a brilliant example of how to cope with recession. They have reduced their annual wage bill by 25%, reduced their debt from £1.2 billion to £200 million without having to raise new equity and yet they still have “eight year Landbank”. There are lots more good corporate stories out there.

AH-C: Thanks very much everyone. As an investor who is no longer at the coalface (managing people’s savings), I am a tremendous fan of well managed funds; it is impossible for private investors to know exactly what’s going on; I like to invest with fund managers who have a really good grip of sound investment principles and leave them to worry!

Editor’s note

These minutes will be posted on our website (www.hamilton-financial.co.uk). In the meantime, if you have enjoyed reading these investment thoughts and you would like our advice on where to place your savings, please don’t hesitate to get in touch.

Andrew Hamilton FCA CTA Cert PFS

anh@andrew-hamilton.co.uk

0131 315 2469