Estate planning update

Inheritance tax

Although HMRC's new inheritance tax toolkit is 'aimed primarily at helping and supporting tax agents and advisers for whom inheritance tax accounts do not make up a significant part of their work', specialist probate practitioners will also welcome the guidance in this toolkit. It starts with a two-page checklist listing what the revenue expects you to investigate or consider when completing the IHT 400 return. The subsequent pages explain where concerns arise over each checklist item in turn and '“ under the heading 'Mitigation', which is a clear warning that non-compliance may be penalised '“ indicates what research or investigation the revenue regards as appropriate.

The toolkit is essentially practical rather than technical. While emphasising the identification and valuation of assets and liabilities, it also reminds the adviser to check that the right questions are asked. 'It is easy to assume that your clients understand what details are required because they do not question a statement, or ask for clarification.' 'Beneficial interest' is lawyer-speak and means little to the man in the street. The revenue highlights the common misconception that putting assets into the names of parent and child reduces the parent's assets (an issue arising not exclusively in a tax context: see Williams v Lawrence [2011] EWHC 2001 (Ch), commented on in the wealth management update in Solicitors Journal 155/41, 1 November 2011).

The toolkit will be useful both for practitioners and for the intelligent non-lawyer client who wants to do as much as possible of the work him or herself.

Solicitors' liability

In Vinton v Fladgate Fielder [2010] EWHC 904 (Ch), it was held that the deceased's family solicitors could be sued by her estate for an unsuccessful pre-death tax planning exercise involving the reorganisation of the family company (see wills and probate update, 154/40, 26 October 2010). In Mason & Others v Mills & Reeve [2011] EWHC 410 (Ch), the solicitors who had handled the sale of the family company were held not liable to compensate the estate for the extra tax payable when their client died shortly afterwards.

The two cases are an interesting contrast; Vinton was not cited to the High Court judge in Mason.

Mason concerned a successful entrepreneur, Mr Swain, who died less than a month after the sale of his company, Swains International plc. Mr Swain had had a heart attack six years previously, and was in poor health, but his death was sudden and unexpected during a routine heart procedure. Had he still owned the company at his death, his shares would have qualified for 100 per cent inheritance tax relief, and would have been uplifted to probate value for capital gains tax. As it was, the cash proceeds of sale were subject to IHT in full, and the gain on sale was also subject to CGT. The executors of Mr Swain's estate claimed that the solicitors who handled the buy-out should have advised Mr Swain on the potential adverse IHT and CGT consequences if he died after the company sale. If he had received that advice, they said, he would have delayed the sale until after the planned heart operation.

At a preliminary hearing, the court decided that the claim could only succeed if the defendant solicitors knew of the heart procedure. It later emerged that the corporate finance partner had been blind copied into a string of emails, one of which mentioned the heart procedure, implying it was routine and saying nothing about any risks. That email was never copied to the tax department.

Mr Swain and his family had not appreciated that the solicitors handling the sale were not offering advice on all the potential IHT and CGT consequences. The court criticised the wording of the solicitors' retainer letter, which stated that they were to provide 'general tax advice'¦ in relation to the tax liabilities arising in respect of the transaction structure', but not advice on the parties' 'own personal financial and tax planning positions'.

The letter should have indicated clearly the limits of the advice and that IHT would not be covered. Nevertheless, given that they had heard of the heart procedure only by chance, the solicitors had no duty to provide advice on how to mitigate the tax consequences of Mr Swain's death. Delaying the sale was not the only mitigation strategy, reinvesting the proceeds in alternative business property would have preserved the IHT relief. It was pure speculation what Mr Swain would have chosen to do if he had taken private client advice.

After Vinton, this decision will come as a relief to full-service law firms that handle corporate transactions without involving estate planning specialists. Both decisions demonstrate how important it is for solicitors' retainer letters to say what will be excluded as well as what will be included not be covered.

The two decisions can be distinguished on their facts. In Vinton the solicitors knew the corporate reorganisation was primarily intended to reduce the terminally-ill shareholder's exposure to IHT. They were the family solicitors who gave (and charged for) trust and tax advice. Their error undid part of the tax saving.

The court decided a breach of duty claim might succeed. In Mason the solicitors were not the family solicitors, were advising on a commercial transaction that was not specifically tax-driven and had no reason to expect the main shareholder's imminent death. The court accepted no breach of duty had occurred.

Rectification

Happily, will-drafting errors can be cured by rectification under section 20 of the Administration of Justice Act 1982, as was shown in Austin v Woodward and another [2011] EWHC 2458 (Ch).

Mrs Austen's solicitors used new standard precedents when updating her will in October 2003, but made a mistake in drafting the clause dealing with the family home. The court accepted that Mrs Austen intended to leave this in trust for her husband for life and then to her daughter outright. However, in the will, the entire gift was conditional on Mr Austen surviving for 28 days (which he failed to do) and, consequently, without rectification, the house would have fallen into residue.

The use of the new will precedents had produced a clerical error that was rectifiable so that the will embodied the deceased's true intentions. The court admitted the claim notwithstanding that it was brought out of time, because the judge was satisfied that the error did not come to light until several months after probate was granted.

Execution of wills

Two recent cases have demonstrated how the court inquires into the circumstances in which a will is signed and how it is prepared to interpret the evidence presented to it.

In Barrett v Bem, re Lavin deceased [2011] EWCH 1247 (Ch), the validity of a deathbed will in favour of the testator's sister Anne was challenged by other family members who would have benefited on intestacy.

At the first hearing Vos J found that the testator knew and approved the will, but that the signature on it was not his. The case came back to court with new evidence from the nurses who had witnessed the will. They now said that Anne had guided the testator's hand. The handwriting expert was categoric that this was not a guided signature.

The court decided (although none of the parties had put forward this version of events) that Anne had actually signed the will at the direction of the testator. Under section 15 of the Wills Act 1837, she would have forfeited all benefit from the estate if she had been an attesting witness. However, strangely enough, there is nothing in the Act to prevent a person who signs the will at the direction of the testator from being a beneficiary of it.

In Ahluwalia v Singh & Others [2011] All ER (D) 113, the presumption of due execution was displaced by evidence from one of the attesting witnesses that he had been the only person present with the testator when the will was signed. The other witness whose signature appeared on the will first confirmed this version of events but later tried to retract his statement. The court assessed the credibility of the two witnesses and decided in favour of the first witness. The will was held to be invalid.

Costs in probate disputes

Charles Dickens, whose bicentenary we celebrate on 7 February 2012, would have recognised the Court of Appeal's observation in Shovelar & others v Lane and others [2011] EWCA Civ 802, that 'if the claimants are right in their assessment of their costs, then, even without a success fee, the costs incurred by them exceed the sum over which battle has been joined. The great British public must think that something has gone wrong somewhere.'

Nevertheless, the court allowed appeals increasing the defendants' liability to pay the claimants' costs and requiring the executors of the estate, two of whom were solicitors, to pay costs personally and without recourse to money from the estate.

The costs appeal followed a hard-fought probate dispute over mutual wills made by a married couple under which both his family (the Stallwoods) and hers (the Shovelars) were to benefit. The Shovelars succeeded in establishing that that the husband could not exclude them as beneficiaries of his estate after his wife's death.

The estate was worth around £134,000, whereas the Shovelars' solicitors sought costs of £320,000, prompting Lord Justice Ward's outraged comment above. However, the solicitors had made it clear to the other side that they were acting under a contingency fee agreement, and repeatedly proposed mediation. All proposals were rejected or ignored. The claimants made a part 36 offer to settle the case in March 2009. No response was forthcoming.

At trial they were awarded a bigger sum than their previous part 36 offer. The Court of Appeal held that their assessed costs after the rejection of the March 2009 offer to settle should be paid on the indemnity basis. The court also held that executors had failed to remain neutral, with the inevitable consequence that they forfeited their right to take costs from the estate.