Taxing transfers

The popularity of inheritance tax (IHT) planning has increased over the past few years. The Treasury has stood firm in the face of demands to raise the IHT threshold and with property prices continuing to rise, more and more people are finding themselves in possession of an estate which will be liable to tax after their death (the current threshold is £300,000).

One of the ways in which IHT can be avoided is by the making of a Provisionally Exempt Transfer. Such transfers may take a variety of forms but to escape inheritance tax liabilities a transferor must survive for a minimum of seven years after the transfer is made.If the transferor dies before this seven-year period has elapsed the property transferred will fall back into his estate and will be liable to tax at 40 per cent.

As personal injury practitioners' we are all familiar with the conventional Fatal Accidents Act (FAA) claims, whereby dependency claims are advanced by surviving spouses and children on the basis of the lost income or services of the deceased. It remains less clear whether the terms of the FAA are broad enough to encompass claims for financial loss sustained in circumstances where a transfer has failed as a result of the premature death of the transferor.

Premature death

Can, for example, a claim be advanced by adult children if their elderly mother is killed in a car accident, prior to the expiry of the seven-year period, thereby diminishing the value of their inheritance. There seems no good reason why such a claim should not succeed. So when proceedings were issued the claim, which was in excess of £100,000, was settled in full.

One first point of note is that a claim in respect of inheritance tax liabilities cannot be made on behalf of the estate under the Law Reform (Miscellaneous Provisions) Act (LRMPA) 1934, as claims under this Act must be in respect of a cause of action vested in the deceased at the time of his or her death.

What the estate is doing under the LRMPA 1934 is pursuing a claim which could have been pursued by the deceased had he/she survived. The loss, or cause of action, is personal to the deceased, and, subject to the express statutory exception made in respect of funeral expenses (section 1(2) (c)), losses to the estate consequent on death are to be disregarded.

IHT liability

The liability to pay inheritance tax is a 'loss' suffered by the estate and not a loss to the deceased '“ see Daniels v Thompson [2004] EWCA Civ 307, a solicitor's negligence case in which the court held that the deceased had not suffered any loss as a result of her solicitors' negligence as she did not have, and could never have had, any liability to pay inheritance tax.

The Fatal Accidents Act 1976 (FAA) provides as follows:

'1(1) If death is caused by any wrongful act, neglect or default which is such as would (if death had not ensued) have entitled the person injured to maintain an action and recover damages in respect thereof, the person who would have been liable if death had not ensued shall be liable to an action for damages, notwithstanding the death of the person injured.

1(2) '¦.every such action shall be for the benefit of the dependants of the person (the deceased) whose death has been so caused.

1(3) In this Act 'dependant' means'¦.(e) any child or other descendant of the deceased.

3(1) In the action such damages, other than damages for bereavement, may be awarded as are proportioned to the injury resulting from the death to the dependants respectively.

4 In assessing damages in respect of a person's death in an action under this Act, benefits which have accrued or will or may accrue to any person from his estate or otherwise as a result of his death shall be disregarded.'

The wording of the 1976 Act is therefore very broadly framed and at face value would appear to encompass any injury or loss suffered by a dependant (including any child or descendant) which results from death.

In practice, however, claims made under the 1976 Act has been restricted by a series of judicial decisions which have considered the proper application of the above words.

Judicial decisions

Thus in Davies v Powell Duffryn [1942] AC 601 Lord Wright said of an earlier, but similarly worded, FAA (the 1846 Act):

'The claim is for. . . injuriously affecting the family of the deceased. It is not a claim which the deceased could have pursued in his own lifetime, because it is for damages suffered not by himself, but by his family after his death. The Act provides that the action is to be for the benefit of the family and (the judge) is to give such damages as may be thought to be proportioned to injury resulting to such parties from the death. The damages are to be based on the reasonable expectation of pecuniary benefit or benefit reducible to money value'.

Further in Malyon v Plummer [1964] 1 QB 330 Lord Justice Diplock made the following observations about the wording of the FAA: 'It has been long established, despite these wide words, first that the pecuniary loss to the persons for whose benefit the action is brought is the only damage

recoverable (see Blake v Midland Railway Company [1852] 18 QB 93) and secondly, that the pecuniary loss recoverable is limited to the loss of benefit in money or money's worth which if the deceased had survived, would have accrued to a person within the defined relationship to the deceased and would have arisen from that relationship and not otherwise (Burgess v Florence Nightingale Hospital for the Gentlewomen Management Committee [1955] 1 QB 349).

Both of the above authorities were considered in the case of Davies and others v Whiteways Cyder Co Limited and another [1974] 3 All ER 168, which appears to be the only reported case considering directly the validity of inheritance tax claims. In Davies the deceased made certain gifts and dispositions to provide for his wife and son to reduce the amount of estate duty payable on his death.

Less than seven years later the deceased was killed in a motor accident in consequence of the defendant's negligence.

As a result of the deceased's death within the seven year period, estate duty amounting to £17,000 became payable on the gifts and dispositions made to the wife and son.

In an action against the defendants by the deceased's executors on behalf of the wife and son, the defendants contended that the wife and son were not entitled to recover the amount of estate duty which had become payable on the deceased's death under the FAA 1846 and 1959, since the estate duty was not 'an injury resulting from death' within the meaning of the Acts in that:

(i) the payment of the estate duty could not be described as the loss of the expectancy of future pecuniary benefit from the deceased, and;

(ii) in any event it was not a loss of a benefit accruing from the relationship of husband and wife or father and son but solely from the relationship of donor and donee.

Mr Justice O'Connor rejected both these arguments and held that the £17,000 estate duty was a benefit which would have accrued to the wife and son from the deceased, but which as a result of his death had had to be paid to the Revenue.

The payment of the estate duty therefore represented the loss of a benefit which would have accrued to the wife and son if the deceased had survived.

Furthermore it could not be suggested that the loss did not arise out of the relationship between the deceased and the wife and son, and the benefits reasonably anticipated did not cease to be recoverable because they were voluntary. The loss was therefore held to be 'an injury resulting from' the deceased's death, and was recoverable, subject to a £500 reduction to allow for the fact that the deceased might not have survived for the remaining period in any event.

Although Davies v Whiteways Cyder is only a first instance decision it lends strong support to the basic proposition that a loss occasioned to dependents by increased estate duties (which would have been avoided if the deceased had survived) is capable in law of amounting to an 'injury resulting from' the deceased's death within the meaning of the FAA 1976.

Changing considerations

It is perhaps surprising that the issue has not arisen for further consideration since Davies but with the rise in popularity of provisionally exempt transfers it is likely to be only a matter of time before the matter comes before the courts again.

One wonders, for example, whether it could be argued that some discount ought to be applied to the loss claimed to reflect accelerated receipt of the sum transferred, or whether such an argument would fall foul of section 4 of the FAA, which requires that benefits which have accrued to any person as a result of the death of the deceased are to be disregarded.

Could it be said that section 4 of the FAA precludes such inheritance tax claims altogether? Such arguments await further judicial consideration. For the moment, however, in the absence of conflicting authority, the initiative would seem to lie firmly with the claimants.