Update: trusts, wills and probate

Setting aside on grounds of mistake

In Ogden v Trustees of RHS Griffiths 2003 Settlement [2008] WTLR 685, the court had to decide whether certain voluntary transactions could be set aside on the grounds of mistake. Mr Griffiths (Mr G) and his wife took tax planning advice to mitigate inheritance tax (IHT) on their respective deaths, and as a result, in April 2003 transferred shares into a short-term discretionary trust with a reverter to settlor. On the following day Mr G and his wife granted a deferred lease over their matrimonial home to another settlement in which their children had life interests. In February 2004 Mr G assigned his reversionary interest in the discretionary settlement to a third trust of which he was not a beneficiary. The intention behind the transactions was that if Mr G survived the assignment of the reversionary interest by seven years its value would fall out of his estate for IHT purposes. Similarly there would be a tax saving if he and his wife survived the grant of the lease, which was a PET, by seven years. In the event, Mr G was diagnosed with cancer in the autumn of 2004 and died in April 2005 with the result that all three transfers were chargeable transfers for IHT and his executors were seeking to set aside the transfers on the grounds that they were made under a mistake.

The claimants primary argument, that Mr G had made a mistake about the effect of the transaction, failed. There had not been any mistake as to the fiscal consquences of either the transfer of shares into the settlement, the grant of the deferred lease, or the transfer of the reversionary interest. All operated as intended '“ what was unexpected was Mr G's early death. However the position was different as regards the claimants' alternative argument that Mr G had made an operative mistake of fact as to his health when he entered into the transaction. A serious mistake about an existing fact was enough to bring the equitable jurisdiction into play. The claimants had to show that if Mr G had known the true facts he would have acted differently. The medical evidence did not show Mr G to be suffering from cancer in April 2003 but suggested that he was by February 2004. As there was no evidence that Mr G had made a mistake as to his health when he entered into the first two transactions, or that if he did he would have acted differently, the court declined to set these aside. However when he assigned his reversionary interest he did have cancer but was unaware of it. Had he known the true position he would have known that he was unlikely to survive for three years and would not have acted as he did. On this basis the court agreed that the assignment of the reversionary interest was voidable and would be set aside.

Hasting Bass principle

Winton Investment Trust [2008] WLTR 553, a case heard in the Jersey Royal Court, was another attempt to have a transfer into trust set aside this time applying the principle in Re Hastings Bass. The settlor established a discretionary trust under Jersey law, the beneficiaries of which included himself and his minor children, and assigned by way of novation to the trustee, his rights in an employee share scheme.This resulted from tax advice given by his accountants from an income tax perspective which did not take the IHT implications into account. It later came to light that in making the transfer the settlor had made a transfer of value that was immediately chargeable to IHT thus incurring a substantial liability. Neither party would have entered into these transactions had they realised that there would be an IHT charge and therefore the trustee applied to the court to set aside the novation agreements using the Re Hastings Bass principle. It was clear that the trustee did have a duty to consider the IHT consequences of the transaction but had not done so because of the inadequate advice received, and that the trustee would not have accepted the additions to the trust fund had it appreciated the fiscal consequences. On this basis the court applied the Hastings Bass principle and set aside the novation agreeements.

Disposal under s 86 TCGA

The case of Coombes v HMRC [2008] WTLR 439 concerned the operation of s 86 TCGA 1992. In 1991, a Swiss resident settlor made a discretionary settlement of which Mr Coombes (Mr C) and his wife and children were beneficiaries. The trustees were resident in the Isle of Man. The settlement held the only two shares issued in a company, Rose Lodge(10m) Ltd,( Rose Lodge) which at the time held no assets. In 1994, Mr C provided £700,000 which was used to buy a property in Cornwall which had planning permission for development. In the following year the land was sold at arms length to a development company for US$2.2m but completion was deferred for two years, and Rose Lodge essentially financed the development. In May 2004 the Inland Revenue assessed Mr C to CGT on trust gains under s 86 TCGA 1992 on the basis that he had provided £700,000 to enable the company to purchase the land, and was thus a settlor in relation to the discretionary trust. By virtue of s 13 of the 1992 Act, the gain accruing to Rose Lodge being a non resident company in which the trustees owned shares, was to be treated as accruing to the trustees. Mr C's appeal to the General Commissioners was unsuccessful and he appealed to the High Court. Rattee J said that the only finding which the General Commissioners could properly have made on the facts was that Mr Coombes provided the £700,000 to Rose Lodge. The land disposed of was not at any stage held on the trusts of the settlement and was not settled property. Therefore there was no disposal under s 86(1)(e) and the assessment was made on an incorrect basis.

Variation of Trusts Act

Re RGST settlement, Ridgewell v Ridgewell [2008] WTLR 527 was an application under the Variation of Trusts Act 1958 made by the trustees of a very substantial settlement, worth around £55m, known as the RGST. Anthony Ridgewell (Mr R) was the 36-year-old tenant for life of the settlement and had a wife who was a year younger, and three children aged seven, five, and two. Under the terms of the settlement the trustees had power to advance capital for the maintenance, education and benefit of Mr R's children. After Mr R's death and in default of appointment by him the trust fund passed equally to his children living at his death who attained the age of 30 with a substitutional provision if any should predecease. The trustees applied to vary the terms of the trust so that Mr R's wife would take a life interest after his death and so that the power to advance capital would also be exercisable during her lifetime.

The motive for the variation was the avoidance of the IHT which would otherwise have been payable on Mr R's death and to enable capital advances to be made to the children during his widow's lifetime.

While it would have been possible to reduce the tax payable on Mr R's death by making outright advances to the children now, the trustees understandably felt it inappropriate to make outright gifts of approaching £2m each to children aged seven and under. In the High Court, Behrens J approved the variation on behalf of the children and unborn children. While the variation would theoretically postpone the children's interests vesting, the greater flexibility that it gave the trustees to enable IHT savings to be made meant that it was for their benefit.

Inheritance tax

Trustees of the Nelson Dance Family Settlement v HMRC [2008] SpC 682, in which, allowing the appeal, the Special Commissioner agreed that business property relief could apply where there is a reduction in the value of the relevant business property (by virtue of the waiver of business assets) without an actual transfer of the business or an interest in the business. There is no requirement that the assets (as distinct from the business) have to be owned for two years. In the case itself business property relief was given on the non-agricultural (development) value of a farm, two cottages and part of another farm, which were transferred to a settlement without any transfer of the business or any part of it having taken place.

McCall & Another (PRs of McClean deceased) v HMRC [2008] SpC 678 '“ in which the Special Commissioner decided that the letting of fields for grazing under a 'conacre' agreement was a business, but one that consisted wholly or mainly of holding investments to which business property relief did not, therefore, apply '“ with the result that except for agricultural value of £165,000, land valued at £5.8m was subject to inheritance tax. Although 'conacre' is specifically an Irish tradition, the decision could have implications for small farms with potential development value which does not qualify for agricultural property relief.

Testamentary capacity

Scammell v Farmer [2008] EWHC 1100 (Ch) [2008] All ER (D) 296. In 1995 the testatrix made a will leaving the property in which she lived to her grandchildren (the claimants) and the remainder of her estate to her daughter, the claimants' aunt (the defendant). Early Alzheimer's was diagnosed in 2001. In January 2003 the defendant, having become aware and upset by the terms of the 1995 will (she had given the property to her mother), told her mother this, and visited a solicitor with her. The upshot was a new will under which the bulk of the estate was left to the defendant who destroyed the original and all copies of the 1995 will. Following the testatrix's death in July 2003, the claimants challenged the validity of the 2003 will. On the three issues that fell to be determined, namely (i) testamentary capacity (ii) knowledge and approval and (iii) undue influence, the judge decided:

 The question of whether the testatrix had capacity should be determined under general common law principles rather than the test in the Mental Capacity Act 2005. The Act gave the courts powers to make wills for persons who lack capacity. The question of whether a particular testator had capacity when a will was made was outside the scope of the Act. To hold otherwise would be to give the Act unintended retrospective effect.

 Based on the evidence, the testatrix had knowledge and approval in relation to the 2003 will. Mild or moderate dementia did not necessarily mean a lack of testamentary capacity (Hoff v Atherton [2005] WTLR 99).

 Due to the suspicious circumstances in which the 2003 will was signed (instructions communicated by the defendant who paid the solicitors' bill and destroyed the earlier will) the onus was on the defendant to disprove undue influence '“ which she had been able to do.

The 2003 will was therefore upheld.

Whether deceased died intestate

Kwawagen v RNLI [2008] EWHC 1268 (Ch) [2008] All ER (D) 76. The question of fact at issue in this case was whether the deceased had died intestate, as alleged by his widow and daughter, or had made a will in favour of certain charities. The evidence came from:

 a solicitor who clearly recalled drawing up a will for the deceased in 1974 '“ although her file was no longer available.

 two neighbours, including a non-practising solicitor, who had helped the deceased's daughter go through her father's papers and recalled seeing an original will leaving the whole of the deceased's estate to the defendant charities.

The court held that it was highly improbable that the witnesses, who had no personal interest in the outcome, would independently allege that the deceased had made a will in favour of the charities where none existed. On the balance of probabilities, a will leaving the deceased's estate to the charities had been drawn up and found by the deceased's daughter. The court therefore pronounced in favour of that will.

Intention of the parties

Glass v Segermann [2008] All ER (D) 15 is another case which shows the courts' willingness to order rectification where there is clear evidence that the intention of the parties has not been implemented.

The deceased had inherited his late wife's share of the property in issue. In 1989 he executed two deeds. First, a deed of variation settling a share of the property worth £100,000 on trusts for his issue; secondly, a deed of gift in favour of his son (the defendant). The deed of gift was expressed to be for £152,000 which, based on an erroneous estimate of the value of the property, and taking into account the £100,000 settled by the deed of variation, represented a third of the remaining value. At the same time the deceased made a will leaving two-thirds of the property to his other two children.

At the date of death of the deceased the property was worth £1.1m which meant a difference of more than £200,000 (before tax) between the defendant's entitlement under the deed of gift and a one-third share of the property. Michael Furness QC, sitting as a deputy judge of the Chancery Division, agreed that the deceased's intention had been to give his son a one-third share of the property undiminished by the value passing under the deed of variation so that all three children benefited equally and that the deed of gift failed to give effect to that intention. Rectification was therefore ordered.

They include: Burden & Burden v United Kingdom [2007] 44 EHRR 51 '“ the widely reported appeal to the Grand Chamber of the European Court of Human Rights which decided (15'“2) that the UK government is entitled to give preferential tax treatment to spouses and civil partners and that refusing an IHT exemption to cohabiting sisters did not amount to unfair discrimination in breach of their human rights.

Practice Points

In its April 2008 newsletter, HMRC mentions that unnecessary applications for references and letters reporting amendments to the value of excepted estates are diverting resources away from estates that need HMRC attention. HMRC reminds practitioners that it is necessary to apply for a reference (now possible online) where they are certain that there will be tax to pay on delivery of the account '“ but not where no tax is due, including following a claim to transfer the unused nil rate band. There is no need for amendments to excepted estates to be reported unless as a result of the amendment the estate is no longer excepted or there is a liability to IHT. See www.hmrc.gov.uk/cto/newsletter.htm.

HMRC has also reminded practitioners of the importance of quoting references and, especially for will trusts, full names (not only initials) of the deceased and the date of death.

Finally, HMRC has issued draft guidelines on the transfer of the nil rate band with a view to updating its IHT manual. See www.hmrc.gov.uk/cto/iht/transfer-unusednet.htm.