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by • April 19, 2010 • Inheritance TaxComments (0)567

Negligence and Inheritance Tax Planning

NOTE: This article was published in April 2010 and reflects the law as it stands on the date of publication and not at any later date.

Introduction

A problematical area is whether a professional, giving tax advice to a client in respect of a lifetime transaction, may be liable to the personal representatives or beneficiaries of the client’s estate, in the event that the tax advice is negligent, causing additional tax to be paid in the client’s estate.

There have been three recent cases in this area: Daniels v Thompson [2004] EWCA Civ 307, Rind v Theodore Goddard [2008] PNLR 459 and Vinton v Fladgate Fielder [2010] EWHC (Ch) 904.

In both Daniels v Thompson and Rind v Theodore Goddard the negligence was essentially the same. The client made a lifetime gift in the hope of surviving for 7 years from the date of the gift with the result that the gift itself would be an exempt transfer and the value of the gift would not form part of the donor’s IHT estate on death. The solicitors failed to take any account of the gift with a reservation of benefit provisions in the Finance Act 1986 (Daniels), or failed to structure the gift transaction in such a way as to avoid a reservation of benefit (Rind). Gifted property which is subject to “a reservation of benefit” by the donor on the donor’s death is treated as forming part of the donor’s estate for IHT purposes, whether or not the donor has survived for 7 years from the date of the gift. In both Daniels and Rind, it was alleged that the consequent IHT liability could have been avoided, and there was a claim by the executors (Daniels) or by the residuary beneficiaries (Rind) to recover damages equal to that liability from the solicitors.

In Vinton v Fladgate Fielder the defendant solicitors advised in respect of a lifetime transaction (the allotment of shares in a company to one of its directors (“D”)) on the basis that the allotted shares would attract business property relief in D’s estate. Due to the alleged negligence of the solicitors the shares were allotted in such a way that relief was not available in respect of most of the allotted shares. A claim was made by the executors and beneficiaries of D’s estate to recover the consequent IHT liability, on the basis that such liability could have been avoided if the shares had been allotted in a different way.

 

Overview

In any case where it is alleged that the negligence of a solicitor, or other tax adviser, has caused an avoidable IHT liability to arise in the estate of the deceased client, difficult issues arise as to: (a) who the claimants should be; and (b) what is the correct cause of action.

It might be thought that the relevant loss has been suffered by the executors or personal representatives: the estate has been diminished by the IHT liability. On the other hand, it is the residuary beneficiaries who will personal suffer a diminution in their entitlement, whereas the personal representatives will suffer no personal loss.

There are a number of possibilities:

 

(1)  A claim by the executors of the estate of the deceased client on the basis that the tax adviser owed a duty in contract to the client to give competent IHT advice for the benefit of the client’s estate; and that the benefit of such a contractual claim devolves on the executors on the death of the client.

 

(2)  A claim by the executors on the basis that the tax adviser owed a duty of care in tort to the client to give competent IHT advice for the benefit of the client’s estate; and that the benefit of such a claim in tort devolves on the executors on the death of the client.

 

(3)  A claim by the executors on the basis that the tax adviser owed to them, in their own right, a direct duty of care in tort not to cause loss to the estate.

 

(4)  A claim by the residuary beneficiaries of the estate that the tax adviser owed to them a duty of care in tort not to cause loss to their entitlements. Such a claim is usually advanced by reference to White v Jones [1995] 2 AC 207 where the House of Lords held that a solicitor could owe a duty of care to the intended beneficiaries of a client’s Will, which was not executed prior to the client’s death due to the negligence of the solicitor. However, the beneficiaries could also claim (on appropriate facts) that they have directly relied on the solicitor’s advice thus justifying the imposition of a duty of care.

 

(5)  A claim by the residuary beneficiaries in contract that they were, in effect, clients of the tax adviser to whom a contractual duty was owed.

 

Problems/objections

 

(1)  Contractual claim by executors

The main objection is that the client suffered no loss during his lifetime, or only a nominal loss, since the client was never subject to any liability to IHT. The personal representatives have, however, suffered a substantial loss (the liability to IHT) after the client’s death. Can it be said that the cause of action devolving on the personal representatives on the client’s death carries with it the right to claim a substantial loss arising after death, when the client had only suffered a nominal loss during his lifetime?

Secondly, there may be a limitation problem. The cause of action in contract is complete even before any loss has been suffered, with the result that time begins to run from the date of the defective advice. The negligence may only come to light after the client’s death, more than 6 years after the date of the defective advice.

 

(2)  Claim in tort by executors derived from deceased client

The objection is that the deceased client had no liability to IHT during his lifetime, with the result that he had suffered no loss during his lifetime. Since a cause of action in tort is not complete until loss has been suffered, a cause of action in tort, in respect of the executors’ IHT liability arising post-death, cannot devolve upon the executors on the client’s death (Daniels v Thompson).

 

(3)  Claim in tort by executors in their own right

The objection is that the executors have suffered no loss in their capacity as executors since they can recover any IHT payable by them out of the estate. Also, there may be insufficient proximity between the solicitor and the executor: the executor may not even have been appointed when the tax advice is given.

 

(4)  Claim by residuary beneficiaries on basis of White v Jones

One objection is that White v Jones only relates to negligence in the context of Will making, and not to negligent tax advice, or failure to give tax advice, in respect of a lifetime transaction. Another substantial objection is that in White v Jones the beneficiaries were awarded a cause of action because there was no one else who could sue: the deceased client was dead, and the estate itself had suffered no loss. There was, therefore, a “lacuna”. However, if the executors can claim in contract or tort, there is no lacuna, and no basis for giving the residuary beneficiaries a cause of action.

 

(5)  Claim by residuary beneficiaries on basis that direct reliance and/or clients

 

This may be difficult to sustain on the facts.

 

In Daniels v Thompson the Court of Appeal dismissed a claim by the executors under (2) above, and refused permission to amend to make a claim under (3) above. In Rind v Theodore Goddard the claim was brought by the residuary beneficiaries. The defence was that the executors had a claim in contract or in tort (contrary to Daniels v Thompson) with the result that the residuary beneficiaries should have no claim and/or that the claim by the residuary beneficiaries was statute-barred. It was held to be arguable, for the purposes of a strike out application, that the residuary beneficiaries did have a claim. In Vinton v Fladgate Fielder the executors and the residuary beneficiaries sued, on every possible basis. All their claims were held to be arguable for the purposes of a strike-out application.

 

 

Daniels v Thompson

The leading case is Daniels v Thompson [2004] EWCA Civ 307. In 1989 Mrs Daniels retained the defendant solicitors to give tax planning advice. She gave her house to her son pursuant to advice that the gift would be exempt from IHT if she survived for 7 years. However, she continued to live in the house rent-free until her death in 1998. This meant that she reserved a benefit for IHT purposes, and IHT was payable on her death in respect of the value of the house. This was something of which Mrs Daniels had not been advised. Mrs Daniels’ son issued negligence proceedings in May 2002. His pleaded case was that he was entitled to damages as personal representative on behalf of Mrs Daniels’ estate in respect of a breach of duty owed to Mrs Daniels in giving her defective tax-planning advice. The defendant solicitors asserted that the claim was statute barred since, in effect, the loss arose at the date of the gift, which was more than 6 years before the commencement of proceedings. The claimant claimed that the claim in tort was not statute-barred since no loss was suffered until Mrs Daniels’ death.

The cause of action in contract was clearly statute barred. Any cause of action in tort would, however, only arise when loss was suffered. The pertinent question was, therefore, when the relevant loss was suffered.

However, the Court of Appeal determined the case on more fundamental grounds than limitation. It held that Mrs Daniels had suffered no loss in her lifetime. She was never at any risk of having to pay any IHT. That was a risk to which the estate, and the estate alone, was exposed, since liability to pay IHT only arises on death (para. 34).

Therefore, there was no cause of action which could accrue to her personal representative on her death under s. 1 of the Law Reform (Miscellaneous Provisions) Act 1934. No issue of limitation arose. The argument (to overcome the limitation defence) that the claimant did not suffer loss until the death of Mrs Daniels amounted to an implied admission that Mrs Daniels did not have a cause of action (in which case the pleaded case was bound to fail).

If, however, Mrs Daniels did have a cause of action during her lifetime, then it arose when she relied on the defendant’s advice by making the gift with a reservation. On that alternative basis the claim was statute barred.

 

Alternative claim by personal representatives

An application was, however, made to amend the claim so as to plead that the solicitors owed a direct duty to Mrs Daniels’ personal representatives (as opposed to a duty to Mrs Daniels devolving on her personal representatives on her death). The argument was that the personal representative had obtained a cause of action as soon as Mrs Daniels died when the personal representative became liable to pay additional IHT. In this way it was hoped: (a) to establish a cause of action and (b) to argue that the cause of action was not statute barred since it only arose on the death of Mrs Daniels when the liability for IHT arose.

 

However, the Court of Appeal refused to allow this amendment. In part, this was because the application was made very late in the day, and the costs of allowing an amendment would be disproportionate. However, the application to amend was also rejected on the grounds that the amended claim had no real prospect of success.

 

Damages recoverable by deceased during lifetime

 

However, the Court of Appeal did accept that any legal costs incurred in taking advice, and of any reasonable remedial steps taken to make good the deficiency, are recoverable before death (Daniels v Thompson, para. [36]). Presumably, any tax liability of the client incurred in taking reasonable remedial steps would also be recoverable. To that extent the client has a cause of action during his or her lifetime. It was also accepted that Mrs Daniels might have been able to claim repayment of fees for the performance of services that were worthless, in restitution, on the basis that payment was made for no consideration (para. 40).

 

This may mean that the client has a cause of action during lifetime to recover the costs of taking advice in respect of a failed IHT scheme, and in respect of any remedial steps, even if there is no cause of action in respect of the IHT liability itself. Presumably, however, the client could not claim an indemnity in respect of IHT payable by his estate following death, since the client has no cause of action with respect to the IHT.

 

Contractual cause of action of deceased devolving on personal representatives

 

A contractual claim by the personal representatives was not considered in Daniels v Thompson because such a claim would have been statute-barred. The cause of action in contract arose when the tax advice was given (which was more than 6 years before the commencement of proceedings).

It is not clear whether a contractual claim could have been made in Daniels by the personal representatives if the claim had been made within the limitation period.  In Rind v Theodore Goddard [2008] PNLR 459 Morgan J commented that the Court of Appeal in Daniels did not discuss in any detail a possible claim in contract, nor whether it would give rise to substantial or nominal damages.

 

Morgan J also referred to the case of Otter v Church Adams Tatham & Co [1953] 1 Ch 280  as authority for the proposition that personal representatives may claim substantial damages in respect of a contractual claim, vested in the deceased, measured by the loss which accrues on death. He commented that Otter was not referred to in Daniels v Thompson.

 

It is submitted that, where the claim is, as in Daniels, to recover an IHT liability arising on death, the personal representatives do not have a contractual claim against the negligent solicitor in respect of that IHT liability. Otter is distinguishable. In Otter Mr Otter had lost the opportunity to take a step which would have increased the value of his assets during his lifetime. If he had been advised to disentail, he could have alienated the settled property for value; without disentailment he could not. He had suffered a substantial loss during his lifetime, albeit one that could have been mitigated if he had been aware of the solicitor’s negligence. By contrast, in Daniels Mrs Daniels had suffered no loss during her lifetime by reason of the IHT liability in her estate arising after her death. She was never exposed to an IHT liability during her lifetime.

 

In the Scottish case of Matthews v Hunter & Robertson Ltd [2008] PNLR 35 (a case involving loss to the estate by reason of the solicitors’ failure to effect the Scottish equivalent of severance of a joint tenancy) the Court of Session accepted, for present purposes, that the client never suffered loss, albeit subject to the express reservation that the matter was not free from difficulty.

 

Even if the deceased, and his personal representatives, have or had a cause of action in contract, the limitation treatment of a contract claim would almost always mean that the claim in contract would not be available, since the normal limitation period is 6 years. In many cases, the negligence will only come to light more than 6 years after the breach of contract, i.e. when the defective advice was given.

 

 

Cause of action in tort devolving on personal representatives

 

Daniels v Thompson is authority for the proposition that – since no cause of action in tort accrues to a person unless that person has suffered loss – the client has no cause of action in tort respect of a liability arising on death (such as IHT) during his lifetime. Consequently, no cause of action in tort can devolve on the client’s personal representatives following the client’s death. Mrs Daniels had not suffered any detriment capable of assessment in money terms in respect of her frustrated wish to confer on her son the benefit of a reduction in the IHT liability of her estate.

 

In Rind v Theodore Goddard [2008] PNLR 24 Morgan J referred to a number of cases where a cause of action in tort vested in personal representatives on death (paras. 41 to 44). However, none of those cases related to IHT, which is a liability only arising on death. By contrast, in Clarke v Bruce Lance & Co [1988] 1 All ER 364 (one of the cases cited) it was stated that the client would have had a cause of action during his lifetime, and that his personal representatives would have a cause of action on his death. The client had a cause of action in his lifetime, having suffered loss during his lifetime by reason of the diminution in the value of his property.

 

In conclusion, personal representatives should not be entitled to enforce a cause of action in tort, in respect of IHT payable on death, to which the client was entitled during lifetime. The client had no cause of action in her lifetime, having suffered no loss.

 

 

Claim by personal representatives in own right

 

Daniels v Thompson supports the conclusion that personal representatives themselves do not, in their own right, have a cause of action in respect of any IHT liability arising on death. In Daniels the Court of Appeal refused permission to amend the pleadings to make such a claim, not only because of the lateness of the application, but also on the merits, on the basis that the claimant suffered no loss in his capacity as executor, since he could recover any IHT payable by him out of the estate (paras.  47, 57, 61, 68, 75). The executor may have less to distribute. However, as his only duty is to distribute what comes into his hands, he has suffered no loss. In reaching this conclusion, their Lordships expressly rejected the reasoning of Park L.J. in Macaulay v Premium Life Assurance Lexis, 29 Apr 1999 where there was a claim by executors of an estate in respect of negligent IHT advice. In Macaulay there was a preliminary issue of whether the claim was statute barred (the advice having been acted upon more than 6 years before the commencement of the limitation period). It was held that the claim was not statute barred because the IHT liability only arose on the death of the client, and did not exist before that date. Park J regarded it as significant that the liability to IHT of personal representatives is not a liability imposed on the deceased by statute, but directly on the personal representatives as such. This reasoning was, however, rejected in Daniels v Thompson. The imposition of liability on the personal representatives was no more than a reflection of the fact that it cannot be imposed on the deceased (para. 61).

 

However, the statements in Daniels v Thompson that the personal representative would not have suffered loss by payment of additional IHT (which were, in any event, obiter) are inconsistent with the decision in Chappel v Somers & Blake [2003] PNLR 730. It is submitted that a personal representative may suffer loss, i.e. loss to the estate during the period of administration, including payment of additional IHT, even though the personal representative is only obliged to account to the residuary beneficiaries for assets in the hands of the personal representative. Chappel was decided before Daniels v Thompson, but is not referred to in the judgments in Daniels, which would suggest that it was not cited.

However, whilst the personal representatives may have suffered recoverable loss, it does not necessarily follow that they are owed a duty of care by solicitors giving tax advice in respect of a lifetime gift. The Scottish case of Matthews v Hunter Robertson Ltd [2008] PNLR 35 supports Daniels in denying that any duty is owed to personal representatives as such. In Matthews the Court of Session rejected the proposition that damages for loss constituted by diminution of the estate can be sued for by an executor as being entirely unsupported by Scottish, English or any other authority. As a matter of principle, it was denied that any duty was owed by a solicitor to the post mortem estate of their client as represented by the individual who eventually comes to accept the office of executor. There was insufficient proximity in the relationship between a solicitor instructed in respect of a specific transaction and a yet to be appointed executor of the client in respect of an interest that the client could never have. In addition, it would not be fair and just to impose a duty given that the claim would only become actionable on, and the limitation period only run from, the client’s death, which might be a number of decades after the conclusion of the relevant transaction.

 

It is submitted that, as a matter of English law, there may be sufficient proximity between the solicitor and the client’s estate, even if the solicitor is unaware of any appointment of executors made in the client’s Will, or even if the executor is yet to be appointed. Arguably, all that should be required is that the solicitor is, or should be, aware that the advice is being provided for the benefit of the client’s estate after he is dead, even if the identity of the executors is not known. There are cases where the courts have found that a duty exists to personal representatives.

 

However, it remains an open question in English law as to whether personal representatives may owe a duty directly to the personal representatives, as such, in respect of IHT payable by the personal representatives.

 

 

Claim by beneficiaries

 

In Daniels v Thompson it was left open as to whether the residuary beneficiaries of the estate might have a cause of action against the solicitors. Carnwarth L.J. said at para. [58]:

 

“It is important to emphasise that we are not dealing with a claim in respect of a duty owed to Mr Daniels in his capacity as a potential beneficiary, under the principles in White v Jones. Whether such a claim could be made is not an issue before us, even under the proposed amendment.”

 

If, following Daniels v Thompson, neither the client, nor her personal representatives, have an effective claim against solicitors who have given negligent estate tax-planning advice, this would give rise to a lacuna in the law, which could be filled by allowing the residuary beneficiaries to sue in respect of the diminution in the value of their entitlements by reason of the liability to tax.

 

In Rind v Theodore Goddard [2008] PNLR 24 Morgan J had cause to consider whether such a lacuna existed, and whether, in consequence, a residuary beneficiary had a real prospect of success in his claim as residuary beneficiary. Mrs Rind transferred the legal title to a commercial property to a Jersey company upon trust for her son, the claimant. There followed a series of transactions, the effect of which was that Mrs Rind reserved a benefit for IHT purposes. The claimant sued the defendant firm (who had advised in respect of the material transactions) in his capacity as a residuary beneficiary of Mrs Rind’s estate. He claimed that the defendant firm owed a duty of care to him, as one of the intended residuary beneficiaries, in particular in relation to estate tax planning; that the defendants had structured the transaction in such a way as to give rise to a reservation of benefit and potential IHT liability (which the claimant had settled after his mother’s death); and that the reservation of benefit and consequent IHT liability could have been avoided. The defendant firm applied for summary judgment and/or to strike out the claim, one ground being that no duty was owed to the claimant as a residuary beneficiary of the estate.

 

Morgan J considered whether, in principle, a duty of care could be owed by solicitors to the residuary beneficiaries of the client’s estate by way of an extension of White v Jones. He doubted whether a first instance Judge would do anything other than loyally follow Daniels v Thompson. The decision in that case gave rise to the possibility that there was a lacuna which needs to be filled by extending a White v Jones duty to the residuary beneficiaries. If Daniels v Thompson was correctly decided, Mrs Rind had suffered no loss; her estate could not inherit a more valuable claim that she had; and the personal representatives had also suffered no recoverable loss. Therefore, unless a remedy were given to the residuary beneficiaries, no person would be entitled to claim in respect of the IHT liability. Morgan J concluded that he could not strike out or dismiss the claim summarily.

 

This does not, however, mean that the court would necessarily, on a full trial, or on appeal, conclude that a duty of care is owed by solicitors to residuary beneficiaries where the solicitors are responsible for a loss to the estate giving rise to a diminution in the value of the beneficiaries’ entitlement, such as an avoidable IHT liability. It may be that the personal representatives can claim.

 

If one of two equal residuary beneficiaries has paid all the IHT payable in respect of the estate, he will only be entitled to recover the reduction in his own share of the residuary estate, which cannot exceed one half of the IHT and interest paid (Rind v Theodore Goddard, para. 79).

 

No lacuna

 

Morgan J commented that if Daniels v Thompson were to be considered again by the Court of Appeal, or reviewed by the House of Lords, he would not be able to predict what the outcome would be. His chief doubt stemmed from the submission by Counsel for the Defendants that there was no lacuna and, therefore, no reason for invoking White v Jones. Counsel had referred to a number of authorities to the effect that personal representatives can claim damages, in both tort and contract, in respect of a breach of duty during the claimant’s lifetime causing damage only arising following the death of the client. Counsel submitted that, subject to any limitation defence, Mrs Rind’s personal representatives could sue the solicitors in contract or tort for breach of duty and the damages recoverable would be the amount by which the estate was diminished by reason of the liability to pay IHT. The damages would be added to the residuary estate and would find their way to the residuary beneficiaries. It was, therefore, argued that there was no lacuna. Morgan J commented that the court in Daniels v Thompson did not discuss in any detail Mrs Daniel’s possible cause of action in contract (which he seemed to regard as a more likely claim by personal representatives than a tort claim) against the solicitor, and that he had had a fuller citation of authority than did the Court of Appeal in Daniels v Thompson.

 

In conclusion, it is possible that, the Court of Appeal or the House of Lords, might in future hold that no duty is owed to residuary beneficiaries on the basis that the personal representatives have or had a contractual claim for the same damage. Even if that is the case, there is a further uncertainty. What if the personal representatives had a contractual claim, which is statute barred, so that the beneficiaries will not be compensated by means of such a claim?

 

However, it is submitted that the personal representatives have no claim, derived from a cause of action vested in the deceased on his death, to recover IHT payable after the death of the deceased, either in contract or in tort. Furthermore, it is questionable whether they have a cause of action in their own right in respect of a duty owed to them as personal representatives. On that basis, it is strongly arguable that the beneficiaries have a cause of action.

 

 

Foreseeability of loss to residuary beneficiaries

 

In Rind, Counsel for the defendant firm submitted that, in any event, the solicitors must have been aware of the persons or class of persons (in each case ascertainable if not actually named) on whom the client wished to confer a benefit. Morgan J stated that, even if the court were to conclude that there was a lacuna, and that the solicitors owed a duty to any persons affected by ineffective estate planning, the solicitors would have a strong argument for saying that a White v Jones duty of care cannot be extended to such persons because this would be to impose upon the solicitors a duty to an indeterminate class of potential beneficiaries. The potential for such an indiscriminate liability is generally a reason for rejecting the existence of a duty of care (see Clarke v Bruce Lance [1988] 1 All ER 364).

 

Morgan J decided, however, that it was reasonably arguable, for the purposes of a summary application, that Mrs Rind’s settled intention was to leave the bulk of her estate to her children and grandchildren, and that the solicitors should be reasonably be expected to have contemplated the claimant as a person who would be adversely affected by ineffective estate planning in relation to Mrs Rind.

 

Therefore, even if solicitors owe a duty to beneficiaries of their client’s estate, in respect of negligent estate tax planning advice, liability will only be imposed if the solicitors are aware that the client has made a Will, or has a settled intention to make a Will, benefiting the claimant or a class of persons including the claimant, and that negligent tax advice will affect such a person. The beneficiaries must have been identified with reasonable certainty at the time of the transaction.

 

 

Other approaches

 

Morgan J’s judgment could, perhaps, be criticised on the basis that a beneficiary’s claim, in respect of a failed IHT-saving scheme, should not be regarded as a White v Jones claim, or as an extension thereof.  The issue should not be whether there is a lacuna, i.e. whether there is any person, other than the beneficiary, who can bring such a claim. The claim is not strictly a White v Jones claim as it is not one where the solicitor has been instructed, but failed, to confer a testamentary benefit on a third party.

 

The correct analysis may be that a claimant/beneficiary should be entitled to recover from a negligent solicitor if the solicitor knew or ought to have known that the beneficiary was relying on the solicitor to give effective IHT-planning advice; the provision of competent advice was of fundamental importance to the beneficiary; and there is a sufficient identity of interest between the client and the beneficiary (Dean v Allin & Watts [2001] EWCA Civ 758, at para. 69). On this basis, the duty is an independent duty owed to the beneficiary, not a duty owed to the client which is extended to the beneficiary, as in White v Jones. The foreseeability of damage and the relationship of proximity to the beneficiary make it fair, just and reasonable that the law should impose a duty of care to the beneficiary (Dean, paras. 40 and 49). Unlike in Clarke v Bruce Lance, there is no conflict between the interests of the client and of the beneficiary. Unlike in White v Jones there is reliance by the beneficiary on the solicitor’s advice, to the knowledge of the solicitor. In other words, the key factor may be reliance by the beneficiary. That reliance will often arise in an IHT-planning case because the beneficiary will be aware that advice is being given for his ultimate benefit, and may even play a part in the instructions given to the solicitor.

 

Indeed, the claimant/beneficiary may even be a client, to whom contractual duties are owed, if the solicitor is held to have advised not only X, in respect of a scheme to save IHT in X’s estate, but also X’s wife or children (see Mathew v Maughold Life Assurance Co Ltd (1987) PNLR 309, where a duty was held to be owed to the wife of a client who sought tax advice). In Hughes v Richards [2004] EWCA Civ 266, there was a claim by both parents and their infant children against accountants for alleged negligence in failing to establish a trust which was effective to benefit the children. Jacob L.J. considered that it was at least arguable that the accountant was advising both donors and donees; and that he was acting directly for the children (who could not act for themselves being under age) and not just for the parents.

 

 

Limitation in case of lifetime gift

 

In a case, such as Daniels v Thompson, where the deceased has entered into a lifetime gift subject to a reservation of benefit, it might be thought that the cause of action, accrued on the date of the gift when the donor has suffered a measurable loss in having made a gift of an asset subject to a reservation of benefit (Forster v Outred [1982] 1 WLR 86; Nouri v Marvi [2010] PNLR 7; Rind v Theodore Goddard [2008] PNLR 24, para. 82).

 

The limitation period in respect of a cause of action in contract will, indeed, expire 6 years from the date of breach. However, in respect of any claim by the beneficiaries of the estate in tort, the cause of action accrues when the beneficiary first sustains damage.  In Rind v Theodore Goddard Morgan J accepted for the purposes of a strike out application (para. 83) that, if the Court were to follow Daniels v Thompson and reach a conclusion that a duty of care was owed by the solicitors to the claimant beneficiary, Daniels v Thompson would seem to produce the result that the claimant suffered damage from the first time on the death of Mrs Rind (para. 83; see also Cotterell v Leeds Day [2001] WTLR 435, at 441F-G where this conclusion was described as “arguable”). The rationale was that no loss of IHT was suffered until death. The limitation period of 6 years (s. 2 of the Limitation Act 1980) ran from the date of death. It is submitted that the limitation period in a claim by beneficiaries in tort – at least in respect of a liability to IHT – would commence on death. The same should be true in respect of a claim by the personal representatives (if such a claim can be made).

 

If more than 6 years have expired since the date of death, it may be possible to extend the limitation period pursuant to section 14A of the Limitation Act 1980. That section applies to actions in tortious negligence and provides for a limitation period to run for 3 years from the date of knowledge required for bringing an action for damages in respect of the relevant damage. In Daniels v Thompson the Judge at first instance held that this date was about 9 years later than the date when the gift was made. This was not challenged on appeal.

 

The House of Lords has given full consideration to the issue of the date when the relevant knowledge is acquired for the purposes of s. 14A of the Limitation Act 1980 (Hayward v Fawcetts [2006] UKHL 9). Time begins to run when the client knows enough to embark on preliminary investigations into the possibility that defective advice has been given causing loss. The requisite knowledge is knowledge of the facts constituting the essence of the complaint of negligence. This may be before the date when the claimant knows that he has, or may have, a claim as a matter of law.

Where the claim is that the solicitors have failed to advise that a deed of variation be executed, time begins to run from the date when the 2-year period permitted for deeds of variation expires (Cancer Research Campaign v Ernest Brown [1998] PNLR 592 where Harman J concluded that no reasonable person could have obtained the relevant knowledge from facts observable or ascertainable by them within the 3 years before the issue of the writ).

In any claim for negligence, not involving personal injuries, there is a long-stop period of 15 years from the last of the dates on which there occurred any act or omission which is alleged to constitute negligence and to which the damage, in respect of which damages are claimed, is alleged to be attributable in whole or in part (s. 14B of the Limitation Act 1980). Section 14B(2) makes it clear that s. 14B can bar a right of action in a case notwithstanding that the cause of action has not yet accrued before the limitation period prescribed by the section. In Rind v Theodore Goddard Morgan J had found that it was arguable that the cause of action accrued on death. The claim was brought within 6 years of death. Nonetheless, he found that s. 14B could produce the result that the claim was statute barred before that time (para. 84). In the event, he found that the last act of negligence occurred within 15 years of the commencement of proceedings (when advice was given that only partially removed a reservation of benefit).

 

Conclusion on Daniels v Thompson

Daniels v Thompson does, at first glance, provide a formidable obstacle to a claim to recover IHT payable by the estate as a consequence of defective advice in connection with a lifetime transaction. The claim (based on the vesting of the deceased’s cause of action in her personal representatives) was dismissed on the basis that the deceased had suffered no loss. Permission was not given to amend to allow a claim by the personal representatives in their own right, in part because it was considered that such a claim was without merit.

However, the possibility of a claim by the beneficiaries was left open; there was no full consideration of a claim by the personal representatives in their own right, and any comments as to the merits of such a claim were obiter; and there was no consideration given to a contractual claim by the executors.

Rind v Theodore Goddard and Vinton v Fladgate Fielder have also left open the possibility of claims by executors and beneficiaries. However, these decisions were in the context of strike-out/summary judgment applications.

Given the state of uncertainty as to the law, any claim in a Daniels v Thompson type of case is best brought by all possible claimants in the alternative, i.e:

(a)  By the personal representatives in respect of a contract claim devolving on them on the client’s death, assuming that no more than 6 years has expired since the date of the gift (held to be arguable in Vinton).

(b)  By the personal representatives in respect of a claim in tort devolving on them on the client’s death (albeit that the Court of Appeal in Daniels v Thompson found that there was no such liability; held to be arguable in Vinton).

(c)   By the personal representatives in tort, by virtue of a direct duty owed to them in their own right (held to be arguable in Vinton).

(d)  By the residuary beneficiaries in tort, by virtue of a White v Jones duty owed to them in their own right (held to be arguable in Rind and Vinton).

(e)  By the personal representatives and/or the beneficiaries on the basis that they had relied on the advice (held to be arguable for purposes of strike out and summary judgment on evidence in Vinton), or even that they were parties to the retainer.

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