Introduction
A testator may be advised to:
The purpose of this article is to examine the relationship between “the beneficiary principle” and the rights of objects of discretionary powers of appointment or advancement exercisable by trustees or others on a fiduciary basis.
The article can be read for free on the Oxford University Press website by clicking on the following link (opens in new window).
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1.1. Standard Will
It has long been standard IHT planning for a married testator (“T”) to leave:
(a) a legacy up to the maximum nil rate band (“NRB”) to a discretionary trust for a class of beneficiaries including the surviving spouse (“S”), children and remoter issue; and
(b) the residue to S absolutely, or on IPDI trusts.
In this way, T’s NRB is fully utilised on his death, no IHT being payable as the chargeable transfer is taxed at 0%.
Before the introduction of the transferable nil rate band (“TNRB”) it was not good tax planning for T to leave everything to S, and for S to leave their combined property to the children. On S’s death, S and T’s combined estate would be subject to IHT, but only one (S’s) NRB would apply. T’s NRB would have been wasted.
1. SUSPICIOUS WILLS
There are a number of classic features common to probate claims where the validity of a Will is challenged. A testator typically executes a new Will in favour of one or more family members (often to the exclusion of others). The new Will represents a significant departure from the terms of previous Wills, which had divided the estate equally between the testator’s children or nearest relatives. The terms of the Will are, therefore, surprising or suspicious, at least to the parties who wish to challenge its validity.
The testator may have been elderly and/or in failing health, perhaps in the early stages of dementia, or suffering from the result of a recent bereavement. The golden rule may not have been observed if a doctor did not certify the testator’s capacity before the Will was executed.
The testator is typically vulnerable and susceptible to influence. The primary beneficiary under the Will may have been in the position to influence the testator, by virtue of their dominating personality or position of trust and/or may have been involved in the preparation or execution of the Will.
There may, however, be little or no direct evidence that the beneficiary had sought to coerce the testator into execute the Will, or that the Will has been procured by a fraudulent statement. However, that is the strong suspicion of the beneficiaries under the testator’s previous Will. In any event, there is a suspicion that the testator was not actually aware, or did not approve, of the contents of the Will as representing his or her wishes. A solicitor may not have been involved; or, if a solicitor was involved, there may be grounds for alleging that the solicitor failed to take proper precautions to ensure that the contents of the Will were brought home to the testator.
Lastly, there may be a lack of positive evidence, or unsatisfactory evidence, from the witnesses or others, as to whether the proper formalities were observed in the execution of the Will in accordance with s. 9 of the Wills Act 1837.
Delay in preparing Will
The starting point is the House of Lords’ decision in White v Jones [1995] 2 AC 207 in which it was confirmed that that a solicitor or will draftsman may be liable to disappointed beneficiaries under a Will where the solicitor is guilty of undue delay in drawing up a Will for execution by the testator before the testator’s death.
In White v Jones the testator quarrelled with his two daughters, and executed a Will cutting them out of his estate. He was then reconciled with his daughters. On 17 July 1986 the defendant firm of solicitors received a letter from the testator asking them to prepare a new Will to include legacies of £9,000 each to his daughters. The testator died on 14 September 1986, without the new Will having been put in place (a delay of 59 days after receipt of the letter of instruction). The defendant firm of solicitors were guilty of negligent delay.
In spite of the absence of any contractual relationship between the solicitor and the daughters, the daughters were awarded a cause of action in tort to recover damages equal to the value of the legacies to which they would have been entitled under the Will (£18,000).
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Charles Holbech has recently joined Radcliffe Chambers. In this article he addresses the role of the court in authorising a self-dealing transaction by a trustee, such as the sale of land by the trustee to himself. The self-dealing rule is that such a sale is voidable at the instance of a beneficiary who has not assented to the sale, and who is not guilty of unreasonable delay.
Charles acted in a leading case on self-dealing by trustees: Newman v Clarke [2016] 4 WTLR 26 in which Charles succeeded, on a summary judgment application, in establishing that there was no breach of the self-dealing rule where a tenant unilaterally exercised a statutory right to purchase the freehold of land of which the tenant was a trustee, as the statutory right had been acquired before the tenant became a trustee.
In this article Charles considers the recent case of Chaston v Chaston [2018] EWHC 1672 (Ch) in which the Court authorised a sale at valuation to a beneficiary of a property of which the beneficiary was also a trustee, despite opposition from two beneficiaries who were pressing for a sale on the open market.
STRICT RULE
The traditional approach of the courts is that a trustee is not entitled to acquire trust property, if even a single beneficiary objects, notwithstanding that the trustee did not, in fact, take advantage of his office and the price is a fair one (Re Thompson’s Settlement [1986] Ch 99). The court will not, therefore, generally authorise such a self-dealing (see In Ex p. James (1803) 8 Vesey Junior 337 where the court refused to permit the solicitor to the trustee-in-bankruptcy to purchase property in the bankrupt’s estate).
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1. Aim of legislation
The Government announced in the July 2015 Budget that an additional nil rate band (“RNRB”) would be introduced where a deceased person’s interest in their residence is “closely inherited” by their children and other descendants, on a death on or after 6 April 2017. The relevant legislation is contained in sections 8D to 8M of the Inheritance Tax Act 1984 (“IHTA 1984”), which came into force on 18 November
2015.
The objective was to meet the criticism that the estates of persons, who are by no means wealthy, were being dragged into the IHT net by virtue only of the historic rise in residential property prices. Why should an ordinary person, who has worked hard all their life, paying tax on income used to finance the purchase of their home, not be able to leave their home to their children free of IHT? One solution is to increase the value at which IHT is charged at a nil rate, provided that the deceased’s estate includes an interest in their home, and that interest is inherited by direct descendants.
Unfortunately, the legislation is of mind-blowing complexity and almost impossible, even for a lawyer, to decipher, let alone apply. It introduces a whole host of different terms, many of which are represented by symbols such as NV/100, TT or VT. As will be seen, there are many circumstances in which the RNRB is of little or no assistance, e.g. in the case of high-value estates, or conversely where the deceased’s residence is of low value, and also where the deceased has no direct descendants, or none whom he or she wishes to benefit.
It might simply have been better to have increased the standard nil rate band. Nonetheless, an attempt is made in this paper to unravel the complexities of the RNRB, and to give some guidance as to its impact on will drafting, and lifetime tax planning.
1.2. Summary of contents
This paper contains the following sections:
2.1. Conditions
The residential enhancement will be available where:
(a) a person dies on or after 6 April 2017 (IHTA 1984, s. 8D(1)); and
(b) that person’s estate immediately before death included a qualifying residential interest (“QRI”) (IHTA 1984, s. 8E(1)(a));
(c) which is “closely inherited” (IHTA 1984, s. 8E(1)(b)).
3.1. Meaning of closely inherited
The QRI in the deceased person’s estate must be “closely inherited”. IHTA 1984, s. 8J deals with what is meant by “inherited”, s. 8K with what is meant by “closely”.
In relation to the death of any person (“D”), something is “closely inherited” if (IHTA 1984, s. 8K) it is “inherited” by:
4.1. Tapering
The deceased’s default allowance, i.e. the aggregate of his residential allowance and brought-forward allowance, is liable to be reduced if and to the extent that the value of the deceased’s estate exceeds the taper threshold (£2m until 2020/21, increasing thereafter in line with the CPI). For every £2 that the estate exceeds the taper threshold, there is a reduction of £1. The reduced default allowance is referred to as the adjusted allowance (IHTA 1984, s. 8D(4)(g)).
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