Update | Estate planning: changes to inheritance tax for non-UK domiciled spouses

In the case of Pankhania v Chandegra [2012] EWCA Civ 1438, Lord Justices Mummery, Patten and Treacy considered an appeal from the first instance decision which had held that the legal and beneficial ownership of a house in Leicester vested solely in the respondent Mrs Chandegra despite the fact that when the property was bought in 1987 in the joint names of Mrs Chandegra and her nephew Mr Pankhania (the appellant) there was an express declaration in the transfer documentation that they held the beneficial interest as tenants in common in equal shares.

In the course of the hearing at first instance, evidence as to the respective parties’ intentions at the time the house was purchased and even the family’s understanding of the beneficial interests in the property had been considered by Justice Harris QC. Briefly, the circumstances of the purchase were that the deposit was provided by the Mrs Chandegra’s brother but the property was bought by Mrs Chandegra and Mr Pankhania in joint names in order to secure the required mortgage, which made up nearly 95 per cent of the purchase price. Mrs Chandegra’s brother had lived in the property for some years and after his death Mrs Chandegra and her husband lived there. For most of the duration of the joint ownership following Mrs Chandegra’s brother’s death, she had contributed to the mortgage repayments. Mr Pankhania paid half of the mortgage repayments between 2005 and 2009.

At first instance, Harris J considered the laws relating to constructive, implied and resulting trusts in the context of joint ownership of property. On the basis of what the judge found were the parties’ intentions at the time the property was purchased, he held that a contrary intention to beneficial joint ownership could be inferred from the facts and the parties’ behaviour. On that basis, Mrs Chandegra was entitled to the whole beneficial interest in the property.

On appeal, it was held that the express declaration of trust executed by the parties at the time of the purchase was conclusive unless it could be set aside, varied or rectified. Only in limited circumstances may an express declaration of trust be set aside, varied or rectified by the court and a constructive, implied or resulting trust inserted. There were no submissions in ?this case that the arrangements constituted ?a sham or that there had been fraud, mistake or undue influence. On that basis, there was no vitiating factor and the provisions of the express declaration of trust were held to stand.

The court had erred at first instance in this regard and the appeal was allowed. The beneficial interest in the property was held by Mrs Chandegra and Mr Pankhania on trust for themselves as tenants in common in equal shares.

The first instance judgment contains a helpful summary of the rules relating to implied, resulting and constructing trusts as set out in the case of Stack v Dowden [2007] UKHL 17. The Court of Appeal decision also recites the authorities on sham trusts. Importantly, it serves as a useful reminder that terms of an express trust will only be set aside, varied or rectified in very limited circumstances and parties purchasing property in joint names should ensure that their intentions as to the beneficial ownership are accurately reflected in the transfer documentation.

Presumption of due execution

In Singh v Ahluwalia [2012] EWCA Civ 1635, the Court of Appeal refused to reinstate the will of the late Mr Ranjit ?Singh which had been overturned by ?a High Court deputy judge on the grounds that the two witnesses did not attest in each other’s presence.

Mr Singh had purported to make a will on 3 May 1999 largely for the benefit of his three sons in preference to his three daughters, two of whom would receive a legacy of £20,000 (and the other who would receive nothing). The will was admitted to probate on application by Jarmail Singh, Mr Singh’s eldest son, but one of Mr Singh’s daughters, Ms Balvinder Ahluwalia, claimed that the will had not been properly attested because the two witnesses were not both present when Mr Singh signed the will. If the presumption of due execution was rebutted, then Mr Singh’s estate would pass to his six children in equal shares under the intestacy rules. The estate was worth approximately £870,000.

The two witnesses who purported to attest Mr Singh’s will were his neighbour of many years, Mr Grantham, and a relation, Mr Ahluwalia. There was no doubt that the signatures on the will were those of Mr Singh, Mr Grantham and Mr Ahluwalia.

Under section 9(c) Wills Act 1837, a will is not validly executed unless the testator has signed in the presence of two witnesses who are present at the same time. The issue here was whether or not the two witnesses were both present when Mr Singh signed his will.

Mr Grantham gave evidence that he recalled witnessing Mr Singh’s signature on a document in 1999 but that Mr Singh had folded the document in such a way that he could not tell if it was Mr Singh’s will. That incident took place at Mr Grantham’s house and no one other than Mr Grantham and Mr Singh were present. Mr Grantham did not recall witnessing Mr Singh’s signature on any document in the company of Mr Ahluwalia. Mr Ahluwalia’s evidence was less clear – he could not be sure who was present when he, Mr Ahluwalia, witnessed Mr Singh’s signature on the will.

Jarmail Singh contended that it would have been physically impossible for Mr Singh to have folded his will in such a way that Mr Grantham would not have seen the words ‘Signed by the Testator’ and therefore known that it was a will. Therefore Mr Grantham’s recollections must have related to another occasion on which he witnessed Mr Singh’s signature (on another document) and he must have entirely forgotten the occasion on which he attested the will.

In deciding that the overall probability was that Mr Singh visited Mr Grantham at his home in the circumstances described by Mr Grantham and subsequently obtained Mr Ahluwalia’s signature on his will, the deputy judge held that there was strong evidence to rebut the presumption of due execution. On that basis, the grant of probate was revoked and an order made that letters of administration should be granted on the basis that Mr Singh died intestate. The credibility of the witnesses, and in particular the evidence of Mr Grantham, had been an important factor in the first instance decision.

Although leave to appeal was refused by the deputy judge, Jarmail Singh took the case to the Court of Appeal on the basis that the first instance judge had made a fundamental error and that the doubts regarding both witnesses’ recollections should mean that the court falls back on the presumption of due execution and uphold the grant of probate.

The Court of Appeal upheld the decision of the deputy judge to refuse leave to appeal on the grounds that no point of law was raised by the proposed appeal. The deputy judge had had the benefit of hearing the witnesses’ evidence and the cross-examinations, as well as a paper-folding demonstration. The case is a helpful example of the evidential burden required to rebut the presumption of due execution of a will.

Another case of interest in the area of contested probates is due to be heard in the High Court. It involves an application to overturn the 2006 will of the late Valerie Webster by one of her grandsons Rupert Webster, in favour of an earlier will. The late Mrs Webster left an extensive Somerset farming estate. The court dismissed Mr Webster’s proprietary estoppel claim in December 2011.

Non-UK domiciled spouses

On 11 December 2012, the government published new draft legislation and guidance notes relating to, among other things, the taxation of high value residential properties. Within the raft of papers published on that day was further new draft legislation relating to the proposed new limit on the exemption which applies to transfers between spouses with a so-called domicile mismatch. Under the current law, a person domiciled within the UK may only leave assets up to £55,000 above the nil rate band to his or her non-UK domiciled spouse or civil partner free from inheritance tax on death. (The limit also applies to lifetime transfers, where the UK domiciled spouse dies within seven years of the transfer.) The new draft legislation will mean that, from 6 April 2013, the UK domiciled person will be able to leave assets up to £325,000 above the nil rate band to the non-UK domiciled spouse or civil partner without incurring an inheritance tax charge. The new limit is to be linked so that it rises in line with the nil rate band in the future. This is welcome news as the current limit of £55,000 has been fixed since 1982.

The new draft legislation will also allow the non-UK domiciled spouse or civil partner to elect to be treated as domiciled within the UK for inheritance tax purposes. For example, following the death of a UK-domiciled individual whose worldwide estate will be subject to IHT, the limited exemption on transfers to the non-UK domiciled spouse may still result in a large liability to IHT. In these circumstances the non-UK domiciled spouse will be able to elect to be treated as UK domiciled and so benefit from the full spouse exemption, resulting in no IHT liability on the first spouse’s death.
The election may be made at any time up to two years after the first spouse’s death (and can be made during their joint lifetimes). It will not affect the electing spouse’s status for any other UK taxes. However, there is a potential downside for the person who elects to be treated as UK domiciled – from that time on their own worldwide estate will be subject to IHT (rather than just their UK estate). That is, unless they cease to be resident in the UK for at least three consecutive tax years.

There will be many considerations for clients to take into account when deciding whether to make such an election and advisers will need to consider each individual client’s position. While such an election cannot be made before 6 April 2013, in many cases it may be sensible for the client to wait and see what circumstances (and IHT rates) prevail at the time of the UK-domiciled spouse’s death or when the couple are considering making large gifts.