Update: wills and probate

Time is running out for probate practitioners who are clinging to the old, familiar Inheritance Tax Account Form IHT 200 until the last possible moment, though the debate at last month's Society of Trusts & Estates Practitioners Spring Conference in London suggested that few have yet embraced its successor, Form IHT 400, with great enthusiasm.

Form IHT 400

From 9 June 2009, IHT 400 will be compulsory for all estates other than:

• 'excepted estates' of UK domiciliaries, which are covered by Form IHT 205; and
• certain estates of foreign domiciliaries, eligible to use Form IHT 207.

Since 2004, there have been two categories of 'excepted estates' for which the short Form IHT 205 remains available. In the first category are low value estates, where the gross value does not exceed the IHT nil rate band (£325,000 from 6 April 2009), the non-UK assets do not exceed £100,000, and the lifetime gifts and trust assets passing on death are within prescribed limits. In the second category are estates not exceeding £1,000,000 on which no IHT is payable because of spouse exemption and/or charity exemption. Again, there are upper limits on the values of foreign assets, trust assets and lifetime gifts passing on the death.

The even shorter Form IHT 207 can be used in cases where the deceased was non-UK domiciled throughout his or her life, and leaves UK assets worth up to £150,000 and consisting only of cash or quoted stocks and shares.

For all estates which do not fall into one of the short form categories, and Form IHT 200 has not been lodged by 9 June 2009, personal representatives will be required to complete Form IHT 400.

By making the questions in Form IHT 400 more specific, the Revenue has tried to signal what information it is looking for. But some assets still fall between two stools '“ for example, a share in a partnership investing in commercial or residential land, which is denied business property relief under s.105(3) IHT Act 1984. Question 31 asks whether the deceased jointly owned 'any assets (other than business or partnership assets)'. Question 40 is headed 'Business relief, business and partnership assets', but relates exclusively to assets which may qualify for business property relief. The Revenue's helpline has confirmed that Question 31 is intended to cover an interest in a partnership dealing in land.

On the Revenue's website, IHT 200 was formerly available online in a self-calculating version compatible with Acrobat standard. Practitioners who invested in the enhanced Acrobat software to cope with their IHT returns have been disappointed to find that the IHT 400 now on the website is not yet available in an integrated format that self calculates.

Such teething problems will undoubtedly be resolved, and completing the new IHT 400 will soon become a familiar part of the probate practitioner's repertoire.

The Revenue has also changed its banking arrangements with effect from 27 April 2009. It now uses different bank accounts for direct payments (internet and BACS or CHAPS transfers) and bank giro credits. The new bank details can be found on the Revenue's website, though they do not yet seem to have appeared on the 'How to Pay' instructions on the back of IHT assessments.

IHT liability

Two recent cases explored the pitfalls of post-death IHT planning.

In Bhatt v Bhatt [2009] EWHC 734 (Ch), a widow was persuaded that to avoid a large IHT bill on her late husband's estate, she should execute a deed of variation in favour of her children. This produced an IHT liability '“ exactly what she had hoped to avoid. English was not Mrs Bhatt's first language, and she had no expertise in legal or tax matters. The gifts were set aside on the grounds that Mrs Bhatt had not understood what she was signing, nor the need for, the effects of and the consequences of it.

A post-death variation made for consideration in money or money's worth will not be treated as made by the deceased (s.142(3) IHT Act 1984). Arrangements which amount to a bargain between the beneficiaries will forfeit the intended IHT saving. This was illustrated by the Special Commissioners' decision in Lau v HMRC (ref Spc00740).

In this case the residue was left to the surviving spouse but subject to a substantial legacy to a son from a previous marriage. The son purported to renounce his legacy. Had his renunciation been tax-effective, it would have increased the spouse-exempt portion of the estate, and reduced the overall liability to IHT. The proceeds of the estate were paid to the widow in cash. Three days later she made a cash gift to her stepson of £1m. The Revenue's suspicions were aroused that the variation of the estate and the subsequent payment were related. The widow and the son contended that the cash payment was made as a separate gift '“ to set him up in business. The Commissioners decided that the disclaimer was made for consideration, and therefore s.142(1) Inheritance Tax Act 1984 did not apply to it.

Factors that led the Special Commissioners to this decision included:

• the son's seeking an assurance from his stepmother that she would pay him £1m, before he renounced his legacy; and
• the solicitors' correspondence, which clearly showed that the renunciation and the payment were linked.

IHT planning involving a surviving spouse is commonplace, but must be implemented with care. If a variation or disclaimer is followed by a payment to the renouncing beneficiary, the adviser's correspondence and file notes may have to withstand Revenue inspection.

As noted in Solicitors Journal 153/12, 31 March 2009, Thorner v Majors [2009] UKHL 18, the case which seized the imagination of the profession and the public, has finally concluded with the unanimous decision of the House of Lords that David Thorner had the right to inherit his cousin Peter's farm, relying on the doctrine of proprietary estoppel. It is interesting to consider the logical implications of David Thorner's legally enforceable right to inherit to the farm. Three of the lords' judgments suggested, without expressly confirming, that if Peter had sold the farm during his lifetime, he might well have been liable to compensate David.

Testator's capacity

The courts have continued to grapple with the key issues of validity and interpretation of wills. In these days of fluctuating and uncertain asset values, how much does a testator have to know about what he owns? In the 2007 case of Blackman v Kim Sing Man [2007] EWHC 3162 (Ch), there was little direct evidence about the testatrix's capacity at the time she made her will, ten years before her death. However, she had obtained a will instruction form from her bank and filled it in without assistance, inserting the names of her chosen beneficiaries and listing her main assets, though without giving values. The court upheld the will, satisfied that the deceased had had the requisite capacity to understand and recognise the essential matters, even though it could not be proved as a fact that she actually had understood and recognised them.

Blackman was followed in the recent case of Bishop v Bishop (LTL 24/04/2009). The testator had intermittent physical and mental problems, caused by alcoholism. He changed his will so as to give his one-third share of the family company to his widow rather than to his brothers. Neither the testator nor his solicitors obtained a valuation of the business at that time. When the testator died two years later, the brothers challenged the will, arguing that without an up-to-date valuation of the company, he could not have understood the extent of the property passing by his will. The court upheld the will: it had been proved that the testator understood that he owned a share in the family business, and it was not necessary that he should have known its exact value.

Deceased's intentions

In interpreting wills, the court likes to give effect to the deceased's intentions wherever possible. In Sammut v Adams [2008] UKPC 58, on appeal from the Bahamanian Court of Appeal, the will gave a share of the estate to '(a) my four cousins '¦ and (b) my ex-spouse'¦ in equal shares'. If any beneficiary predeceased the testator, there was a gift over to his or her issue, failing whom, 'among all such surviving beneficiaries in equal shares per stirpes'. All the named beneficiaries survived. The Privy Council decided that the ex-wife should receive one fifth of the share, rather than one half.

The starting point when construing any will is an attempt to deduce the intention of the testator by giving the words in the will their natural meaning. The Privy Council (wearily, one feels, but patiently) ruled that little assistance could be gleaned from considering the 17 decided cases cited by counsel concerning the wills of other testators. In this particular case, the court was satisfied that the testator had intended the five beneficiaries to divide the share equally between them. 'Per stirpes' had been added superfluously.

In Sprackling v Sprackling [2008] EWHC 2696 (Ch) the testator's will left his widow 'my property known as Sandilands Farm to include the fishing lake with access to the car park'. The testator had prepared a note of instructions for his solicitors describing the property as 'Sandilands Farmhouse and Paddocks and Gardens and also the Fishing Lake with access across the farm to the car park'. The children of the testator's first marriage proved to the satisfaction of the court that he had not intended to give his widow the entirety of the 105-acre farm. Although there was no ambiguity on the face of the will, the court ordered rectification of the will in accordance with s.20(1) of the Administration of Justice Act 1982 on the grounds that it did not carry out the testator's intentions because of the solicitors' failure to understand his instructions.

The court in Sprackling took into account the evidence provided by the solicitors' file, containing attendance notes recording the testator's instructions and the circumstances in which the will was executed. Following the Court of Appeal's ruling in Larke v Nugus [2000] WLTR 1033, solicitors are required to produce this material when a will is disputed. The Law Society's 'Disputed Wills Practice Note', issued on 16 April 2009, explains the solicitor's duty in such cases, and warns that if there is delay in making information available, and this causes loss to the estate, the beneficiaries may seek recompense from the solicitor concerned. Practitioners must also beware of adopting a partisan stance, however strongly they feel that the will they prepared is valid. As the court recently confirmed in Raymond Saul v Holden [2008] EWHC 2731 (see 'update: wills and probate' Solicitors Journal 153/1, 13 January 2009), in disputes between potential beneficiaries neutrality is the only safe option for solicitors and personal representatives.