Update: wills and probate

The government has decided that for the time being the UK will not opt in to the European Commission's proposals for a regulation on succession and wills (first reported at solicitorsjournal.com, 16 October 2009; see also the previous wills and probate update, Solicitors Journal 153/40, 27 October 2009).

This decision notwithstanding, the UK intends to take a full part in the negotiations over the proposals, with the hope that ultimately at least some of these regulations can be introduced into English law.

This decision was announced on 17 December 2009 by the secretary of state for justice and lord chancellor following a six-week consultation carried out by the Ministry of Justice, which closed on 2 December 2009. The consultation process highlighted a number of concerns.

One contentious issue is the status of notarial acts. The proposals include the automatic recognition of notarial rulings as legally binding. In many European jurisdictions, it is the notary who formally determines the validity of the will and the identity of the heirs. In England and Wales, these issues are ultimately subject to the determination of the court. If this proposal were to be accepted, in any case where the deceased was habitually resident overseas, the English courts would be bound to accept the ruling of a notary as effective to determine the inheritance rights to his or her property in the UK.

A further concern is the lack of any definition of 'habitual residence' in the proposals. The Ministry of Justice consultation document highlights the problems that may arise in the case of an individual who dies while working temporarily abroad or somebody with homes in several different countries.

'Clawback' of lifetime gifts

At the head of the MoJ's list of potential problems is 'clawback' of lifetime gifts. This arises where compulsory inheritance rules entitle the deceased's children, parents, spouse or others to inherit a fixed share of his estate, irrespective of any directions to the contrary in the will, and where anti-avoidance rules bring gifts made before his death back into the estate from which the fixed share is paid. So, for instance, if an individual gives away his wealth on his deathbed so as to deprive his children of their inheritance, the lifetime gift can be set aside and 'clawed back' from the recipient into the estate to pass to the compulsory heirs. Some countries apply clawback not merely to deathbed gifts made with the deliberate intention of flouting forced heirship rules, but also to lifetime gifts made many years before the death.

Currently, although the UK will enforce foreign compulsory inheritance rules over estates, it does not recognise claims to set aside lifetime gifts on the basis of clawback. The MoJ is greatly concerned that accepting this part of the proposal would mean that any lifetime gift of UK property, even a gift by a donor with British nationality and resident in the UK, might be set aside many years later. This would jeopardise the validity and security of lifetime gifts and of the whole system of UK property rights. This issue is likely to be the greatest sticking point to UK acceptance of the European proposals.

English law does, of course, provide a mechanism for an executor or beneficiary to challenge the validity of a gift made by the deceased in his lifetime (for instance, on the grounds that the donor lacked capacity). In Sutton v Sutton [2009] EWHC 2576, unusually, both the recipient of the gift and the executrix of the donor's estate joined forces to persuade the court to set aside the gift. Mr Sutton owned a bungalow in which he and his wife lived. In 1997, a relative of the Suttons suggested that they give the bungalow to their son Mark, in the hope of saving future inheritance tax. This was a mistake '“ it was a gift with reservation of benefit, and thus ineffective for IHT purposes during Mr Sutton's lifetime. On his death, when his reservation of benefit ceased, there would have been a transfer liable to IHT and not covered by the spouse exemption, nor qualifying for capital gains tax uplift.

Mr Sutton's widow (as executrix) and his son (as donee) asked the court to declare that the 1997 transfer was invalid because of Mr Sutton's lack of capacity. A donor who makes a gift of his only or principal asset, a gift which effectively pre-empts the dispositions in the deceased's will, must have the same capacity and understanding of the gift as if he were making a will: he is required to know the extent and value of the asset being given away, and the claims of all those who might reasonably have expected to benefit from it. In this case, the court decided that Mr Sutton could not possibly have appreciated that he was making a gift which deprived himself and his wife after his death of the right to live in their only home. The gift was invalid and the court ordered rectification of the Land Register.

A change in English law to allow clawback of valid lifetime gifts after death is very unlikely. Currently, valid lifetime gifts can affect the devolution of an estate in English law, but only to a limited extent. A lifetime gift by the deceased to his child may be taken into account when calculating that child's share of the estate, so that the child's inheritance is reduced by the 'portion' paid to him in advance: see In the estate of Cameron deceased, Phillips v Cameron [1999] Ch 386.

Proprietary estoppel

In a sense, the re-emerging doctrine of proprietary estoppel involves precisely the opposite process to clawback: it involves a claim that an asset which is ostensibly part of the estate belongs to the claimant rather than the beneficiaries of the estate. The claim is based on the deceased's words and actions in his lifetime '“ which amount to a legally binding bargain on which the claimant relied to his or her detriment.

The claimants in the case of Macdonald and Bannigan v Frost [2009] EWHC 2276 were the two daughters of the deceased. Under the inheritance laws of many European countries, they would have been automatically entitled to inherit a share of their father's estate. Following their mother's death in 1995, he remarried and when he died in 2006 his last will gave his estate to his second wife. The daughters received nothing.

The daughters had no grounds to seek 'reasonable provision' under the Inheritance (Provision for Family and Dependants) Act 1975 because they had been providing financial support to their father in his lifetime and not vice versa. For 20 years up to their father's death, each of the daughters had given him £100 per month. The daughters claimed that they had agreed to make these payments on condition that they would ultimately inherit their father's estate. Hence, they claimed, a proprietary estoppel arose, giving them the right to his estate, despite being excluded from his will.

The court disagreed. The monthly payments had started soon after the father and mother had given a property and cash to the daughters. Those transfers had probably been made in exchange for the monthly payments. Crucially, the daughters failed to prove there had been any agreement about their future inheritance rights. The court held that there had been no commitment on the father's part to leave his estate to his daughters.

Challenging a will: the position of executors

Two recent cases have clarified the position of executors when a will is challenged, and the extent to which an executor is justified in going to court, and incurring costs on behalf of the estate, in order to establish the validity of the will.

A beneficiary who threatens action against the estate but refuses to take any positive steps can make life extremely difficult for an executor. In Cobden-Ramsay v Sutton [2009] WTLR 1303, one of the residuary beneficiaries alleged that a codicil to the will was invalid because of lack of capacity. The codicil contained cash legacies reducing the residuary estate. The beneficiary refused to apply to court himself, but insisted that it was for the executor to go to court to prove the codicil's validity. The executor successfully applied to the court for an order under section 27 of the Administration of Estates Act 1925 authorising him to distribute the estate in accordance with the will and codicil as admitted to probate. The court pointed out that this did not debar the disgruntled beneficiary from challenging the codicil if he wished to do so. It simply protected the executor from any liability, leaving the beneficiary to bring proceedings against the cash legatees if he so wished.

Smith v Springford [2007] EWHC 3446 concerned the executors appointed by a disputed will. The executors and beneficiaries under an earlier will contended that it was a forgery. After several months' delay, a joint handwriting expert concluded that there was a 75 per cent chance that the later will was forged.

The court considered whether the executors of the later will should have to pay the costs of the other parties. An executor is justified in propounding a will which he believes in good faith to be genuine. However, the court considered that the executors should have cooperated in obtaining a joint expert's report on the issue of forgery and ordered them to pay the defendants' costs from the date when that report should have been available.

HMRC and inheritance tax

Turning to inheritance tax, UK practitioners look enviously at their US cousins, for whom the year 2010 will be an estate tax holiday following the blocking of the renewing legislation in the Senate. On this side of the Atlantic, inheritance tax continues in force, without even the expected annual uplift from 6 April 2010 following the chancellor's announcement in the Pre-Budget Report that the IHT nil rate band will be frozen at £325,000. In the meantime, the Revenue has been writing to all estates currently paying inheritance tax to alert them to the introduction from September 2009 of an interest rate charge of three per cent on inheritance tax paid late, while the rate of interest credited on IHT refunds is only 0.5 per cent.

There are signs that the Revenue is taking a tougher line on inheritance tax issues generally. HM Revenue & Customs' August 2009 newsletter raised the question of valuation of assets in probate cases. It highlights the need for executors to demonstrate a careful and correct approach to the valuation of real estate and suggests that valuations from three estate agents, or a Royal Institution of Chartered Surveyors valuation, should be obtained. The Revenue implies that if a higher valuation is subsequently established on the sale of the property, the executors may be liable to penalties for under-declaration as well as the extra inheritance tax.

Meanwhile, HMRC has asked the Society of Trusts & Estates Practitioners and other professional organisations to join in an informal consultation later this month, designed to tackle the inheritance tax avoidance via the use of trusts. Does this mean yet another reorganisation of the ever more complicated rules affecting trusts set up by lifetime gift and/or by will? Let's hope nobody mentions clawback!