Update: wills and probate

Probate lawyers sometimes struggle to extrapolate general legal principles from reported cases involving ultra high-value assets, complex planning arrangements or unusual factual backgrounds. For once, many of this season's crop of court decisions on wills, probate and estates arise from situations which most practitioners regularly encounter: control of a company with assets of a mere £82,000; the allocation of a stakeholder pension between the pensioner's adult daughter and his cohabitee; the ownership of a joint bank account in the names of a mother and a son. The High Court has also given us a glimpse of a unique, and uniquely British, cultural entity as it disappears forever.

Private company shares

When a private limited company owns the assets of a trading business or property portfolio, changes in the ownership and control of those assets require a transfer of shares in the company. It was established by the Court of Appeal in Re Rose deceased [1952] EWCA Civ 4 that the beneficial ownership in shares can pass by gift even if the shares have not been transferred into the name of the recipient in the company's share register.

The court held that by signing a share transfer form and giving this, with the share certificate, to the intended transferee, the donor had done all he could do to divest himself of the shares and to vest them in the recipient. Registration of the share transfer required the consent of the directors, and had not taken place by the time the donor died. The court held that the shares were outside the donor's estate and held by him on trust for the recipient.

That decision was followed by a majority of the Court of Appeal in Pennington v Waine [2002] EWCA Civ 227. Again, a share transfer had been signed but never registered; the transfer form had not been delivered to the intended recipient but placed on the company's file. The court held that there had been a valid equitable assignment of the shares in the lifetime of the donor and consequently those shares were not part of her estate.

The case of Zeital v Kaye [2010] EWCA Civ 159, which came before the Court of Appeal in March 2010, involved another signed but unregistered share transfer. The company concerned, Dalmar Properties Limited, owned the net proceeds of a flat amounting to £82,000. Dalmar had been incorporated by an entrepreneur, Raymond Zeital, who died in February 2004. His widow and daughter claimed the company was an asset of his estate which had passed to them on his intestacy. His cohabitee claimed that Zeital had given her the beneficial interest in the shares during his lifetime.

Little evidence was available about the legal ownership of Dalmar. The company's share register was not produced at the trial and may never have existed. Dalmar was struck off the register in 1998 and was restored to the register only after Zeital's death. It was immediately put into voluntary liquidation. The liquidator had applied to the court for directions as to the beneficial ownership of Dalmar's shares.

Both Re Rose and Pennington concerned gifts of shares by the registered shareholder. In Zeital, the alleged donor, Raymond Zeital, was never registered as a shareholder in Dalmar. Two shares were issued when the company was formed. The original subscribers were the formation agents, who gave Zeital blank share transfer forms signed by them. The shares continued to be held in the names of the agents as nominees or bare trustees for Zeital.

In the High Court, the judge found that, before his death '“ and before the company was struck off in 1998 '“ Zeital inserted his cohabitee's name and the date in one of the blank share transfers. Later, he handed the completed transfer form to her. The judge held that this was sufficient to transfer the beneficial interest in that share to the cohabitee. That decision was not appealed.

Zeital handed the other share transfer to the cohabitee without inserting her name or dating the form. The Court of Appeal decided that the donor had not done all in his power to transfer the shares to her. In order to be registered as a shareholder, she also needed to produce the share certificate, the whereabouts of which was unknown. The donor could have asked his nominee, the formation agent, who was the registered holder of the share, to procure a duplicate, but failed to do so, and his cohabitee had no right to demand a duplicate of the missing share certificate from the company; her claim to be registered as a shareholder depended on her being able to produce the share certificate along with the signed transfer form. The Court of Appeal held that the purported lifetime gift failed and that the second share in Dalmar was an asset of Zeital's estate.

Lord Justice Rimer's judgment hints that the beneficiaries of the estate might have challenged the validity of the gift in other ways. Dalmar did not exist as a company when the blank share transfer was handed over; the legal owner of the shares was the nominee shareholder, and there was no evidence that she had authorised the cohabitee '“ or anyone other than Zeital '“ to complete the blank transfer form. Since the beneficiaries of the estate did not argue these points, the court had made no ruling on them.

Practitioners may be surprised that an intended lifetime gift of shares in a private company will fail if a share certificate is not produced. Share certificates, once cherished and guarded, have come to be regarded as largely irrelevant and replaceable in the years since Stock Exchange dematerialisation.

The Court of Appeal's decision in Zeital will be helpful when executors are assessing whether a private company shareholding was the subject of a valid lifetime gift. Such a gift can be effective in equity without registration of the share transfer '“ even if the directors have the power to block the transfer, as long as the donor has done all in his power to complete it. We now know that this includes handing over to the intended recipient (or irrevocably putting at his disposal) not only a signed share transfer form but also the share certificate.

Stakeholder pension and death benefit

Another unsuccessful cohabitee lost out in a ruling of the deputy pensions ombudsman (Blundell, determination 78553/1), which demonstrates that the pension trustees must apply strict criteria to decisions over death benefits payable at discretion.

Mrs Blundell's father belonged to a stakeholder pension scheme but did not complete a death benefit nomination. After his death, the scheme administrators, AEGON Scottish Equitable, paid the death benefit to his cohabitee. The deputy ombudsman upheld Mrs Blundell's complaint on the grounds that AEGON had failed in its duty to 'properly consider all potential beneficiaries' and had not adequately checked whether the cohabitee qualified to benefit under the scheme rules. Simply having a joint bank account was not evidence of financial interdependency.

Although the class of potential beneficiaries included the heirs under the deceased's will, AEGON had not obtained the will to check that the cohabitee was one. Mrs Blundell, as a daughter of the deceased, was automatically a potential beneficiary and did not have to prove that she was financially dependent on her father as AEGON had suggested. The deputy ombudsman awarded Mrs Blundell £150 for distress and inconvenience and ruled that the pension trustees must consider their decision 'wholly afresh'.

Joint bank account

The urban myth that money in a joint bank account automatically belongs to the account holders in equal shares was contradicted in Northall v Northall [2010] EWCH 1448 (Ch).

In December 2006, Mrs Northall, at the age of 78, opened a bank account for the first time in her life. It was opened in the joint names of Mrs Northall and one of her sons, but the money paid in was all hers. Mrs Northall died a month later. Her executors called on the son to account for (i) his withdrawals in his mother's lifetime, and (ii) the money remaining in the account on her death.

The High Court found there was no evidence that Mrs Northall had agreed to her son having the beneficial right of survivorship over the account at her death. Simply opening a joint account did not, by itself, amount to an agreement that the survivor would be entitled to the balance. The son was entitled to retain withdrawals made before Mrs Northall's death with her authority. Payments made without her authority had to be returned to her estate.

Gift to defunct charity

The case of Kings v Bultitude [2010] EWCH 1795 (Ch) revealed the fascinating history of the so-called 'Ancient Catholic Church'. Flourishing in the 1950s, the organisation declined in later years. By 1995, a Mrs Schroder was the only minister of the church. She died in 2008, leaving her residue 'for the general purposes of the said church'.

The church effectively ceased to function on her death. Had the church outlived Mrs Schroder, even briefly, her bequest to it would automatically have been applied cy-près. However, the High Court held that 'if an institution and its purposes come to an end by virtue of a death there is nothing for the legatee to inherit'. The gift was dependent on the continued existence of the church as an organisation; the will did not indicate a general charitable intention. The gift failed and there was a partial intestacy.

However, the Attorney General (representing charities) did not leave empty-handed, for the court ruled that the church's archive, chattels and bank accounts were not part of Mrs Schroder's estate but were held by her as trustee for it and were therefore applicable cy-près.

Inheritance tax valuation

HMRC continues to pounce on valuations which turn out to be significantly below a later sale price. However, the tribunal decision in Hatton v Commissioners of Revenue & Customs [2010] UKUT 195 showed HMRC taking a surprisingly moderate attitude. The executor submitted a probate valuation figure of £400,000 for the house, but sold it just over two years afterwards for £650,000. HMRC's valuation was £475,000. Surprisingly, the executor appealed this. Less surprisingly, he lost, and the tribunal criticised the evidence he put forward as misleading. It is interesting to consider what the consequences could have been for putting forward a similarly flawed valuation after the new penalty regime came into force on 1 April 2010 (see 'Update: wills and probate', 154/20, 25 May 2010).