Update: wills and probate

Winter is the time of year for storytelling, and every wills and probate case has a story to tell. In recent months, the Court of Appeal has revealed the final instalment '“ and, in the best tradition of suspense, the unexpected twist '“ of some of the important cases we have looked at in previous updates.

Knowledge and approval

On 14 December 2010 the Court of Appeal gave judgment in Gill v Woodall [2010] EWCA Civ 1430, and upheld the first instance decision in favour of the daughter of the testatrix, Mrs Gill, at the expense of the beneficiary named in her will, the RSPCA.

Unexpectedly, the court reached its conclusion on different grounds from those which had influenced the judge below. Mrs Gill's husband was an extremely dominant personality, and she was timid and reclusive, suffering from acute agoraphobia.

Husband and wife executed mirror wills leaving their estates to each other, and, on the death of the survivor, to charity, effectively disinheriting their daughter and grandson.

Before Mrs Gill signed her will, the family solicitor read it over to her at his office. At first instance the judge held that Mrs Gill knew and approved the contents of her will but that it was invalid because of the undue influence of Mr Gill '“ even though he took no personal benefit from that gift, and despite the fact that Mrs Gill could have changed her will after his death (she survived him by seven years). The will was invalid when it was made; it could not be retrospectively validated by the testatrix's failure to replace it.

The Court of Appeal agreed that Mrs Gill's will was, and remained, invalid, but on the grounds of Mrs Gill's lack of knowledge and approval of the contents. There was no evidence she had read the will in draft and there was evidence that the visit to the solicitor would have been an exceptionally stressful experience for her. This was sufficient to displace the 'grave and strong' presumption that somebody who correctly executes a will prepared by their lawyer and read over to them beforehand knows and approves the contents of that will. As Mrs Gill had never understood the contents of the will, undue influence was irrelevant.

The court acknowledged that 'there may be a danger of this decision being seen as something of a green light to disappointed beneficiaries'¦ It is therefore right to emphasise that the facts of this case are quite exceptional.'

Helpfully to practitioners, the court made it clear that, unlike Key v Key [2010] EWCH 408 (see 'Update: wills and probate', 154/20, 25 May 2010), Mrs Gill's solicitor could not have known that the testatrix's psychological problems made her unable to understand the will she signed.

Loss of capacity

The questions of testamentary capacity and knowledge and approval also came before the Court of Appeal in Perrins v Holland [2010] EWCA Civ 840. In this case the testator had testamentary capacity when he gave instructions for his will, but lacked capacity when he executed it. The next of kin challenged the will on the grounds of lack of capacity and want of knowledge and approval.

The Court of Appeal upheld the will and confirmed that the principles set out in Parker v Felgate [1883] LR 8 PD 171 are still good law. Mr Perrins' will was valid because he signed it knowing he had given his testamentary instructions to his lawyer (although he did not recall those instructions) and relied on him to have prepared a will giving effect to those instructions.

Gill illustrates the difficulty for lawyers to assess a client's fluctuating testamentary capacity. Perrins is useful confirmation that the critical time for that assessment is when instructions are given.

Parker was cited and its principles extended to lifetime gifts in the High Court decision in Singellos v Singellos [2010] EWHC 2353. This case arose from a dispute between the son and daughter of Mrs Singellos, who died on 30 April 2008, after a long illness.

The son challenged a will executed by Mrs Singellos in hospital on 19 March 2008, and documents signed on 27 April 2008 which (if valid) transferred certain assets offshore and then gave the assets to the son and daughter.

The court agreed without hesitation that the March 2008 will was valid. It was clear that Mrs Singellos understood it, as she spotted an error in the original engrossment of the will and made her solicitor provide a corrected version for signature.

The court also accepted that Mrs Singellos had capacity to make the decision to proceed with the IHT planning scheme which involved the export of assets followed by lifetime gifts. However, this involved a series of documents, 21 in all.

As the end approached, Mrs Singellos started to flag. Her daughter helped her sign the last few documents. The son claimed that the assisted signatures were ineffective and the documents were invalid for lack of capacity. The court held that as the evidence showed that Mrs Singellos wished and intended to sign the documents, her assisted signatures were sufficient.

A high degree of understanding was needed to make such large lifetime gifts, and, by the time Mrs Singellos executed the last documents, it was doubtful that she had the requisite capacity. The court nevertheless upheld the transfers as valid, because Mrs Singellos knew they implemented the gifts she had previously decided to make; the court was willing to extend the Parker principle to deathbed gifts.

This decision will be important for all practitioners whose clients leave their (increasingly complex) IHT planning to the very last minute.

Mutual wills: sparse evidence

Inevitably, events have confounded the statement in the October 2010 update that 'mutual wills are comparatively rare', because in the same month the Court of Appeal heard another case of alleged mutual wills: Fry v Densham-Smith [2010] EWCA Civ 1410.

The Court of Appeal upheld Guildford County Court's decision that, after marrying in 1985, Mr and Mrs Densham-Smith had agreed to make mutual wills under which the children of their respective first marriages would eventually take equal shares of their combined estate; that they had in fact made mutual wills before the husband's death in 1989 (even though neither the original, nor a copy, nor even a draft of the wife's will was ever found); and that Mrs Densham-Smith's subsequent will was ineffective.

Although the documentary evidence was sparse '“ not surprisingly, in view of the lapse of time '“ it was a sufficient basis for the judge at Guildford County Court to have reached the conclusion he did.

Nil rate band gift

The Court of Appeal's decision in RSPCA v Sharp [2010] EWCA Civ 1474 just before Christmas ended the well-publicised story of Mr Mason's will.

To the relief of many, the Court of Appeal accepted that a gift of 'the amount which at my death equals the maximum which I can give them by this my will without inheritance tax becoming payable in respect of this gift' amounted to a gift of whatever remained of the IHT nil rate band after taking into account all other taxable gifts in the will; in other words, the maximum amount possible without giving rise to any liability to inheritance tax.

All practitioners, whether or not RSPCA sympathisers, must welcome the court's confirmation that it was wrong in principle for the judge below to make an order against the RSPCA for indemnity costs. This is an exceptional order, inappropriate in a case of simple disagreement on the interpretation of a will, particularly since the RSPCA had made genuine efforts to settle the case out of court.

Gift aid

Two estate-related tax cases were dealt with in the second half of last year; both raised seemingly straightforward issues of principle, and on both occasions HMRC was successful.

The First-tier Tax Tribunal case of Harris v Commissioners of HMRC [2010] UKFTT 385 arose from a post-death variation of an estate giving an additional £550,000 to charity. The extra bequest qualified for IHT exemption, the IHT payable by the executors was reduced accordingly, and the estate was distributed on that basis. The charity and the original beneficiaries under the will sought to treat the £550,000 payments as qualifying donations made under gift aid.

The revenue pointed out that section 25 of the Finance Act 1990 makes it a condition of gift aid that the donor (or any person connected with him) should not receive any benefit greater than £250 from his donation. What about the IHT reduction? No, said the beneficiaries, the variation is treated as having been made by the deceased in his will (section 142 of the IHT Act 1984). There is no IHT 'reduction'; the variation has retrospective effect for IHT purposes and hence the IHT liability on death was the amount that was in fact paid by the executors.

The revenue argued that the fiction of a retrospective variation operates forinheritance tax but not for income tax. The reality is that the beneficiaries were entitled to the money under the will and chose to redirect it to charity, thereby reducing the IHT liability on the rest of their inheritance.

The tribunal agreed with the revenue's arguments and concluded that the beneficiaries received the benefit of the IHT exemption in the capacity of residuary beneficiaries. The payments to charity did not qualify for gift aid.

Valuation principles for 'related property'

In Price v Commissioners of HMRC [2010] UKFTT 474 the revenue and the First-tier Tax Tribunal also faced the daunting prospect of the eminent silk, Leolin Price QC, appearing in person in the capacity of executor and trustee of his late wife's estate.

The issue was about the valuation for IHT purposes of Mrs Price's undivided half share of the family home, which she and her husband had owned as tenants in common. Section 160 of the IHT Act 1984 decrees that the value of any property for inheritance tax purposes is its open market value.

Section 161 directs that 'where the value of any property comprised in a person's estate would be less than the appropriate portion of the value of the aggregate of that and any related property, it shall be the appropriate portion of the value of that aggregate'. 'Related property' includes property belonging to a spouse.

The taxpayer's contention was straightforward. It is well accepted that the open market value of a part-interest in land should be discounted by around 15 per cent; a fractional share is less marketable than the entirety. So, Mrs Price's undivided half share had a market value of 42.5 per cent of the entirety. The market value of Mr Price's half share was likewise 42.5 per cent of the entirety.

By section 161, their two part-interests had to be valued together. But, the taxpayer argued, nothing in section 161 directed that the two part-interests should be treated as a single (and very different) item of property, the entire freehold.

Predictably, the revenue disagreed with this approach, and, relying on the authority of IRC v Gray [1994] STC 360, contended that the Act requires the aggregated property to be valued as a single item. Consequently, Mrs Price's interest in the property was 50 per cent of the value of the freehold, without any discount as a part-interest. The tribunal upheld the revenue, and dismissed the taxpayer's appeal.