Update: wills, probate and trusts

Reviewing the reports over the last few months for this article, what is striking is the number of cases which, despite costs risks, are reaching the courts. All the usual suspects are there '“ Inheritance Act claims, questions of construction and procedure, applications for rectification, cases on testamentary capacity and undue influence, cost disputes. What follows is a pot pourri of just a few of the reported decisions on some of these topics.

Inheritance Act claims

In O'Brien v Seagrave & Another [2007] All ER (D) 56 [2007] EWHC 788 (Ch), the claimant, Ms O'Brien, the deceased's partner for 12 years, issued proceedings seeking a declaration that his will was invalid for lack of capacity and that he died intestate. Ms O'Brien did not benefit under either the will or on intestacy. However, her admitted right to bring a claim under the 1975 Act would be affected by the outcome of the proceedings.

If the will was upheld there would be a number of beneficiaries of the estate who were expected to oppose Ms O'Brien's claim whereas if he died intestate the estate passed to a brother who was not. The High Court judge, reversing the decision of the Master who had struck out the claim for failure to disclose reasonable grounds, held that Ms O'Brien's claim under the 1975 Act was an interest in the proceedings for the purposes of bringing a probate action under CPR SI 1998/3132 Part 57.7.

Garland v Morris & Another [2007] All ER (D) 11 involved a claim by an adult child for a share of her father's estate, the residue of which, valued at c.£285,000 had been left to her sister. The circumstances were: a) the claimant had inherited the whole of her late mother's estate; b) she had severe financial difficulties by the time of her father's death; c) 15 years of complete estrangement from her father; and d) the sister, although much better-off than the claimant, also had financial difficulties. Moreover, she was close to her father and had been promised his estate. The judge, having considered the factors in Section 1 of the 1975 Act, and placing some weight on the deceased's moral obligation to the sister who inherited under his will, held that the claimant had failed to prove that her father's decision to exclude her was, in all the circumstances, unreasonable.

Construction: Gibbs v Harding & Others [2007] EWHC 3

As Sister Joseph Harding lay dying in hospital she made a will (written out for her in manuscript) which read as follows:

'I'¦ being of sound mind and aware of what I am doing wish to revoke my last will and testimony made previous to todays date'¦ If I should die in the meantime before making another will it is my wish that everything I possess be taken over by the Diocese of Westminster to hold in trust for the Black community of Hackney, Haringey, Islington and Tower Hamlets'.

The question was whether this created a valid testamentary gift. Sister Harding's earlier will had left the residue to the Westminster Roman Catholic Diocesan Trustee and other funds administered by that diocese. Lewison J decided that the estate was held by the diocese on charitable trusts '“ rejecting the possibilities that it was held for the diocese absolutely (the words 'in trust' prevented that), by the diocese on trust for the Caribbean Community Centre where Sister Harding had worked (there was no evidence of such intention) or that there was an intestacy. In so doing he relied on the following principles:

a) The court would do its best to uphold a testamentary gift;

b) A gift to a community or class of inhabitants within its locality without specifying a particular purpose is a valid charitable gift; and

c) The rationale for b) is that the court construes the gift as implicitly limited to charitable purposes.

He went on to say that, in the instant case, the precise nature of the charitable trust should be decide by scheme.

Thomas & Another v Kent [2006] EWCA CIV 1485

The issue which fell to be determined was whether 'brothers and sisters' (who were the beneficiaries of the ultimate trusts under a 1944 will) referred to those alive at the time the will was made (when, apart from a brother who was specifically excluded, there were known to be one brother and two sisters) or if it included siblings who had died before the will was made (the deceased was one of 11). The Court of Appeal held that the judge had been right to conclude that the expression meant all siblings and was not limited to those alive when the deceased made his will. By using the plural at a time when he had for these purposes only one brother, the deceased had made it clear that he intended all siblings/their families to benefit.

Rectification: Clarke v Brothwood & Others [2006] EWHC 2939

The testatrix's will left one-tenth of her residuary estate to each of the two named charities and one-twentieth to each of four named godchildren '“ thereby disposing of only 40 per cent. It was common ground between the parties that the testatrix had intended to dispose of 100 per cent of her estate and that her solicitor had failed to implement her intention. The issue was whether the jurisdiction to rectify under Section 20 Administration of Justice Act 1982 applied to a case (such as this) where failure to carry out a testator's intention was due to the solicitor not having applied his mind to the effect of defective drafting '“ rather than to a simple clerical (typographical) error or mistake in taking instructions. The judge held that it did, saying that to do otherwise would produce absurd results '“ and ordered rectification so that each beneficiary received 10 per cent or 20 per cent (rather than fractional shares).

Benjamin v Bennett & Others [2007] All ER (D) 243

The deceased's English will made provision for his funeral service and burial and named the claimant as sole executrix and residuary legatee. A later will, made in Barbados contained the following words:

'This is the last will and testament of'¦ hereby revoking all former wills and testamentary dispositions at any time heretofore made by me and declaring this to be my last will and testament'.

The word 'Barbados' was included in the heading. The will contained legacies of money and property there but made no provision for funeral arrangements/burial.

The court agreed that the claimant had satisfied the burden of proving that the deceased had not intended to revoke the English will. He had intended the later (Barbadian) will to deal with and revoke any previous wills relating to property there. The claimant was, therefore, entitled to prove and benefit under the English will.

Practice points

As far as wills and probate practice points are concerned it has been a quiet few months '“ the only development of real note being the increase in the nil-rate band of Inheritance Tax to £300,000 for deaths on or after 6 April 2007 (and rising to £310,000 by 2010)

Catherine McAleavey is a partner in the private client team at Farrer & Co

Budget

The Chancellor's Budget on 21 March 2007 was relatively uneventful when compared with last year's complete overhaul of the taxation of trusts.

Self-assessment filing dates

In practice, the most important change for trustees was the change to the filing dates for self-assessment income tax returns. Whereas for 2006/07 and earlier years, trustees had to file their self-assessment tax return by 31 January following the end of the relevant tax year, there will now be two separate dates depending on whether returns are submitted in paper form or online.

For 2007/08 and future years, the date remains at 31 January for returns filed online and a calculation of the tax due will be automatically provided on filing. For trustees filing paper returns, the cut-off date is 31 October following the end of the relevant tax year and this is also the deadline for trustees wanting HM Revenue and Customs (HMRC) to calculate their tax liability for them. There is also a change to the 'enquiry window', that is the period during which HMRC can enquire into the return. Whereas for 2006/07 and earlier years, this ran until the anniversary of the 31 January filing deadline (provided the return was submitted on time) it will now close one year after delivery of the return. In addition, legislation will be introduced in the Finance Bill 2007 to provide a single new penalty regime for incorrect returns, where the penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to it and the extent of disclosure by the taxpayer. It is not expected that this regime will apply until 2007/08.

Trust modernisation: capital receipts

As expected, the Finance Bill will include two amendments to the provisions introduced as part of the Trusts Modernisation programme by the Finance Act 2006 to correct omissions. The first relates to payments received by trustees following the purchase by a company of its own shares and will be retrospectively effective from 6 April 2006. The second concerns the interaction of trustees' tax pools with payments received by them which are chargeable events gains on life policies and will take effect as of 6 April 2007.

CGT-targeted anti-avoidance

As announced in the Pre-Budget Report, a targeted anti-avoidance rule is to be introduced in the Finance Bill 2007 to counter schemes to create and use artificial capital losses to avoid tax. This measure will ensure that for individuals' trustees and personal representatives, allowable capital losses are restricted to those arising from general commercial transactions. It will take effect in relation to capital losses arising on disposals on or after 6 December 2006 and is an extension of a similar rule introduced for companies in the Finance Act 2006.

Bare trusts for minors

Practitioners will be relieved to hear that HMRC has confirmed that where assets are held on trust for a minor absolutely, such a trust will not be a settlement for Inheritance Tax (IHT) purposes under s 43(2) IHT Act 1984. HMRC had previously suggested that a bare trust for a minor might be a settlement for IHT purposes leaving uncertainty as to whether a gift to such a trust would constitute a potentially exempt transfer, and raising fears that such trusts would be subject to the new regime for discretionary trusts. Further more detailed guidance on this point is expected from HMRC soon.

Trustees residence

Trustees should be aware that the new rules enacted in the Finance Act 2006 relating to a trustee's residence came into force on 6 April 2007. Prior to that date, there were separate rules to determine residence for CGT and income tax and it was possible for trustees to be resident for income tax purposes but not for CGT. From 6 April 2007, the old income tax test will apply to determine residence for both income tax and CGT purposes. A trust will only be treated as resident in the UK if either all of the trustees are UK resident or at least one trustee is resident in the UK and the settlor was UK resident, ordinarily resident or domiciled at the time of creation of the settlement or his or her addition of funds to it. Some trusts will therefore automatically have a changed status for CGT from 6 April 2007 and hopefully trustees have already taken action where the change in status was perceived to be detrimental. Trustees will however need to keep a close eye on foreign settlor trusts on an ongoing basis and ensure that trustees understand that their own residence status could affect that of the trust. If, for example, one of a number of UK trustees of a foreign settlor trust were to emigrate, this would take the trust offshore with a potential charge to CGT.

New form R185

A new version of Form R185 ( Trust Income) is available from April 2007 to reflect the changes made in the Finance Act 2006 to the way discretionary payments from settlor-interested trusts are taxed. The form includes a new box 7.3A to record discretionary payments made to beneficiaries other than the settlor.

Residence and domicile

The ruling of the Special Commissioners in Gaines Cooper v HMRC [2007] WTLR 101 has attracted some interest from practitioners concerned that the Revenue has changed the basis on which it calculates the '91-day test'. The case concerned the residence and domicile status from 1992/93 to 2003/04 of Mr Gaines Cooper who was born and brought up in England and had a domicile of origin here. The detailed facts of the case are complex but in brief, he was a businessman who travelled widely and from 1975 onwards he maintained two homes, one in the Seychelles and one in England. He claimed that he had acquired a domicile of choice and become resident in the Seychelles although his wife lived in England and he made frequent, albeit short, visits here.The 91-day test contained in HMRC's booklet IR20 says that individuals who have left the UK will continue to be regarded as UK resident if their visits to the UK average 91 days or more in a tax year taken over a maximum of up to four tax years. HMRC states its normal practice is to disregard days of arrival and departure in calculating days for this purpose. The difficulty in Mr Gaines Cooper's case was that many of his trips were short or even single-night trips. If days of arrival and departure were ignored then he would not have been regarded as UK resident under the 91-day rule but HMRC argued that because the trips were short, ignoring these days would create a distorted picture as, for example, an overnight trip would not be recorded as a visit at all. The Special Commissioners agreed with HMRC's analysis and decided that Mr Gaines Cooper was UK resident for the years in question. HMRC have since issued a Brief (01/07) confirming that there has been no change to the 91-day test. The rationale for this is that in order to consider the issues of residence ordinary residence and domicile in the case, the Commissioners had to build up a full picture of Mr Gaines Cooper's life, an important element of which was his pattern of presence in the UK and, in looking at the pattern, it would have been misleading to ignore days of arrival and departure. Based on evidence of his lifestyle and habits and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK. As he had never left the UK for tax purposes, the 91-day rule was irrelevant.