Miscellany - A Newsletter for Private Clients

Once again, before the Budget, there were rumours of major inheritance tax changes and once again the rumours proved unfounded. So with this issue, we have included a reminder of the basic rules while they are still with us. Tax is not, of course, the only factor affecting inheritance, and the main newsletter looks at some of the other surrounding issues which could cause bad dreams...

People are often concerned to know how a past or prospective inheritance will be treated on divorce. When the Court decides how the property of husband and wife should be divided it must have regard to the provisions of Section 25 of the Matrimonial Causes Act 1973 (the Act). This requires the Court to have regard to all circumstances, the first consideration being given to the welfare of any child under 18, and to have particular regard to eight sets of factors. The most relevant for present purposes are:

• the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
• the financial needs, obligations and responsibilities which each of the parties has or is likely to have in the foreseeable future.

The Court has a wide discretion to tailor make orders which suit the circumstances of every family so that the outcome is, in each case, fair. Inheritance may be relevant in several situations.

Inherited -v- matrimonial property
First, a party may have brought into the marriage property which was inherited or acquired as a beneficiary under a trust. There is a view that this property should be treated differently from other matrimonial property. It is argued that, where inherited property still exists at the time of divorce, the spouse to whom it was given should be allowed to keep it. Conversely, the other spouse has a weaker claim to such property than he or she may have to matrimonial property. This issue was considered by the House of Lords in the case of White (discussed in our February 2001 issue).

Mr and Mrs White had been married for some 33 years during which they built up a successful farming partnership and, by the time of the divorce, had assets worth £4.6 million. Those assets did not, however, derive wholly from their own efforts. The Court found that without an initial loan from Mr White’s father, the young couple would have been unable to acquire their own farm when they did. Mr White also acquired one of the family’s farms on advantageous terms from his father. The House of Lords considered that in these circumstances, gifts to one party were a significant factor which resulted in Mr White receiving 20% more of their combined assets than Mrs White. It must be remembered that White was a case where the assets exceeded the parties’ reasonable requirements for housing and sufficient income to meet their respective needs. The House of Lords made it clear that where a claimant’s financial needs cannot be met without recourse to the property inherited by his/her spouse then the inheritance factor will carry very little weight.

Provision for children
Secondly, a party to a long marriage who is likely to be elderly, may seek an award which exceeds his or her reasonable requirements, so that he or she is in a position to make provision by Will for his or her adult children. The House of Lords in White decided that such a wish was not a financial need but, in circumstances where resources exceeded needs, the award should not be confined to living accommodation and a vanishing fund of capital earmarked for living expenses which would leave nothing to pass on. However, the precise amount which will be left to pass on will depend on the circumstances of each case.

Expecting to inherit?
Thirdly, there is an issue as to how the Court, at the time of divorce, should treat an expectation of inheritance at some time to come. This was considered by the Court of Appeal in the case of Michael. At the time of the Court hearing, to determine the financial and property issues, the matrimonial home was owned by Mrs Michael’s mother and Mrs Michael had a tenancy for which she paid rent. Mrs Michael’s mother was 60 years old and hypertensive. Although Mrs Michael had an expectation of inheriting an interest in the house under her mother’s Will, her prospects of inheriting it outright were uncertain and subject to the interests of other likely beneficiaries such as her father, her brothers and children. Mrs Michael also said that she was vulnerable to her mother changing her Will at a later stage. The Court of Appeal held that the wording of the Act was wide enough to allow them, in certain circumstances, to take account of a mere expectancy such as an interest which might be taken under the Will of a living person. However, the Court of Appeal held in this case that the considerable uncertainties were such that they could not conclude that there was any real possibility of Mrs Michael inheriting the property in the foreseeable future and this expectancy should not be taken into account. So far as the timing of any possible inheritance, the Judge remarked that "the world is full of women in their eighties who had high blood pressure in their sixties".

The Court will, though, take into account a party’s interest in the Will of a living person, for example, where that party’s parent is suffering a terminal illness and is highly unlikely to revoke the provision made in a Will for one of the parties. A similar situation occurred in the case of MT where the husband expected to inherit substantial capital from the estate of his father, a man of considerable wealth who was 83 years old. The husband’s father was a German national and, under German law, the husband would automatically be entitled to claim one eighth of his father’s estate. As there was no uncertainty that the husband would inherit but there was uncertainty as to the amount of the inheritance, the Court adjourned the wife’s claim for lump sum provision until the death of her father-in-law.

Whilst the relevance of inheritance (both received and to be received) will depend on the circumstances of each case, this issue can be significant when determining the appropriate division of family assets between spouses on divorce.
Mark Fenton

On the death of an employer, personal representatives (PRs) will have to deal with the employees they "inherit" from the deceased. The main provisions of the law in this situation are to be found in s174 of the Employment Rights Act 1996 ("ERA").

There may be a number of different people in the deceased’s employment at the time of death. In the case of "domestic services", if the household continues, the new head of the household will be responsible for the employees. In the case of a family business or any other situation in which the deceased has employed people, the properly appointed executors will have responsibility.

Redundancy or continued employment?
The position under UK law is that an employer’s death terminates the contract and the employees will be automatically dismissed by reason of redundancy. Potentially, therefore, the employees are entitled to a redundancy payment. However, the general policy as stated in the ERA is that continued employment is to be preferred, especially if the business is to continue after the employer’s death. If the employment is to continue, PRs should, if possible, offer to renew the contract within eight weeks of the death. In this case the supposed dismissal "vanishes" and, on the face of it, so does the employees’ entitlement to a redundancy payment; otherwise PRs should make the redundancy position clear. If they simply keep the business ticking over without doing either, they are not necessarily committed to keeping the employees on, but the situation is less clear and it is good practice to consult as early as possible.

There has been some discussion as to whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE") apply to the transfer of an undertaking from the deceased to PRs. The ERA implies that the Regulations are not intended to apply so that the contracts do not transfer. However, legal authority is not clear on whether this is compatible with the European law that TUPE purports to implement.

The options for PRs
To conclude, an employee is potentially entitled to a redundancy payment from the deceased’s estate but cannot insist that he should be given continued employment. Nor does he have a claim for unfair dismissal. Nonetheless he might argue that in the light of the European law which TUPE purports to effect, his contract is preserved and therefore that the PRs’ refusal to re-employ him a constructive dismissal. So watch this space for a test case to the European Court on this issue and indeed the long-awaited amendments to TUPE.

It is important to have a proper consultation period and it may be wise to discuss with staff what their reasonable expectations would be upon the death of their employer. It may also be necessary to explain to domestic staff that the house may have to be sold or leased after their employer’s death.
Anna Gregory and Eliza Hebditch

Where one person relies on another’s promises or assurances and loses out as a result, there are a number of ways in which he can seek a remedy in the courts under a legal doctrine known as estoppel, which takes a variety of forms.

"One day all this will be yours"
One variant, proprietary estoppel, can affect inheritance. If A encourages B to act to B’s detriment, and gives credence to the belief that B may have some rights over A’s property, then A may have to make that good in some way.

So, if one person relies on the assurances of another along the lines of ‘one day all this will be yours’, acts to his detriment in reliance on the assurance, and then does not inherit after all, there may be a claim.

In a recent case, Jennings -v- Rice, the claimant had looked after his elderly employer for many years having been led to believe by her that he would inherit her estate. The employer died leaving her estate elsewhere. The court found that the claimant had indeed acted to his detriment in reliance on the expectation, and proprietary estoppel therefore operated to give him an interest in the employer’s estate.

How much is fair?
The next question was how to quantify the expectation – how much of the estate should he get? The trial judge held that the expectation did not extend to the entire estate (£1.3 million) as the claimant had no idea what the elderly lady owned other than the house in which they lived. The promise that ‘all this will be yours’ could therefore only extend to the house (£435,000). The claimant could not have expected to inherit property which he did not even know existed. In fact the award, upheld on appeal, was for £200,000. The valuation of the claimant’s entitlement depends on all the circumstances, including what he expected to receive and the extent to which he acted to his detriment, the financial circumstances of the claimant and the amount available, and the Court’s task was to ensure proportionality on the basis of all the facts and overall to do justice.

Not all disappointed beneficiaries can use this remedy, but in some cases it can be used to give a result which many would see as fair. Those who inherit under a Will should be aware that others might have a prior claim.
Joanna Tolhurst

Over the past few decades there has been a marked decrease in the number of young couples who decide to tie the knot. People are generally marrying later in life and, indeed, many decide never to do so, choosing instead to live together as "common law spouses" – or so they might think.

This is, however, a popular misconception, since UK law does not currently recognise "common law marriages" – but, in a recent survey, 57% of the population believed that common law marriages are recognised in law, affording cohabiting couples the same rights as married couples.

More tax and fewer rights for unmarried couples
As a result of this lack of legal recognition unmarried couples enjoy none of the rights afforded to their married counterparts. In particular, there are great disparities in the way married and unmarried couples are taxed and also in the way the deceased partner’s estate is distributed if he or she dies leaving no Will. Sadly it is often only on the death of a partner that the surviving partner realises the full extent of these inequalities.

So what are these inequalities? Some of the main examples are shown in the table:

As you can see, if the deceased partner dies intestate, the surviving partner will have no right to a share in the deceased’s estate and may be left at the mercy of the deceased’s family. In the worst cases this has resulted in the surviving partner losing the family home and having no source of income.

Apart from the obvious inequalities arising on the death of a partner, there is also less scope for lifetime tax planning between unmarried partners who cannot make use of the spouse exemptions on lifetime transfers, which themselves open up further tax planning opportunities (see the example in the article "A Guide to Inheritance Tax").

Greater equality may be coming
Good news may, however, be on its way for unmarried couples. There are currently two Bills before Parliament proposing reform of the law relating to cohabitants: Lord Lester’s Civil Partnership Bill and Jane Griffith’s Relationships (Civil Registration) Bill. Both Bills provide for a system of partnership registration for same and opposite sex cohabitants and, upon registration, the couples would become entitled to various rights and duties. Lord Lester’s Bill has been put on hold until the Autumn, but Jane Griffith’s Bill is due for a second reading in the House of Commons on 19 July 2002.
Julia Richards

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.