UK: Transferable Nil Rate Band – Where Now?

Last Updated: 13 May 2015
Article by Beatrice Calderbank and Paul Hewitt

Introduction

Last year the Court of Appeal decided The Woodland Trust v Loring, the first reported case to consider the interpretation of a nil rate band legacy following the introduction of the transferable nil rate band. This decision impacts on charities, which, as exempt beneficiaries, often benefit from a testator's desire to avoid paying unnecessary inheritance tax ('IHT'), but now find clauses interpreted in a way that significantly reduces the gift to charity.

IHT is charged at 40% (save for certain exemptions) on a person's entire estate above the nil rate band of £325,000. However, bequests to surviving spouses, civil partners or charities are wholly exempt. Testators often seek to make a tax-efficient will (whereby none of the estate goes in tax) by splitting their estate between beneficiaries who are not exempt from inheritance tax, and so typically receive the 'tax free' amount, and beneficiaries who are exempt (such as a spouse, civil partner or charity) who typically receive the rest.

The calculation of the sum that can pass without payment of inheritance tax changed in October 2007 when the 'transferable nil rate band' ('TNRB') was introduced.

This change has a significant impact on charities as beneficiaries of residuary estates where there is a legacy to others of the nil rate band, 'tax free sum' or similar wording linked to the nil rate band. The legacy may be interpreted as a single person's £325,000 nil rate band, or anywhere up to £650,000 if a 100% uplift is applied due to the transferable nil rate band. Thus, the residuary legacy could be reduced by up to £325,000. This is a significant loss to charity in respect of just one estate, clearly worse when extrapolated across a number of estates.

Inheritance Tax

IHT taxes the 'value transferred' by a 'chargeable transfer' and, on a person's death, it is charged 'as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death' (section 4(1) Inheritance Tax Act 1984 ('IHTA')).

A 'transfer of value' is 'a disposition made by a person ... as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer' (section 3 IHTA).

The Transferable Nil Rate Band

In a 9 October 2007 Pre-Budget Report, the Government announced that a surviving spouse or civil partner would be able to increase his own nil rate band by the same proportion as went unused of the nil rate band of his pre-deceased spouse or civil partner. This applies to the estates of surviving spouses and civil partners dying on or after the date of the announcement, despite the fact it did not come into force until 21 July 2008 under the Finance Act 2008 ('the Act'), which inserted new sections 8A to 8C into the Inheritance Tax Act 1984.

Section 8A provides that if a person had a spouse or civil partner immediately before their death and they have an 'unused nil rate band' then 'where a claim is made' under section 8A the 'nil rate band maximum at the time of the survivor's death' shall be increased by the percentage that was unused of the first to die's nil rate band.

Section 8B contains the mechanism for claiming the TNRB. The personal representative of the surviving spouse or civil partner and 'any other person liable to the tax chargeable on the survivor's death' may bring or withdraw a claim, within prescribed time limits.

In February 2009, HMRC published guidance and example clauses, set out below.

  Example wording Augmented by TNRB?

 A 

I give free of tax to my trustees such sum as at my death equals a maximum amount which could be given to them by this Will without Inheritance Tax becoming payable in respect of my estate. Augmented
 B To my trustee such sum as I can leave immediately before my death without IHT becoming payable. Single
 C I give free of tax to my trustees an amount equal to the upper limit of the nil per cent rate band in the table of rates in Schedule 1 Single
 D To my trustees an amount equal to the nil rate band in force at my death Single


Despite only being guidance, these examples informed a great deal of commentary. They no longer appear on HMRC's website.

Construction – principles

When considering the construction of a document, effect must be given to the testator's intention. Intention is primarily determined from the document (ie the will) itself. Therefore the court is looking to construe the 'expressed intentions' of the testator from the will.

The Supreme Court recently set out in Marley v Rawlings [2014] UKSC, [2014] 2 WLR 213 the proper approach to construction of wills, aligning it with construction of contracts. Lord Neuberger stated:

'When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party's intentions...

When it comes to interpreting wills, it seems to me that the approach should be the same ... the aim is to identify the intention of the party or parties to the document by interpreting the words used in their documentary, factual and commercial context. As Lord Hoffmann said in Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] 1 All ER 667, para 64, "No one has ever made an acontextual statement. There is always some context to any utterance, however meagre." To the same effect, Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC 1396, that "[c]ourts will never construe words in a vacuum"...

... Indeed, the well known suggestion of James LJ in Boyes v Cook (1880) 14 Ch D 53, 56, that, when interpreting a will, the court should "place [itself] in [the testator's] arm-chair", is consistent with the approach of interpretation by reference to the factual context.'

Section 21 of the Administration of Justice Act 1982 allows evidence beyond the will to be considered in determining construction:

  1. insofar as any part of the will is meaningless;
  2. insofar as the language used in any part of it is ambiguous on the face of it; and
  3. insofar as evidence, other than evidence of the testator's intention, shows that the language used in any part of it is ambiguous in the light of surrounding circumstances.

Following Loring, clauses concerning the TNRB are unlikely to be 'meaningless' for the purposes of (i). It is also unlikely that the words used will be 'ambiguous on the face of it' for (ii) above.

However, it may be that the words used are 'ambiguous in the light of surrounding circumstances'. Specific wording in a will, coupled with changes in the tax rules, may create an ambiguity such as to allow extrinsic evidence to be admitted.

Loring v The Woodland Trust

Loring considered the construction of a nil rate band legacy clause and whether the legatees would receive £325,000 or £650,000. Extrinsic evidence was not admitted. The court concluded the TNRB was enhanced, at the expense of the charity.

Facts

Valerie Smith ('Mrs Smith') was a widow when she made a will in 2001 which included a nil rate band legacy to her family at clause 5, as follows:

'MY TRUSTEES shall set aside out of my residuary estate assets or cash of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil rate band for inheritance tax and to hold the same for such of the following as shall survive me'

She left residue to the Woodland Trust.

Mrs Smith had conversations with her Lloyds TSB relationship manager, Mr Ian Taylor, summarised here in the words of Mr Taylor's 26 June 2012 letter to the claimants/respondents:

In summary, my notes from the meeting show the following:

'(2) On 29 July 2008 I explained to Mrs Smith legislative changes regarding a deceased spouse's unused nil rate band (NRB) and that it was now possible to pass the portion of the unused NRB on to the surviving spouse. As a result, her estate should benefit from a double NRB. At the time of the discussion, this would double up the NRB for her estate to £624k, and as we had a value for her estate of approximately £640k we agreed that it was no longer necessary to conduct any further inheritance tax planning (please note there is an error in the notes as they detail that we agreed that it was necessary). I noted that she was appreciative of this conversation.

'(3) On 9 March 2011 I noted that we discussed that she should have two NRBs available and she was gifting her remaining allowance to charity.'


Mrs Smith died in 2011 leaving a net estate of £680,805.

Mrs Smith's executors (her sons) claimed a 100% increase in Mrs Smith's nil rate band, equal to the 100% unused proportion of their father's nil rate band.

First Instance

Mrs Smith's executors brought proceedings claiming that Mrs Smith had intended to leave them the enhanced nil rate band legacy so that the gift at clause 5 was worth £650,000 (rather than £325,000).

The Woodland Trust's position was that the gift of residue to the charity was worth £355,805 (rather than £30,805), clause 5 being a gift of Mrs Smith's unenhanced nil rate band.

The Judge found, in favour of the claimant executors, that the clause was effective to transfer the husband's unused nil rate band.

The Judge held that, as the words were not 'ambiguous or meaningless', extrinsic evidence was not admissible under section 21 of the Administration of Justice Act 1982.

In any event, there was no evidence of Mrs Smith's intention contemporaneous with her making the will. The Woodland Trust succeeded in having Mr Taylor's subsequent letter to the claimants ruled admissible, as Mrs Smith had reviewed her Will with her advisors after the TNRB came into force, and not at the time she made her will.

The Judge referred to RSPCA v Sharp [2011] 1 WLR 980 and Perrin v Morgan [1943] A.C. 399 as to the approach to take in construing the language of the will, i.e. that one has to 'examine the language of the will in its context taking into account the will as a whole; any relevant background circumstances which inform the meaning of the words used; and giving the words their ordinary meaning unless they are obviously used in some special or technical sense.'

The Judge concluded that the natural meaning of the wording in clause 5 includes an enhanced nil rate band.

The clear intention behind section 8(3) of the IHTA 1984 was that a successful claim to transfer the pre-deceased spouse's unused nil rate band resulted in it being added retrospectively to the deceased's nil rate band.

Reference to 'my nil rate band' did not, in the Judge's view, indicate that the increase is not included. In fact, it 'has the opposite effect'.

The Judge was referred to the nil rate band examples in HMRC's Inheritance Tax Manual IHTM 43065 (see above). The Judge concluded that clause 5 came closest to the first example that was said to dispose of the nil rate band enhanced by a spouse's transferred nil rate band.

The legacy at Clause 5 therefore amounted to £650,000.

Appeal

The Woodland Trust appealed. Leading Counsel for the charity (Penelope Reed QC) argued that the words 'at the date of my death' and the possessive 'my unused nil rate band' in the relevant clause pointed away from any enhancement. The effect of the Judge's conclusion was that the amount of the legacy was dependent upon whether or not the executors chose to make the section 8A claim. The testatrix could not have intended the amount of her legacy to depend on the exercise of discretion by the executors.

The Court of Appeal found Penelope Reed QC's arguments 'compelling' but decided in favour of the family. When the testatrix made her will she clearly did not have a specific figure in mind but intended that the gift be equivalent to the amount of her unused nil rate band. The statutory consequence of section 8A was to increase the value of the nil rate band to £650,000. The post-death claim by her executors retrospectively increased the value as at the date of her death of her nil rate band.

Charities can take little comfort from the Loring decision. Not only did the Court of Appeal uphold the first instance decision upheld, it took a broader, more purposive approach which will make it more difficult in future to restrict legacies to a single nil rate band. The evidence that Mrs Smith was advised after 2008 that the transferable nil rate band would increase the legacy (although ruled inadmissible) cannot have helped.

Not all nil rate band clauses are in this form, however, and there will be many instances where the wording only gives a single nil rate band. Individual clauses still need to be considered on their specific wording.

For example, it is difficult to see how 'To my trustee such sum as I can leave immediately before my death without IHT becoming payable' can carry the TNRB.

For the full appeal decision click here.

Conclusion

When looking at wills drafted prior to section 8A's enactment, one has to interpret the wording knowing the testator had no idea that the TNRB would exist.

Loring is undoubtedly bad news for charities, but it certainly does not mean that every form of words will have the same outcome.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Beatrice Calderbank
Paul Hewitt
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.