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:
- insofar as any part of the will is meaningless;
- insofar as the language used in any part of it is ambiguous on the face of it; and
- 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.