1
Q
What must be present for a will to be valid?
A
- A testator must be aged 18 or over (s7 Wills Act 1837) to make a valid will, with exceptions for those in military service, and satisfy all of the following legal requirements:
- To make a valid will the testator must have testamentary capacity, know and approve of the contents of the will and comply with s.9 Wills Act 1837
- To make a valid will no specific wording or form is required and a testator (person who makes a will) can leave their property to whomever they choose (known as testamentary freedom).
2
Q
- Following Banks v Goodfellow a testator will have testamentary capacity if they:
A
Understand the nature of the act
Appreciate the extent of their property
Are aware of moral claims against their estate
Testamentary capacity must be present at execution (unless the rule in Parker v Felgate applies)
Testamentary capacity is presumed where the will is rational and has been duly executed
3
Q
Case for test for testmentary capacity?
A
Banks v Goodfellow
4
Q
- Testamentary capacity
A
- A testator must be mentally capable of making a will, referred to as ‘testamentary capacity’.
5
Q
Nature of the act meaning in the test for testamentary capacity?
A
- A testator must understand that they are signing a document that takes effect on death and disposes of their property.
- A testator should be able to understand the broad effects of the will but is not required to understand every detail.
6
Q
- ‘Extent of Property’ meaning in the test for testamentary capacity?
A
- A testator should have a general recollection of what they own and appreciate the approximate value of their estate and relative value of its assets.
- A testator is not required to recall every item or know the precise value of each.
- The test is one of general understanding rather than perfect memory.
7
Q
How does ‘Disorder of the mind’ affect testamentary capacity?
A
- A testator suffering from insane delusions, affecting their judgement generally or in relation to specific dispositions in the will, lacks testamentary capacity.
- A testator may be suffering from an insane delusion and still have testamentary capacity provided that delusion is unconnected with and has no effect on the terms of the will.
8
Q
- Timing Requirements for testamentary capacity?
A
- A testator must have testamentary capacity at the time the will is executed.
- However, a limited exception to this timing requirement was established by Parker v Felgate,
9
Q
Parker v Felgate exception?
A
a testator who lacks testamentary capacity at the time of execution can still make a valid will provided they:
Had testamentary capacity at the time they gave instructions for the preparation of the will; and
The will was prepared in accordance with those instructions; and
At the time of execution the testator understood they were signing a will for which they had previously given instructions.
* This exception may apply where a testator’s testamentary capacity fluctuates over time (usually as a result of illness), or, an unexpected event occurs between giving instructions and executing the will which means a person no longer satisfies the test.
10
Q
What can affect testamentary capacity?
A
- A testator may have intermittent capacity; for example someone with dementia may have ‘lucid’ days on which it would be possible to satisfy the test for testamentary capacity and other days not.
- A testator may temporarily lack capacity as a consequence of a particular life event. In Key v Key the testator’s wife died a week before he made his will and the testator was found to lack capacity due to the effect of grief on his mental state.
- The effect of depression and other mental health conditions which may affect the decision making abilities of a testator should be taken into account when assessing their testamentary capacity.
11
Q
- Golden Rule?
A
A solicitor preparing a will for a testator whose
mental state is in doubt (possibly due to age or ill health) should follow the ‘golden rule’
The solicitor should ask a
medical practitioner to provide a written report confirming that the testator has testamentary
capacity and also ask the doctor to witness the will. The solicitor should record their own view
of the testator’s capacity in a file note. The written evidence should be kept on the file in case
someone challenges the validity of the will after the testator’s death.
12
Q
Burden of proof for testamentary capacity?
A
- The burden of proof of capacity technically lies with the propounder of the will (person seeking to admit the will to probate, usually the executor). However, capacity is presumed if the will on the face of it appears rational and has been duly executed.
- Anyone who wishes to challenge the validity of the will on the grounds of lack of capacity must provide evidence sufficient to raise doubt. If such evidence is provided the presumption is rebutted and the burden of proof reverts to the propounder of the will to demonstrate the testator satisfied the Banks v Goodfellow test.
- The threshold to satisfy the test in Banks v Goodfellow is relatively low. A person may lack the ability to manage their own affairs and require help with day-to-day activities and still have testamentary capacity to make a will.
13
Q
What should a solicitor do if a client lacks testamentary capacity?
A
- If a client lacks testamentary capacity they cannot make a valid will and a solicitor should not accept their instructions for the preparation of a will.
14
Q
Statutory wills?
A
, it is possible for the court to authorise the execution of a will on behalf of an adult who lacks capacity to make one for themselves (s.18(1) CA 2005). The court must be persuaded there are grounds to diverge from the existing testamentary position and it is in the person’s best interests to do so.
* This could be because the person has never made a will and the intestacy rules would otherwise apply, or because a change in circumstance means it is likely the testator would have reviewed his current position.
15
Q
When is knowledge and approval assumed?
A
o Knowledge and approval is presumed where the testator has testamentary capacity unless the testator is blind, illiterate, someone signs on their behalf or there are suspicious circumstances.
16
Q
- Knowledge and approval meaning for a vlaid will?
A
o A testator must have a general intention to make a testamentary document which disposes of their property and should take effect following their death.
o A testator is also required to have a specific intention to make the particular will they sign. This means they must know and approve of its contents and understand the choices they have made. It is possible to satisfy the test for testamentary capacity but lack knowledge and approval.
o Practically, a testator must read their will and understand it, and by their signature intend to give effect to its terms.
o Similarly to testamentary capacity, knowledge and approval must be present at the time of execution, unless the exception in Parker v Felgate applies.
17
Q
When is an affadavit of knowledge and approval used?
A
o If there is no presumption of knowledge and approval, and the attestation clause (which explains the circumstances under which the will was executed) does not address this, an affidavit of knowledge and approval would be needed when submitting the will to probate.
18
Q
What happens if the will was made as a result of undue influence or duress?
A
it will not be valid because the will does not reflect the testator’s true intention.
19
Q
To what extent can undue influemnce render a will invalid?
A
o A testator may have been unduly influenced in respect of a particular gift within the will or the will as a whole.
o Where the whole of the will was made as a result of undue influence with will is invalid. Where part of a will was made as a result of undue influence, the remainder may be given effect to provided that the omissions do not “upset the whole tenor of what remains”, but the court cannot add or substitute words.
20
Q
What is required for undue influence?
A
Undue influence occurs where a testator is coerced into making a will, or including particular terms, against their judgement and contrary to their true intention. The testator does not genuinely exercise choice but has surrendered to pressures they were not able to withstand.
Undue influence goes beyond persuasion. It is not unlawful to encourage someone to make a will or persuade them that certain provisions should be included e.g. by appealing to “ties off affection” or “pity for future destitution”. With persuasion the testator’s judgement is ‘convinced’.
* Coercion – not just persuasion
21
Q
Is there a presumption of undue influence?
A
There is no presumption of undue influence in relation to testamentary dispositions (which differs to lifetime arrangements) and whether undue influence has occurred is a question of fact.
* Must have evidence to prove this
22
Q
Who has the burden of proof for undue influence?
A
The burden of proving undue influence lies with the person making the allegation and the court requires evidence
23
Q
What does the court consider for establishing undue influence?
A
The physical and mental strength of the testator are relevant when determining how much pressure would be necessary to overbear the will. A weak or ill testator may be more susceptible and for the sake of a quiet life may be induced to do anything.
Whether or not the court considers the testator’s will to be fair is irrelevant. The question is whether, in executing the will, the testator acted “as a free agent”.
24
Q
requirements of s.9 Wills Act 1837?
A
it is in writing, and signed by the testator, or by some other person in his presence and by his direction; and
it appears that the testator intended by his signature to give effect to the will; and
the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time; and
each witness either
* attests and signs the will; or
* acknowledges his signature,
in the presence of the testator (but not necessarily in the presence of any other witness), but no form of attestation shall be necessary.
it is in writing, - Includes handwritten and typed/printed text in any language
and signed by the testator, - Any ‘mark’ may constitute a ‘signature’ if the testator intends it to be, but it is preferable for a testator to use their normal signature to avoid doubt
or by some other person in his presence and by his direction - This could apply e.g. if a testator is physically unable to sign themselves and authorises another person to sign on their behalf
o b) it appears that the testator intended by his signature to give effect to the will - Where the signature is at the end of a will it usually indicates the necessary intention. Signatures at the beginning or in the middle of the will can be problematic.
the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time - A testator either signs in person or acknowledges the signature of the person who signed on their behalf. Two is the minimum - there is no maximum.
o Witnesses must be physically and mentally present but do not need to know a will is being signed or its terms. A minor, someone who is blind, drunk or of unsound mind should not act.
o The full name, addresses and occupation of each witness should be noted in case the will is challenged at a later date and they are required to give evidence (in an affidavit) of what happened at execution or the testator’s mental state.
each witness either (i) attests and signs the will; or (ii) acknowledges his signature, in the presence of the testator (but not necessarily in the presence of any other witness) - Both witnesses must sign the will in front of the testator, but it is not necessary for each witness to also sign in front of each other
o To comply with s. 9 the will must be in writing and signed by the testator (or by someone else on his behalf)
o The testator’s signature must be made or acknowledged in the presence of two adult witnesses with capacity
o The witnesses must each sign the will in the presence of the testator but not necessarily in the presence of each other
25
attestation clause in a will?
describes the circumstances under which the will was signed.
26
# Section 15 Wills Act 1837
What happens if a beneficiary (or their spouse/civil partner) acts as a witness to a will?
o If a beneficiary (or their spouse/civil partner) acts as a witness the will as a testamentary document remains valid but under s.15 Wills Act 1837 the gift to the beneficiary is void
27
Is there a legal obligation to include an attestation clause?
o There is no legal obligation to include an attestation clause nor is any specific form of attestation required.
28
Consequences of a properly drafted attestation clause?
a properly drafted attestation clause raises a presumption that the will was executed in accordance with the requirements of s 9 WA (a presumption of due execution).
29
What happens if a will is signed in special circumstances?
o If the will is executed in special circumstances (e.g. will is signed on behalf of the testator, or, the testator is blind or illiterate) the attestation clause should be amended to reflect these special circumstances and to provide evidence of the requisite knowledge and approval. The example below could be used where a testator cannot read the will.
o Signed by the above named [testator] in our joint presence and then by us in his/hers all signatures having been added after this document had been read to [testator] by [name] when [testator] seemed thoroughly to understand and approve its contents.
30
Who is a beneficiary in a will?
A beneficiary is anyone who gains any benefit under the will.
31
Consequeces of a beneficiary witnessing the will?
o The will remains valid but a solicitor may be negligent if they do not provide advice on the effect of s 15.
o If a professional executor (who is entitled to charge for their services) witnesses a will, s 28(4)(a) Trustee Act 2000 confirms s 15 will not apply to the remuneration the professional executor will receive for acting in this role.
o The appointment of the beneficiary as an executor remains effective even if s 15 applies to deny them their inheritance.
32
When can s.15 (beneficiary witnessing a will) be disregarded?
o If there are at least two other witnesses not caught by s 15, or if the will is subsequently confirmed by a properly executed codicil, the effect of s 15 can be disregarded; the will would be properly executed without the beneficiary (or their spouse) witnessing the will.
33
What does a codicil do?
A properly executed codicil has the effect of republishing the existing will. Republication
confirms the will and causes the will to take effect as if made at the same time as the codicil,
but incorporating any changes made by the codicil.
34
To be valid, a codicil must meet certain requirements....
Same as will
35
Where a testator with capacity appears to have known and approved the contents of the will,
any person who wishes to challenge the will (or any part of it) must prove one or more of the
following to prevent some or all of the will from being admitted to probate:
*
Force or fear (through actual or threatened injury), or
*
Fraud (eg after being misled by some pretence), or
*
Undue influence (where the testator’s freedom of choice was overcome by intolerable
pressure, but their judgement remained unconvinced). Undue influence in the context
of wills means coercion or duress. Persuasion stopping short of coercion is not undue
influence.
36
How does mistake affect the presumption of knowledge and approval?
The presumption of knowledge and approval does not apply if all or part of the will was
included by mistake. Any words included without the knowledge and approval of the
testator will be omitted from probate. In this respect, it is important to distinguish between
actual mistake (ie absence of knowledge and approval) and misunderstanding as to the
true legal meaning of words used in the will. In the latter case mistaken words will not be
omitted.
37
What is required for a will that has been made under duress, i.e. as a result of force and fear, to be valid?
Court must pronounce that it is valid, and issue a grant in solemn form
38
What can occur where an omission from a will is made under duress?
The disappointed beneficiary can be entitled to the gift on the basis of the earlier will.
Duress is deemed to invalidate the revocation and the new will is read in line with that earlier valid provision.
39
Who has the burden of showing the testator did not have intention, and how might they show this?
The person challenging their intention, and they may do so by showing the testator acted due to fear, fraud, undue influence, or mistake
40
Who can act as an administrator?
- Any adult with capacity may be appointed and act as executor
41
Minimum and maximum number of executors?
- A minimum of one executor is required and a maximum of four can be named on the grand of probate
42
What is an executor?
- An executor is a PR appointed by will.
43
What is an administrator?
- An administrator is a PR appointed under the Non-Contentious Probates Rules 1987 (‘NCPR’).
44
Where do executors derive their authority from?
their authority to act derives from the will.
45
When is grant of probate needed?
Grant of Probate: This grant will be needed if the deceased left a valid will which appoints executors who are going to act.
46
* Entitlement to grant of probate?
- The entitlement to act as executor derives from the appointment under the will. Only those named may take out the grant and they cannot simply give that right to someone else. However, a named executor may formally appoint someone to act on their behalf under a power of attorney.
- If the appointment of an executor under the will is limited e.g. to specific assets, jurisdiction or by time, then this will be reflected in the authority conferred by the grant.
47
- An executor named in a will is unable to act as PR if they
pre-deceased the testator (or survived but died before taking out the grant). The will may expressly appoint a substitute executor to act in their place. *
are a minor. Although a minor cannot act as PR, their appointment by will is valid. Power can be reserved to the minor who, on reaching the age of 18, can make an application later if the administration remains incomplete. *
lack capacity *
are the testator’s former spouse/civil partner and the divorce/dissolution took place after the will was made. By s.18A/C Wills Act 1837 the former spouse/civil partner is treated as having pre-deceased the testator and therefore cannot be appointed (unless the will expressly overrides the effect of s.18A/C).
- If an executor is unable to act, the remaining executor(s) can still apply for the grant of probate but will need to explain to the probate registry why all of those appointed by the will are not applying.
48
How many executors do you need?
- Only one executor is required, but for practical reasons it is common for at least two to be appointed.
- If more than one executor is appointed, but not all of them will apply for the grant of probate, e.g. if one of them has pre-deceased, the remaining executor(s) may continue with the application. However, they will need to explain to the probate registry why not all of those named are applying e.g. by providing a copy of the death certificate.
- The testator may appoint as many executors as he likes in the will but a maximum of four people can be named on the grant. If more than four are appointed in the will they must decide who is to take out the grant.
49
What does power reserved mean?
- Power can be reserved to any remaining executors, which means they would be able to apply at a later date if vacancy arose and the administration remained incomplete. In this case, they would apply for a grant of double probate.
50
What happens if a grant has been taken out and one of the PRs appointed dies before the administration is complete?
-** At least one PR remains**: If more than one PR was appointed, following the death of one of them, the remaining PRs may continue with the administration. If, following the death, the number of PRs falls below the minimum needed an additional PR can be appointed.
-
- **If no PR remains**: Following the death of the sole/last surviving PR, what happens depends on the estate being administered. Either: *
Chain of representation applies, or *
Grant of letters of administration de bonis non is issued
- The chain of representation will apply if the last surviving executor (E1) dies having appointed an executor of their own estate and this person takes out the grant probate for E1’s estate (E2). S.7 AEA 1925 provides that E2 automatically becomes executor of the original testator’s estate as well as being executor for E1’s estate. No additional grant is required.
- S.7 does not operate where administrators are acting.
- If the chain of representation cannot operate a second grant will be issued - a grant of letters of administration de bonis non.
- Three requirements must be satisfied: *
the administration is incomplete; *
there are no remaining personal representatives; and *
there has been a previous grant of representation.
51
An unwilling executor may
renounce probate (unless they have intermeddled), have power reserved (provided another executor takes out the grant) or may appoint an attorney.
52
* Renunciation?
- An executor may formally renounce (give up) their right to apply for probate and the administration continues as though they had not been appointed.
- - Renunciation is final and the executor cannot later change their mind without court approval.
53
When can an executor not renounce?
- An executor cannot renounce if they have intermeddled with the estate and the court will not accept an attempt to renounce.
54
What must an executor do for renounciation?
- The executor must sign a form of renunciation
- Those who are applying for the grant must submit the form of renunciation to the probate registry as evidence of why an executor appointed by the will is not making the application.
- The renunciation will be noted on the grant when it is issued
- Renunciation is final and the executor cannot later change their mind without court approval.
55
* What is intermeddling?
- A person intermeddles when they take steps indicating they have ‘accepted their appointment’ and are fulfilling the duty to administer the estate (even if they do not in fact wish to act as executor). Examples include:
“Obtaining, receiving or holding” the deceased’s assets, or forgiving any debt or liability due to the estate (s 28 Administration of Estates Act 1925)
Paying debts, selling assets, disposing of personal property (under common law)
Acts of common humanity such as arranging a funeral or taking steps to secure the estate assets do not amount to intermeddling.
56
Requirements for reserving power?
- To reserve power there must be at least one other executor who does take out the grant of probate. The power ‘reserved’ is to apply for the same grant as originally issued i.e. there must be an original grant of probate.
The executor taking out the grant must give notice to the other executor that they are making the application without the executor who is reserving power
57
When is applyiing for a grant of double probate appropriate?
- Applying for a grant of double probate is only appropriate if the administration is not yet complete.
58
Rule 27 NCPR?
where power is reserved to an executor, the executor(s) who are applying for probate must give notice of their intention to apply to the executor to whom power is reserved. The reservation of power will be noted on the grant.
59
Executor appointing an attorney?
- An executor who does not want to be directly involved in the administration may appoint another person as attorney to act on their behalf. The power may be given by the executor (donor) to the attorney (donee):
- * After the executor has obtained a grant: s 25 Trustee Act 1925 confirms that a PR may delegate their functions to an attorney for a maximum of 12 months. This can be renewed if needed. Notice should be given to the other executors. Once appointed the attorney can carry out administrative steps on behalf of the donor.
- * Before a grant has been obtained: in this case the executor is delegating the power to apply for a grant. As the attorney is not named in the will as executor they cannot apply for a grant of probate. Instead, if other executors are applying, the executors would apply for a grant of probate and the attorney would make a parallel application for letters of administration (with will).
- The power of attorney must be provided to the probate registry as part of the application.
60
All executors unable or unwilling to act?
- If there is no executor who is able or willing to act then a grant of probate cannot be issued.
61
a person cannot act as administrator if they:
* Pre-deceased the testator or survived the testator but died before taking out the grant (although in some cases their PR may act)
* are a minor (unless an application is made on their behalf)
* lack capacity
* do not have a beneficial entitlement to the estate (for appointments under NCPR 22 only)
62
- If a potential administrator does not wish to act they have a number of options:
* Renunciation
* Appointing an attorney
* Note that unlike an executor, an administrator cannot ‘reserve power’.
63
How can a potential administrator renounce?
- A form of renunciation must be signed and submitted to the probate registry with the application for the grant. The renunciation will be noted on the grant.
- A potential administrator may renounce at any time before the grant is issued. They are not prevented from renouncing even if they have intermeddled with the estate.
- An executor who renounces their right to apply for a grant of probate, does not automatically renounce their right to apply as administrator under NCPR 20/22 so they may may need to renounce both rights**.**
64
When can an administrator appoint an attorney?
- The power may be given by the administrator (donor) to the attorney (donee):
* After the administrator has been appointed under the grant: s.25 Trustee Act 1925 confirms that a PR may delegate their functions to an attorney for a maximum of 12 months. This can be renewed if needed. Notice should be given to the other administrators. Once appointed the attorney can carry out administrative steps on behalf of the donor.
* * Before a grant has been obtained: in this case the applicant is delegating the power to apply for a grant, which is permitted under Rule 33 NCPR. The power of attorney must be provided to the probate registry as part of the application.
65
what happens if those entitled to apply refuse to act but also refuse to renounce their right to apply? Or, what if an executor intermeddles in the estate (and is thus unable to renounce) but refuses to apply for the grant?
In these situations, it is possible to obtain a court direction (using the citation process) to:
* * Require a person to take out a grant
* * Remove their right to apply
* * Authorise another person to take on the administration
66
How can an administrator renounce?
Any person entitled to apply for a grant of letters of administration with will annexed can
renounce in the same way as an executor (though using a Form PA16), except that an
administrator does not lose the right to renounce by intermeddling. Renunciation does not
affect any beneficial entitlement of the administrator or any appointment as a trustee.
A person entitled to a grant under NCPR 1987, r 22 can renounce his right to the grant in
the same way as an administrator with the will annexed. Renunciation does not affect any
beneficial entitlement of the administrator.
67
* A will may be revoked by:
- Destruction by the testator of the original with an intention to revoke
- Destruction by a third party if at the testator’s direction and in their presence
- An express revocation clause included in a later will
- Express wording in a codicil
- Implication if a later will or codicil contain no express words of revocation – but the earlier will is only revoked to the extent it is inconsistent with the later will or codicil
- Presumption if the original document is missing
- Lacking a revocation clause does not mean it is not a valid will but makes it confusing
68
What happens if a testator signed a mutual will?
* If a testator has signed a mutual will their property will be subject to a constructive trust should they attempt to revoke or change that will at a later date. There is no obligation to avoid revocation where a couple make mirror wills.
69
Requirements for destroying a will?
* By s 20 Wills Act 1837 a will may be revoked by the testator:
- ‘**burning, tearing or otherwise destroying**’ it
- provided there is also an **intention** to revoke the will.
70
* The intention to revoke may be:
- absolute (in which case the revocation is effective immediately)
- or
- conditional (for example on getting divorced) in which case the revocation will not be effective until the condition is satisfied.
71
What happens if a will is destroyed by someone who does not have capacity?
* Complete destruction of the original will by a testator who lacks capacity or intention is not effective and the will remains valid. Affidavit evidence would be required for a copy of the will to be admitted to probate.
72
Must the original will be destroyed for the will to be validly destructed?
* The original will must be destroyed rather than a copy.
73
When is someone else destroying the will effective?
* If another person destroys the will this will not be effective unless it is at the direction of the testator and in his presence.
74
Partial destruction?
* If a testator does not destroy all parts of the will the effect depends on the parts that remain. The destruction is partial if the will can operate effectively with the sections that remain. If not, the whole of the will is effectively revoked. For example, if the attestation pages are destroyed including the testator’s signature.
75
What happens if a will is missing or damaged?
* There are presumptions as to revocation that arise where a will is missing or damaged.
76
* If a testator is known to have made a will or codicil which they kept in their possession, but after the testator's death the original document is: Missing?
- Missing - the testator is presumed to have destroyed their will with an intention to revoke it, unless evidence is presented to suggest otherwise (Patten v Poulton)
77
* If a testator is known to have made a will or codicil which they kept in their possession, but after the testator's death the original document is: - Damaged?
- Damaged - the testator is presumed to have carried out the act of damage/destruction with the intention to revoke, unless evidence suggests otherwise
78
* Those administering the estate of the deceased when the will is missing or damaged will have the burden of rebutting a presumption of revocation by showing:
- -a valid will existed when the deceased died but was lost/damaged after death
- -the deceased did not intend to revoke their will
- -the deceased did not carry out or give instruction for the act of destruction.
* If sufficient evidence can be provided to rebut the presumption, a copy of the will may be admitted to probate (NCPR 54).
79
Express Revocation by will?
* An express revocation clause is usually included in every will as standard (even where a testator tells their solicitor they have not made a will before). This ensures that all previous wills are revoked and there is only one valid will at any one time. To be effective express words of revocation are required.
- “I hereby declare this to be my last will”: Does not revoke previous wills or codicils.
- “I hereby REVOKE all former wills and testamentary dispositions and declare this to be my last will”: Effective to revoke previous wills and codicils.
* NB: It may be appropriate for a testator to have more than one valid will if they own assets abroad. It is common for a testator to make a will in relation to their UK assets and another will in the jurisdiction where their foreign assets are located. If this applies the wills should not attempt to distribute the same assets and neither should revoke the other.
80
* Implied Revocation by Will?
* A will is valid without a revocation clause but one should be included as a matter of good drafting. If a later will does not contain an express revocation clause the testator will have more than one valid will. In this situation the combined effect is followed but, to the extent they are inconsistent, the later will impliedly revokes the earlier, so the later will is given priority.
81
* Revocation by Codicil?
* A codicil (a testamentary document that amends rather than replaces a will) may revoke a will or clauses within in it.
* A codicil will usually only revoke part of a will, and do so by express wording. A codicil should state the extent to which it revokes or confirms the previous Will.
* If express words of revocation are missing, the codicil only revokes the will to the extent it is inconsistent with the will.
* Revocation of a will by destruction will not necessarily revoke any codicils to it.
82
What are Mutual wills?
where one testator agrees with another testator to each make a will on terms agreed between them. Both testators also agree that neither of them will amend their will without the consent of the other. If a testator attempts to revoke their will, contrary to the previous agreement, equity may impose a constructive trust over that testator’s property on the terms previously agreed and limit the effect of any new will.
83
What are mirror wills?
the wills of a couple which mirror each other.
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What is the effect of having mirror wills?
* Executing a mirror will does not imply that there is an agreement not to revoke the will later and there is no constructive trust imposed. The survivor of the couple is free to revoke their will at any time prior to the death of either of them.
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* To successfully incorporate an unexecuted document into a will, each of the following criteria must be satisfied:
· **The document must exist when the will is executed** (or at the time a later codicil is made – because the codicil re-publishes the original will)
· **The will must refer to the document as being in existence at the time of execution**
· The** document must be clearly identified in the will**
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What happens if a doc is validly incorporated into a will?
* If a document is validly incorporated into a will, it becomes part of the will even though the document itself does not comply with s.9 Wills Act 1837.
* The document will be made public along with the will once it is admitted to probate following the testator’s death.
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Is it a good idea to incorporate docs into a will?
* The incorporation of an unexecuted document may seem appealing to a client who wants to create a detailed schedule of personal possessions, perhaps with photographs, without this needing to form part of the will itself. However, this should be avoided wherever possible because of the danger of failing to satisfy the conditions, or loss of the document to be incorporated before death.
* If an inventory or detailed list of goods is to be part of the provisions of the will it would be safer to include such a list in the will itself as a schedule.
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What are STEP provisions?
· STEP (Society of Trust & Estate Practitioners) is a professional association which promotes best practice on matters such as will drafting and estate administration. STEP have produced a set of nationally recognised administrative powers for personal representatives and trustees. These are commonly incorporated into a will or trust deed as an alternative to drafting lengthy and technical administrative clauses in the body of the document itself.
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How can STEP provisions be incorporated?
· The STEP provisions (an unexecuted document) can be incorporated into a will or trust deed by reference i.e. each provision does not need to be copied out in full in the will
· The example below would successfully incorporate these provision into a will:
* The standard provisions and all of the special provisions of the Society of Trust and Estate Practitioners (2nd Edition) shall apply.
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What are Letters of wishes?
· Where a trust is created under a will you may find an expression of wishes / letter of wishes has been drafted by the testator and stored with the will.
· These ‘letters’ are common in practice and are drafted by the testator. They set out how the testator would like the trustees of the estate to manage their discretionary powers.
· The letters are not legally binding and merely serve as guidance.
· These letters do not form part of the will (or trust created under it) and there is no intention for these documents to be incorporated into the will.
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* Alterations given effect to:
· Made before execution of the will/ codicil
· Obliterations with intent to revoke
· Attested alterations
· Completion of a blank space (presumed to have been completed before execution)
· Subsequently confirmed by re-execution or codicil, with reference to the alteration
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* Alterations not given effect to
· Made after execution of the will/codicil (provided original gift still apparent)
· Obliterations without intent to revoke
· Obliterations by 3rd parties
· Obliterations as conditional revocation (provided extrinsic evidence of the original gift can be found)
· Unattested alterations (presumed to have been made after execution)
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What can a testator do if they want to alter their will?
· A number of options are available for such a testator. They may choose to make:
* an entirely new will
* a codicil to an existing will (a formal testamentary document amending a will)
* make manuscript amendments to their original will.
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How should a client be told to alter their will?
· If a testator wants to alter their will they should usually be advised to make a new will rather than making a codicil or hand amendments to their existing will.
· The cost of making a new will is minimal compared to the costs incurred later if the terms of the will are disputed because of a poorly drafted codicil or because manuscript amendments are unclear or ineffective. The law governing the effect of manuscript amendments is complex and there is a risk that the overall result is not what the testator would have planned.
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When are hand alterations binding?
* “No obliteration, interlineation, or other alteration made … after the execution … shall be valid or have any effect… except so far as the words …. before such alteration shall not be apparent, unless the alteration shall be executed in like manner as … required for the execution of a will”
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* Obliteration:
where the text has been crossed out in such a way that the original text is illegible
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* Interlineation
where writing has been inserted between the existing lines of the document, often to add something that was previously omitted.
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general rule for amendments made after the will is executed
· The general rule is that amendments made after the will is executed are invalid and unenforceable. The alteration has no effect and the original wording is given effect to.
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Are alterations made prior to execution form part of the will?
Alterations made prior to execution form part of the will and are enforceable.
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What is the presumption on when alterations are made?
there is a rebuttable presumption that an alteration was made after execution
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What should PRs do to show when an alteration was made to the will?
· The personal representatives could produce affidavit evidence of the state and condition of the will at the time of execution (confirming when the alteration was made) although this would require the witnesses to accurately recall what the will looked like at execution.
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Test for attested alteraions?
| Alterations made after execution that are valid
· If an alteration is executed like a will (signed by the testator and two witnesses in accordance with s.9 WA) alongside the alteration it is valid. The witnesses do not have to be the same people who witnessed the will.
the initials of the testator and the
witnesses in the margin next to the amendment will suffice.
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* Execution of manuscript amendments?
· A testator who needs to make manuscript amendments to their will should be instructed to execute the amendments in the same way as a will.
· If the manuscript amendment itself is not specifically attested, a testator may instead confirm manuscript amendments by:
* re-executing the amended will as a whole
* executing a subsequent codicil that affirms the will it amends
- Note that in both cases, express reference to the manuscript amendments is required to ensure the presumption that the alterations were made after execution is rebutted.
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· There are a couple of exceptions to the general rule that unattested alterations are invalid as they are presumed to have been made after execution
· Where a blank space has been completed there is a presumption that this occurred **before** execution.
· This presumption on timing can be rebutted by internal evidence from within the will or by external evidence (i.e. affidavit of plight and condition signed by witnesses).
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Is obliteration effective?
· If the original wording is not apparent because it has been obliterated, covered over or cut out, the obliteration is treated as having been made by the testator with an intention to revoke and the alteration will be effective.
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* Meaning of ‘apparent’
· apparent’ means the original wording can be deciphered by natural means (reading it or holding it to the light etc. but not e.g. infra-red technology) and without the need for extrinsic evidence (e.g. draft documents).
· If the testator did not intend to revoke the gift or a third party made the amendment extrinsic evidence can be used to establish the original gift and infra-red technology would be permitted. If the original gift could be determined the beneficiary would take their entitlement.
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· Conditional revocation?
· **If the testator made the obliteration with a conditional intent to revoke the gift then extrinsic evidence is permitted to show the original wording. **A fresh copy of the will containing the original wording would be admitted to probate.
* E.g removal of a gift via obliteration for a new gift – if that new gift is not properly attested then there is conditional revocation and extrinsic evidence can be used to show the original wording
· A conditional intention to revoke is usually found where the testator attempted to substitute another figure (here £100) for the original wording (here unknown) and the attempt at substitution has failed.
· The original gift, if it can be ascertained, should be given effect to and extrinsic evidence is permitted to establish the original wording.
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* When are manuscript changes appropriate?
* The amendments have no impact on the interpretation or meaning of the will. This could include correction of a typo, change to a beneficiary's address or correction to the spelling of a name.
* The changes must be made urgently and a codicil or new will cannot be prepared. This may arise where a testator requires urgent hospital treatment or is due to travel abroad.
· If any amendments are made, the testator and witnesses should initial the alterations even if making these before execution and even if the amendments are unimportant. This will avoid the requirement to rebut the presumption on timing.
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To make a valid codicil a testator must have ....
testamentary capacity, knowledge and approval (of the codicil, and the will and any previous codicils referred to) and comply with s.9 Wills Act 1837.
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* When are codicils appropriate?
· Codicils may be used to:
* **create new provisions in a will** e.g. add a legacy for a new beneficiary
***edit existing provisions in a will ** e.g. change the value of a pecuniary legacy
* **revoke provisions in a will** e.g. remove a particular beneficiary’s entitlement
· If the testator wants to make significant or multiple changes it is usually advisable to execute a new will rather than make a codicil to remove the risk of inconsistency between the documents.
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How many codicils can you make?
· There is no legal maximum number of codicils a person can make but given the potential for confusion it is usually advisable to limit the number of codicils made to an original will.
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· There is a significant risk of error when drafting codicils. The following are some of the issues which can occur:
* Not expressly noting a change to the testator's name or address
* Not affirming the parts of the original will which remain unchanged
* Missing or incorrect cross reference to the date of the original will or earlier codicil
* New codicil that refers only to the original will and not the previous codicil(s)
* The effect of the codicil does not make sense when read in conjunction with the original will and/or fails to take into account changes made by a previous codicil
* Incorrect references to clause numbering (this is more likely when freestanding clauses are added rather than changes made to existing clauses)
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Ptresumption when there are no express words of revocation in a codicil?
· If there are no express words of revocation there is a presumption (which can be rebutted) that the terms of the original will remain where possible. The codicil will only revoke an earlier will to the extent there is inconsistency between them (Lemage v Goodban).
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What should you do when drafting a codicil to avoid ambiguity or inconsistencies?
· For the avoidance of doubt the codicil should expressly state the extent to which the testator confirms or revokes their earlier will (and any previous codicils).
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When inconsistencies arise with regards references to the date of the will (or earlier codicil), or the number of codicils that exist, what could be done?
· Where inconsistencies arise with regards references to the date of the will (or earlier codicil), or the number of codicils that exist, affidavit evidence can be provided to explain the discrepancy.
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* What problems can be corrected by codicil?
· If a beneficiary (or their spouse) witnesses a will, s15 Wills Act 1837 has the effect of denying the beneficiary their inheritance. However, if a later codicil is witnessed by different people, the gift under the will to the original witness can be given effect to and the effect of s 15 WA 1837 is avoided.
· If the will (or previous codicil) contains unattested manuscript amendments, which would not have effect under the general rule in s 21 Wills Act 1837 because they were made (or deemed to be made) after execution, these can be confirmed by a later codicil.
· The amendments must be made before the codicil is executed, and the codicil must expressly refer to the alterations it confirms. Otherwise additional evidence is needed to prove the amendment was made before the codicil was executed.
· If a will (or previous codicil) was not properly executed in accordance with the requirements of s 9 Wills Act 1837 then due execution of the codicil will validate the original will (or previous codicil) to which it refers. Technically this is not a “re” execution as due execution of the original document did not occur.
| Because it is republishing the will
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How can a codicil revoke a will?
· A codicil may revoke only part of an earlier will (or codicil), or it may revoke the document in full. If a codicil expressly revokes a previous will (and codicils to it) in full, unless the codicil contains new terms, the testator will effectively be intestate.
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How can a codicil revive a will?
· A codicil can only re-publish a will that is currently valid and has not previously been revoked. However, a codicil can revive a will that was revoked previously if this is the testator’s intention (s 22 Wills Act 1837).
· It is usually preferable to make a new will rather than revive a will that has been revoked as there may be confusion regarding testamentary documents made in the interim, and if the original was destroyed it cannot be revived.
· If a codicil revokes all/part of a will, and the codicil itself is then subsequently revoked, this would not automatically re-instate the terms of the will that had been revoked by the codicil.
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How can you avoid revoking your will if you get married/enter a civil partnership.
· It is possible to avoid revocation by making a will in contemplation of a particular marriage/civil partnership
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What is the effect of divorce on a will?
· A testator’s divorce or the dissolution of their civil partnership by virtue of s18A and s 18C WA 1837 has the effect of treating the former spouse/civil partner as having died before the testator - this is a partial revocation of the will
· S.18A/C apply to all references to the former spouse/civil partner in the will and renders their appointment as an executor and/or trustee ineffective, as well as any gift to them void
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* Revocation by marriage/civil partnership?
· By s 18 Wills Act 1837 (‘WA 1837’) when a person marries this automatically revokes in full any will (and codicil) made prior to the marriage, even if this is not the testator’s intention. This would be the case whether the testator marries someone of the same or opposite sex.
· S 18B WA 1837 has the equivalent effect for a testator who enters into a civil partnership.
· The effect of s 18 is significant and many clients will be unaware of its effect.
· Therefore, when meeting a client it is important to identify whether or not they plan to get married in the near future. Even if your client does not, you should advise on the effect of s 18 in case their circumstances change.
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* Wills in contemplation of marriage?
· If your client plans to marry/enter a civil partnership after signing their will, and does not wish their will to be revoked as a result, it is possible to avoid the effect of s 18/18B by drafting the will in contemplation of marriage/civil partnership.
· The will must name the future spouse/civil partner and identify the intended ceremony. It must also expressly state whether or not the testator intends the will to be revoked on the event of the marriage/civil partnership.
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· It is not possible to avoid revocation by making a will in contemplation of:
- a hypothetical marriage
- a marriage/civil partnership to one person but then marry/enter a civil partnership with someone else
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What else should you put in a clause that contempl;ates marriage?
· If the will includes a clause ensuring its survival following the marriage or civil partnership, you should also take instructions re the effect of the ceremony not taking place (e.g. due to the testator’s death or the couple’s separation).
· In essence, is the testator’s new will (and any revocation of a previous will) also intended to be conditional upon the marriage/civil partnership? In the absence of express wording to the contrary the new will takes effect even if the ceremony does not. The testator may want this if they have died but not if the couple have separated. The will should expressly state the testator’s intention.
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Can contrary intention in the will stop the effect of divorce?
YES
· The effect of ss 18A and 18C is subject to any contrary intention expressed in the will i.e. the testator could expressly state that he/she wants a spouse or civil partner to inherit, notwithstanding any divorce or dissolution of the civil partnership.
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What should be included in a will to revoke previous wills?
No particular wording is required, but a professionally drafted will
usually begin with a statement such as **‘I hereby revoke all former wills previously made by
me’**. The inclusion of such a statement in a will is sufficient to revoke previous wills.
If a will does not contain an express revocation clause, it operates to revoke any earlier will or
codicil by implication to the extent that the two are inconsistent. This could result in complete
revocation of the earlier will if the two are totally inconsistent or there could be just a partial
revocation in which case the two wills will need to be read together in order to piece together
the testator’s intentions.
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doctrine of ‘conditional
revocation’ or the doctrine of ‘dependent relative revocation?
the court may construe a testator’s intention to revoke an earlier will by an
express revocation clause as being conditional upon a particular event (eg the effectiveness
of the new will). If that condition is not satisfied, the revocation may be held to be invalid
so that the earlier will remains effective
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What physical acts are needed to destroy a willl?
**A will may be revoked by ‘burning, tearing or otherwise destroying the same by the testator or
by some person in his presence and by his direction with the intention of revoking the same’ (s
20 Wills Act 1837).
Physical destruction is required: symbolic destruction (eg simply crossing out wording or
writing ‘revoked’ across the will) is not sufficient, although if a vital part (eg the signature) is
destroyed, this partial destruction may be held to revoke the entire will.**
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What happens if a will is partially destroyed?
if a vital part (eg the signature) is
destroyed, this partial destruction may be held to revoke the entire will. If the part destroyed
is less substantial or important, then the partial destruction may revoke only that part which
was actually destroyed. **The test is whether the remainder of the will is intelligible and can still
operate in the absence of the destroyed part.**
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When may the court apply the doctrine of dependent relative revocation to save a will when the will was destroyed?
Sometimes, the court may apply the doctrine of dependent relative revocation to save a will,
on the basis that the testator’s intention to revoke their will by destruction was conditional
upon some future event (eg upon the later execution of a new will). If that event did not in fact
take place, the original will may be valid even though it was destroyed. The contents of the
original will may be reconstructed from a copy or draft.
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Does a codicil change the time the will has deemed to be have been made?
Yes
Under s 34 Wills Act 1837 a republished will is deemed to have been made at the time
of republication.
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What happens if the original wording after an invalid alteration is not apparent?
Where an invalid alteration has been made, the original wording of the will stands provided
that it can be deciphered. The requirement is that the original wording must be ‘apparent’
.
This means optically apparent. The original wording of the will must be capable of being
read on the face of the will by ordinary means. So, for example, the original wording will be
apparent if it can be read using a magnifying glass or by holding the will up to the light. It is
not possible to ascertain the wording by extrinsic evidence (eg from the solicitor who drew up
the will). Nor is it possible to ascertain the wording by interference with the will (eg applying
chemicals) or by producing another document (eg an X-ray of the will).
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Structure for most wills precedents?
1. introductory clauses,
2. appointment of executors and guardians,
3. dispositive clauses,
4. administrative provisions,
5. execution/attestation.
o Revocation, date and attestation clauses should be included to avoid confusion but a will is still valid without them.
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How to appoint a law firm as executors?
o To appoint a law firm partnership all of the partners must be appointed (then expressly limit the number). An LLP and trust corporation may appointed directly.
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How are most executors and trustees appointed in a will (clause)?
o Most wills appoint executors and trustees in the same clause and appoint the same people in both capacities.
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What do administrative powers do?
o The administrative clauses state the powers the executors and trustees have to carry out their role.
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Do powers in a will take priority over other ones?
Yes
Express powers take priority over statutory and common law defaults.
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What should be included in a commencement clause?
o I TOM JAMES JONES sometimes known as JAMES JONES of [ ] a solicitor declare this to be my last will and testament
o Purpose is to identify the testator (stating their full name and address). The testator’s occupation is sometimes also added.
o If the testator is known by another name that should be referred to (see example above).
o If the testator owns assets in another name the grant of representation must refer to each possible alias. If it does not, it will not be possible to administer all of the estate and this causes delays.
o The date can be included in the commencement or at the end of the will.
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What should be in a revocation clause in a will?
o I hereby REVOKE all former wills and testamentary dispositions and declare this to be my last will
o A revocation clause can be included as part of the commencement or as a separate clause.
o It ensures that all previous wills/codicils (both are testamentary documents) are revoked so only one valid will exists at any one time.
o A will is valid without a revocation clause but one should be included as a matter of good drafting to avoid uncertainty.
o If a testator has more than one valid will the later will impliedly revokes the earlier will but only to the extent that it is inconsistent with or merely repeats the terms of the earlier will.
o There are other methods of revoking a will either in whole or in part. For example by way of codicil, in the event of a testator’s marriage/divorce, or civil partnership or its dissolution, destruction of the will, or making effective manuscript amendments. However, the most common form of revocation is express revocation by way of a later will.
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* Burial & Funeral wishes clauses?
o I WISH for any part or parts of my body where possible to be used for transplantation and for the treatment of others but subject to this I request that all burial and funeral arrangements conform with Bahá’í law and tradition
o Many testators want to direct what should happen to their body after their death and have specific funeral and burial instructions they would like followed. These clauses are usually inserted at the start of the will before the operative provisions.
o The instructions are not legally binding on the personal representative (‘PRs’) but will normally be followed where possible.
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* Appointment of executors and trustees clauses?
o I APPOINT [ ] and [ ] (hereinafter called “my Trustees”) jointly to be the executors and trustees of my will but if either of them shall be unable or unwilling to act I appoint [ ] to fill any vacancy thereby arising
o If a trust does or could arise following the testator’s death, e.g. an express trust is created or there are minor beneficiaries, at least two trustees should act (or a trust corporation).
o It is common, but not necessary, to appoint the same person(s) in capacity as both executor and trustee. A defined term of either “Executors” or “Trustees” can be used throughout the rest of the will. Trustees is more common.
o The above example appoints two executors to act jointly, in the role of both executor and trustee, and names a third executor to act if either of the two appointed do not act.
o A family member will often be appointed along with a legal professional. A professional executor can provide experience, expertise and a neutral perspective that family members cannot offer.
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* Appointment of law firm partnership as executors clause?
o I appoint the partners (which term includes directors or members) at the time of my death in the firm of [ ] or the firm which at that date has succeeded to and carries on its practice including a firm which has been incorporated or formed an LLP ……………..to be the executors and trustees of this my will and express the wish that no more than two of them shall prove my will and act initially in its trusts but that [ ] if then a partner should be one of them
o A partnership does not have a separate legal identity distinct from its partners so cannot be appointed. Instead, all of the partners (construed as profit sharing) at the date of death are appointed (‘a’ or ‘any one’ partner is void for uncertainty).
o The number who should act can be limited by stating only ‘one/two’ should act. A testator can express a preference for a specific partner but should avoid a personal appointment (that person may no longer practice or work at the firm).
o The example above considers that the firm in the future may change its name, merge with another, convert to an LLP or incorporate.
o Many law films have LLP status. An LLP has legal capacity to apply for a grant of representation and may be appointed as an executor (see above).
o I APPOINT my spouse and [ ] LLP of [ ] jointly to be the executors and trustees of this my will (hereinafter called my Trustees)
o A trust corporation is a specific type of corporation with authority to carry out trustee and PR roles. Law firms, banks and financial institutions may have established their own trust corporation and this will have separate legal personality from the limited company or LLP that owns or runs it. A trust corporation may be appointed as executor.
o I APPOINT [NAME OF TRUST CORPORATION] to be the only executor and trustee of this my will (hereinafter called my Trustee)
o An LLP or trust corporation may be appointed as sole executor and trustee.
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* Appointment of professional executors - payment?
o Only professional executors and trustees may charge for their time (s.29 Trustee Act 2000 (‘TA 2000’)). However, this statutory right to charge imposes some restrictions.
o Rather than relying on the scope of s 29 TA 2000, professional executors and trustees (whether partners in a law or accountancy firm, an LLP or a trust corporation) will want to include an express charging power. This is commonly added as part of the appointment clause.
o Any Professional Trustee is entitled to charge, and be paid, reasonable remuneration for services that the Professional Trustee or their firm provides.
o Receiving payment for services under s 29 TA 2000 or an express charging clause is not a breach of fiduciary duty, either by way of making a profit from a fiduciary position or a breach of the prohibition on self-dealing/ no conflict rules.
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* Appointment of Guardians clause?
o I APPOINT [ ] and [ ] jointly to be the guardians of any of my children who have not attained the age of 18 at the death of the survivor of myself and my civil partner [ ]
o A testator with parental responsibility may appoint a legal guardian for their infant children by will (s 5 Children Act 1989). Appointment by one parent would not normally take effect until after the death of the surviving parent.
o Acting as guardian is a position of responsibly and the testator should obtain consent from the proposed guardian(s) that they are willing to act. A guardian is not required to accept their appointment.
o Consider whether any financial provision for the guardian is appropriate e.g. a legacy to be paid only if the guardian is appointed.
o Consider whether jointly appointed guardians will work together effectively.
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An executor's primary duty?
o An executor’s primary duty is to administer the estate. Once they have distributed the remaining assets to the beneficiaries their task is complete. A trustee is responsible for the management of any trusts that continue following the estate administration and this role continues for as long as the trust is in existence.
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o An understanding of the trustee role as well as the executor role is important when drafting a will because:
the will may include an express trust
even if no express trust is created a trust may arise if the executors cannot distribute all of the estate e.g. a beneficiary is a minor or there are contingent interests which have not been satisfied. In which case the assets gifted under the will need to be held on trust until such time as they can be distributed.
* In both situations the will drafter must consider the administrative powers required both by an executor to ensure effective estate administration and a trustee to ensure proper management of any ongoing trust.
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What happens when a will does not contain express administrative powers?
o If a will contains no express administrative powers then by default only statutory and common law powers will apply. This is also the case when someone dies intestate (without having made a will).
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What can express powers in wills do in relation to default administrative powers?
Express powers may restrict, re-state, or expand the default position and may also create new powers which would not otherwise exist.
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When do express administrative clauses appear in wills?
o Professionally drafted wills usually contain express administrative provisions which should reflect the needs of the client. These clauses usually appear at the end of a will after the clauses that dispose of the testator’s property.
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How is a trust created in a will?
o Where a trust is created by will, the will itself is the trust deed. However, for clarity, ‘trust deed’ usually refers to a document creating a lifetime trust and ‘will’ refers to the document that creates a trust following death.
o A will may contain a list of express clauses at the end or may include by reference a standard set of express clauses. The standard provisions produced by the Society of Trusts and Estates Practitioners (STEP)) are nationally recognised and widely used in practice.
o STEP is a professional body promoting best practice for those advising on wills, trust and tax matters. The use of standard provisions avoids the need for an extensive list of clauses to be included in the will itself. The detail of the STEP provisions is outside of the scope of the module.
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* Date & Attestation clause?
o Date: []
o Signed by [ ] in our joint presence and then by us in [his OR her] presence
o An attestation clause describes the circumstances in which the will was signed.
o The attestation clause usually states that the will was executed in the presence of two or more witnesses (who attest the execution), and in doing so confirms the requirements for due execution in s 9 Wills Act 1837.
o The date may be included as part of the attestation clause (or earlier at the commencement) but should not appear in both places.
o The testator does not have to sign at the end of the will but it is common practice for the attestation clause to be the final clause in the main body of the will to avoid any question about their intention.
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What should gift of residue contain?
- The gift of residue will usually be more complex than other gifts as it should include a definition of the property, explain what items will be paid out of residue, and often trusts are created.
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What happens when s specific, general or pecuniary gift fails?
- The failure of a specific, general or pecuniary gift, in the absence of any express or implied substitution, means the subject of the gift would be distributed under a clause giving away the chattels (if relevant) or fall within the definition of ‘residuary estate’ and pass under the residue clause.
154
What happens when a residue clause fails?
- The failure of the residue clause (or any part of it) will usually give rise to full or partial intestacy.
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- Dispositive clauses?
By these clauses a testator directs who is to inherit their assets, what each person should receive and on what terms
156
When are the words legacy and devise used in the wills?
Legacy’ normally refers to a gift of chattels or personalty and ‘devise’ is normally used in relation to gifts of real property (land).
157
In what order do dispositive clauses appear in wills?
Traditionally, the dispositive clauses appear in the following order with non-monetary gifts first, followed by gifts of cash, and finally the gift of ‘everything else’ referred to as the residue
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What are specific gifts?
- Specific gifts are of a particular item owned by the deceased at the date of death (distinguished from other property of a similar type owned by the deceased).
- **If the testator does not own at death the item referred to in the will the gift adeems (fails to take effect) and the beneficiary receives nothing.**
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How should specific gifts be drafted?
- A specific gift should be drafted precisely.
The subject matter must be clear so the item can be identified, otherwise the clause may fail for uncertainty.
e.g. I GIVE to [ ] my painting of Epsom race course framed in red and gold absolutely
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Are collections of chattels specific gifts?
Yes
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The statutory definition of chattels (which applies on intestacy)?
all tangible movable property except for money or securities for money, assets used at the intestate’s death solely or mainly for business purposes and assets held at the intestate’s death solely as an investment”
* It includes vehicles, modes of transport and pets.
* It excludes: Money or securities for money Items used solely or mainly for business purposes Items owned solely as an investment
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In what order should specific gifts and chattel gufts appear in wills?
- Where a will contains specific gifts and also a gift of chattels as defined by s 55 there would be a conflict if both clauses attempted to give away the same items.
- To avoid this, specific gifts of items/collections appear before the gift of chattels in a will, and the gift of chattels is drafted to cover only the items that have not already been given away (see words in bold above).
163
What land would be subject to specific gifts of land?
- Property owned as joint tenants passes outside of the succession estate and is not distributed under the terms of the deceased’s will (or intestacy).
- Instead, the property will pass automatically to the surviving co-owner under the law of survivorship. If this reflects the intention of the testator no provision within the will is required.
- Property owned solely by the testator, or jointly as tenants in common, is included within the succession estate and will pass in accordance with the deceased’s will (or intestacy).
- If a testator wants this property to be given to a sole beneficiary of the residuary estate, no specific provision within the will is required.
- If the testator has no particular beneficiary in mind to receive the property and is happy for it to be sold as part of the administration (with sale proceeds being distributed according to the terms of the will) no specific provision within the will is required.
- If a testator wants to give away their interest in a property to a particular beneficiary(ies) then the usual considerations regarding specific gifts should be addressed:
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- If a testator wants to give away their interest in a property to a particular beneficiary(ies) then the usual considerations regarding specific gifts should be addressed:
The property must be identifiable. The full address and registered title number should be used. \
The clause should expressly state what will happen if that property is no longer owned by the testator when they die. Should a specific alternative property be given? Or should the gift be of the testator’s “main residence on the date of my death”. Additional matters should also be considered which include:
* The property must be capable of passing under the will so if owned as joint tenants the joint tenancy will need to be severed.
* A solicitor should check whether any third party interests affect the property and/or if the testator holds the property on trust for anyone else.
* If the property is owned jointly as tenants in common and the testator wants to leave their share to someone other than the surviving co-owner the testator needs advising on the rights of the co-owner.
The testator should be given tax advice regarding the Residence Nil Rate Band.
* If the property is subject to a secured charge/mortgage the testator will need advice relating to the repayment of any outstanding loan and who should be liable for this.
* If the testator does not want to make an outright gift and instead plans to leave the property on trust e.g. conferring a right of occupation or an interest in possession, then practical considerations should be considered. Who will have a right to occupy? Should they pay rent? Can they veto a sale? Who pays the expenses associated with upkeep?
* If the property is being left to more than one person the terms of their joint ownership should be clear.
165
What is a general legacy?
- A general legacy is a gift of property which is not distinguished from property of a similar type – e.g. “a” rather than “my”.
166
Why do general legacies not normally fail?
- A general legacy does not normally fail because the PRs would have to buy the specified property if it was not part of the estate at death.
167
Demonstrative legacy?
- A demonstrative legacy is a type of general legacy (most often pecuniary in nature) which the will directs should be paid out of a specified fund. Such a gift will not fail if there are insufficient assets in the specified fund. Instead, if the specified fund has ceased to exist or is inadequate then the beneficiary is entitled to receive what is left in the fund and to have the balance of the legacy paid as a general legacy.
168
Example of demonstrtive legacy clause?
- I GIVE to [ ] the sum of five hundred pounds (£500) to be paid from my Rochdale Building Society Account absolutely
169
Pecunary legacy clause?
- A pecuniary legacy is a gift of money.
- It can be specific (‘my £300 in the safe in the garage”) or general (see above).
- The clause will often contain the amount of the gift in numbers and words in case there is an error when typing a numerical figure.
- e.g. - I GIVE to [ ] the sum of five hundred pounds (£500) free of tax and absolutely
170
Ways to avoid a gift of residue failing?
avoid giving separate parts of residue (Example 1) and instead use clauses similar to Example 2;
create express substitution clauses in the event that original gift does not take effect; and/or
use an ultimate gift over clause (sometimes referred to as a disaster clause) where the testator specifies who their estate should pass to in the event of all other gifts failing. A gift to a charity is a common choice of ultimate beneficiary.
171
What does the word "my" demonstrate in a will?
The word “my” demonstrates the requisite intention and that item is identified with reference to the property owned at the date of the will
172
When are items that comprise a collection identified?
Items that comprise a collection are identified at the date of death
173
When are people are identified in a will?
o To identify the person(s) who should inherit under a clause the will is deemed to speak from the date of execution, unless the wording in the will shows a contrary intention.
o Where a gift is given to a class of beneficiaries e.g. ‘my grandchildren’ a testator should state expressly when the beneficiaries will be determined e.g. does the testator mean grandchildren alive when the will was executed / when the testator dies / all grandchildren including those born after the testator dies? Without express wording the ‘class closing’ rules apply and the class closes when the first beneficiary in the class obtains a vested interest.
o The execution of a later codicil republishes the will it amends and under the general rule people are identified with reference to the date of the codicil. A gift to ‘my nurse’ in a will would refer to the nurse at the date of a later codicil not the will.
174
IHT attached to gift in will?
o In the absence of any express provision an individual gift in a will is made free of inheritance tax (‘IHT’) and IHT would be payable out of the residue as a general testamentary expense.
o For the avoidance of doubt it is standard practice for legacies to be drafted expressly as free from tax and for the residuary estate to bear the burden of such tax even if it is not strictly legally necessary.
175
What costs is a specifc gift made subject to?
A specific gift is made subject to expenses and costs of transfer
176
What is a gift of property made subject to?
o The general rule set out in s.35 Administration of Estates Act 1925 (AEA) is that unless the will shows a contrary intention, the asset charged bears liability for payment.
o The beneficiary will therefore inherit the property subject to the charge.
o A testator can expressly relieve the property of the charge. It would then become a general debt of the estate to be paid out of residue.
Note that a general direction in the will to pay debts and expenses from the residue of the estate is insufficient to oust the effect of s.35.
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General rule for intrepreting gifts in wills?
: Unless a contrary intention is shown, the will speaks from the date of the testator’s death in respect of identifying the subject matter of a gift
178
How is contrary intention shown in a will?
* A contrary intention can be demonstrated by the use of words such as ‘my’ (as you would see in a specific legacy), ‘now’, or ‘at present’ when describing a gift. These words make the date of execution of the will the relevant date. In both examples below the car the testator owned when they executed the will (not when they died) would be the subject matter of the gift.
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Does contrary intention impact what date a collection is referenced from?
o If there is a gift of a collection which is capable of growing the will speaks from the date of death notwithstanding the use of ‘my’.
o Instructions should be taken from the testator as to whether he intends the gift to be of the collection owned at the date of the will or to include any items acquired in the future. This should then be expressly provided for in the drafting
180
* Relieving provisions?
o Relieving provisions deal with such matters as who should bear the burden of taxes, charges (e.g. mortgages), expenses and costs. Such provisions should be expressly stated to avoid confusion but in the absence of express wording there are general rules which apply.
181
Can a testator oust the general rule that a gift does not bear its own IHT?
o If the general rule does not reflect the testator’s wishes the testator can oust the general rule by stating a gift is to bear its own inheritance tax.
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o In the absence of any express provision specific beneficiaries bear the burden of the:
cost of delivery of the item of property to them
expenses incurred since the date of death in preserving the item or ensuring its upkeep
o The testator may prefer these costs to be paid out of the residuary estate and if so, the gift should be stated to be ‘free of’ expenses and / or costs of transfer.
183
o Under s 21 Administration of Justice Act 1982 extrinsic evidence may be submitted in the following circumstances:
If the will or any part of it is meaningless;
If the language used in any part of it is ambiguous on the face of it;
If the will is ambiguous in light of the surrounding circumstances.
o Extrinsic evidence is used to help with construction of the will. Evidence is not used to vary or contradict the language used by the testator in the will.
184
What should be considered when drafting gifts to testator's issue?
o When drafting gifts to the testator’s issue consider whether a class gift should be made or gifts to named individuals. If a class gift is made express wording should be used to state when the class closes.
185
When do contingent interests arise?
Contingent interests arise where a beneficiary must satisfy a condition before their interest vests.
186
What happens if a beneficiary dies before a testator?
o If a beneficiary dies before a testator a gift to them will lapse.
187
s. 33 Wills Act 1837?
o In the case of gifts in a will to the testator’s issue, if there is no express substitution clause, s.33 Wills Act 1837 (set out below) may apply to prevent the gift lapsing where:
33 (1)
* a will contains a devise or bequest to a child or remoter descendant of the testator; and
* the intended beneficiary dies before the testator, leaving issue; and
* issue of the intended beneficiary are living at the testator’s death,
o then, unless a contrary intention appears by the will, the devise or bequest shall take effect as a devise or bequest to the issue living at the testator’s death.
o S.33(2) includes a similar provision but in relation to class gifts to children/grandchildren.
o Section 33 applies where:
there is a will containing a gift to the testator’s issue (child or other lineal descendant)
the intended beneficiary dies before the testator leaving issue of their own who are living at the testator’s death
* The effect of s 33 is to enable the gift to be shared equally between the issue of the deceased beneficiary, provided no contrary intention is expressed in the will.
It is good practice to include substitution provisions expressly for clarity even if s 33 would otherwise apply to achieve the same result.
Where s 33 applies and the original gift is contingent (e.g. to a beneficiary at 21) it may be unclear whether s 33 imposes a similar contingency on the substitution. It is therefore preferable to provide expressly what the terms of any substitutional gift should be.
It is important to appreciate that s 33 only applies to gifts to issue of the testator (whether to a named child or remoter descendant, or a class gift consisting of children or remoter descendants). However, it does not operate in relation to any other gifts. For example, a gift to a sibling who has predeceased will lapse and s 33 will not apply to enable nieces and nephews to inherit. Therefore, express wording is needed if this is the testator’s intention.
Does not create a contingency unlike intestacy rules
188
Which children does a gift to children include?
o A gift to children includes illegitimate (born to unmarried parents), legitimated (born to unmarried parents who later marry) and adopted children. However, a stepchild is not included unless the interpretation of the will is clear this was intended.
189
General rule for when a class closes?
o The general rule is that a class closes (i.e. the beneficiaries within the class are identified and no one born subsequently can qualify) when any one member of the class first becomes entitled in possession.
190
What happens if no contingency applies to the class?
o If no contingency applies (or at least one of the class has already satisfied the contingency when the testator dies) the class closes on the date of death, provided there is at least one person who satisfies the definition
191
Vested interest?
o A gift vests if it is given outright and absolutely and there are no conditions which must be met.
192
Does age affect someone's vested interest?
If the testator’s children were aged 15 and 19 when the testator died both would have a vested interest even though one of them is a minor (under 18). Vesting is not about age. If a minor with a vested interest dies before attaining the age of 18 the gift belongs to them and will pass into their own estate.
However, where a vested gift is made to a minor the gift would be held on trust until the child attains 18 because a minor cannot give a good receipt for capital.
It is sometimes possible for a child aged 16 or 17 to give good receipt but only if there is an express clause within the will permitting this.
193
When does s.33 not apply?
o Section 33 will apply unless excluded by the wording of the will or the will otherwise indicates a contrary intention. If a testator does not want s.33 to apply it is important that this is clearly stated.
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o If the testator wishes to leave a gift to a club, institution, charitable organisation or other unincorporated association the drafter must have regard to the following:
The organisation should exist and a full name and address (plus registered number of a charity) should be used to avoid doubt over the identity of the intended beneficiary.
Consider whether the organisation has registered charity status (there are inheritance tax implications).
Express provision should be made for the organisation subsequently changing its name, amalgamating with another organisation or ceasing to exist.
Provision should be made for who can give valid receipt (it is common to name the treasurer). In the absence of express provision all members or potential beneficiaries would need to give a receipt which is not practical.
o For gifts to charities, the testator should decide what they wish to happen if the charity ceases to exist or is subject to a winding up order. If the testator wants the gift to be given only to the named charity and/or not made if the charity is subject to a winding up order then ensure this is expressly stated.
e.g. * I GIVE to [ ] of [ ] (registered charity No.) (‘the charity’) absolutely £6,000 for its general purposes provided that:
* if at the date of my death the charity does not exist or is subject to a winding up order my Executors shall pay the legacy to such another charitable body having the same or similar objects
* the receipt of the treasurer or other appropriate officer for the time being of the charity (or of any substituted charity) shall be a good discharge to my Trustees
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When interpreting a will, the task is to discern the testator’s intentions through the language of
the will itself. In trying to establish those intentions the court applies two basic presumptions:
(a) **Non- technical words bear their ordinary meaning**
It is possible for some words to have several different meanings and then the court has
to try to determine the meaning the testator intended given the context of the will as
a whole –
eg ‘money’ can mean notes and coins, but it can also mean everything an
individual owns.
(b) **Technical words are given their technical meaning**
For example, in Re Cook [1948] 1 All ER 231 the testatrix made a gift of ‘all my personal
estate …
’ The court gave the word ‘personal’ its technical meaning of personalty as
opposed to realty.
These presumptions may be rebutted if from the will (and any admissible extrinsic evidence)
it is clear that the testator was using the word in a different sense. So, the testator can use
words in their own way provided it is clear from the will that that is what the testator intended.
The court cannot, however, invent different meanings
196
How to reference spouse/civil partner in will?
The terms ‘husband/ wife’ and ‘civil partner’ are not synonymous. So, a gift to ‘John’s wife’ will
fail if John never marries but enters a civil partnership instead.
197
How can a gift in will fail?
* Uncertainty
* Benficiary is a witness
* Divorce/dissolution
* Ademption
* Lapse
* Disclaimer
* Forfeiture
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How can a gift in will fail for uncertainty?
If it is not possible from the wording of the will to identify the subject matter of the gift or
the recipient, the gift will fail for uncertainty. Obviously, the court will first seek to establish
the testator’s intentions and consider its powers of rectification (see 2.4), but if the meaning
cannot be discerned the gift fails. The only exception is a gift to charity which does not
sufficiently identify the charity. Provided that it is clear that the gift is exclusively for charitable
purposes the court can direct which charity is to benefit.
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Ademption?
**A specific legacy (ie a gift of a particular item or group of items of property) will fail if the testator no longer owns that property at death. The gift is said to be ‘adeemed’. Ademption usually occurs because the property has been sold, given away or destroyed during the
testator’s lifetime.**
200
What problems can arise with regards to ademption?
**Problems may arise where the asset has been retained but has changed its nature since the will was made**. For example, where the will includes a specific gift of company shares, the company may have been taken over since the will was made so that the testator’s shareholding has been changed into a holding in the new company. In such a case, the
question is whether the asset is substantially the same, having changed merely in name or
form, or whether it has changed in substance. Only if there has been a change in substance
will the gift be adeemed.
**Another area of potential difficulty occurs where the testator disposes of the property
described in a specific gift but before death acquires a different item of property which
answers the same descriptio**n; for example a gift of ‘my car’ or ‘my piano’ where the
original car or piano has been replaced since the will was made. It has been held that
the presumption in such a case is that the testator intended that the specific gift was to be
of the particular asset they owned at the date of the will so that the gift is adeemed. By
referring to ‘my’ car or piano, the testator may be taken to have shown a contrary intention
as specified in s 24 Wills Act 1837 (see 2.5). However, this interpretation may vary according
to the circumstances, and the respective values of the original and substituted assets may be
taken into account.
201
How does a gift lapse and what happens if it does lapse?
A gift in a will fails or ‘lapses’ if the beneficiary dies before the testator. If a legacy lapses,
the property falls into residue, unless the testator has provided for the possibility of lapse
by including a substitutional gift. If a gift of residue lapses, the property passes under the
intestacy rules (see Chapter 4), unless the testator has included a substitutional gift in the
will. Where no conditions to the contrary are imposed in the will, a gift vests on the testator’s
death. This means that provided the beneficiary survives the testator, for however short a time,
the gift takes effect. If the beneficiary dies soon after the testator the property passes into the
beneficiary’s estate.
It is possible to show a contrary intention, for example by wording a gift to make it clear
that the property is to pass to whoever is the holder of a position or office at the date of the
testator’s death.
202
How is the order of death established if it is unknown what order someone died in?
f the order of their deaths cannot be proved, s 184 Law of Property Act 1925 provides that the elder of the two is deemed to have died first. If the testator was older than the beneficiary,
the gift takes effect and the property passes as part of the beneficiary’s estate.
203
Survivorship clauses?
Commonly, gifts in wills are made conditional upon the survival of the beneficiaries for a
specific period of time, such as 28 days. These survivorship provisions prevent a gift from
taking effect where the beneficiary survives the testator for only a relatively short time or is
deemed to have survived by s 184. As with any other contingent gift, if the beneficiary fails to
satisfy the contingency, the gift fails.
204
Lapse of gifts to more than one person?
A gift by will to two or more people as joint tenants will not lapse unless all the donees die
before the testator. If a gift is made ‘to A and B jointly’ and A dies before the testator, the
whole gift passes to B.
If the gift contains words of severance, for example ‘everything to A and B in equal shares’,
this principle does not apply. If A dies before the testator, A’s share lapses and B takes only
one share. The lapsed share will pass under the intestacy rules unless, as is often the case,
the testator included a substitutional gift to take effect if one of the original beneficiaries
predeceased.
If the gift is a class gift (eg ‘to my nieces and nephews equally if more than one’), there is no
lapse unless all the members of the class predecease the testator.
205
Section 33 Wills Act 1837?
An exception the doctrine of lapse applies to all gifts by will to the testator’s children or remoter
issue (ie direct descendants) unless a contrary intention is shown in the will. Its effect is to
incorporate an implied substitution provision into such gifts. It provides that where a will contains
a gift to the testator’s child or remoter descendant and that beneficiary dies before the testator,
leaving issue of their own who survive the testator, the gift does not lapse but passes instead to
the beneficiary’s issue. The issue of a deceased beneficiary take the gift their parent would have
taken in equal shares. This is particularly important when establishing entitlement under the will
because the substitutional gift does not appear on the face of the will.
Section 33 does not apply if the will shows a contrary intention. This is usually shown by including an express substitution clause.
206
Disclaimer?
A beneficiary cannot be forced to accept a gift. A beneficiary can disclaim the gift, which will
then fall into residue or, in the case of disclaimer of a gift of residue, pass on intestacy (see
7.3). A beneficiary who disclaims a gift is treated as having predeceased the testator, which
will allow the beneficiary’s issue to replace them under s 33 Wills Act 1837 (see 2.7.5.5).
However, a beneficiary who has received a benefit from a gift (eg a payment of income) is
taken to have accepted the gift and may no longer disclaim.
207
Forfeiture in wills?
As a matter of public policy a person should not profit from their own crime. The long
established forfeiture rule provides that a person should not benefit from the estate of a
person they have unlawfully killed. The rules applies to any entitlement whether it arises by
survivorship, under the intestacy rules or under the terms of a will.
The rule applies to various forms of unlawful killing including murder, manslaughter, aiding
and abetting suicide and causing death by careless driving. However, the rule does not apply
where the killer was insane.
Subject to a contrary intention in the will, a person who forfeits an entitlement under a will is
to be treated as having predeceased the testator. This means that if a child of the testator
forfeits or disclaims, their issue can be substituted under the s 33 Wills Act 1837
In cases of unlawful killing other than murder the Forfeiture Act 1982 allows the court to modify
the effect of the forfeiture rule. The court can modify the effect of the rule in any way including
granting complete relief. The court must not make an order unless satisfied that the justice
of the case demands it having regard to the conduct of the deceased and the offender and
all the surrounding circumstances. The killer must apply for the relief within three months of
conviction. The time limit is strict, and the court has no discretion to extend the period.
208
Opening of a will?
The main purpose of the opening is to identify the testator and the nature of the document.
The full name and address of the testator should be stated.
The date should appear within the commencement or at the end of the will. It is advisable
to date a will so that the chronology can be established for the purposes of revocation (see
3.2.1). The will is dated at the time it is executed.
If the testator intends to marry in the near future, they should state that the will is made in
expectation of that marriage and that they do not wish the marriage to revoke the will (see
3.2.3). In the absence of such a statement the will is automatically revoked by subsequent
marriage. Formation of a civil partnership has the same effect.
209
In family wills, common express trusts are:
*
contingent trusts, conditional on the beneficiaries attaining a specified age;
*
discretionary trusts (where the trustees select who, from a class of beneficiaries, is to
benefit, and how much each will receive, eg ‘on trust for such of my children and in such
shares as my trustee shall select’); and
*
trusts with successive interests, such as a trust to pay the income to the testator’s or
testatrix’s spouse for life, remainder to the children.
210
Power to accept receipts from or on behalf of minors in wills?
Under the general law, an infant cannot give a good receipt for a legacy or share of the
estate. However, the Children Act 1989 allows parents and guardians to give a good receipt
to PRs on the infant’s behalf.
There are often tensions within families and a testator or testatrix may not be happy for a
parent or guardian to give a good receipt for a legacy. In such a case, the will should be
drafted to leave a legacy to trustees to hold for the benefit of the minor rather than to the
child directly. Alternatively, the will may include a clause allowing the PRs to accept the receipt
of the child if the child is over 16 years old. The provision may be incorporated into the legacy
itself or may be included in a list of powers in the will.
211
Other possible powers to include in wills?
* Power to charge
* Extended power to appropriate assets without consent of legatee
* Power to insure assets
* Power to accept receipts from or on behalf of minors
* Self- dealing
212
Power to charge in wills?
If the testator wishes to give the executors (and trustees) power to charge remuneration,
the power can either be included as part of the appointment clause or with the other
administrative provisions (see 5.5.1). When drafting such a clause it is important to be clear
whether a person engaged in any profession or business can charge for time spent on the
administration (for example, a brain surgeon) or whether only a person whose profession
involves administering estates and trusts can charge (for example, a solicitor or accountant).
213
Extended power to appropriate assets without consent of legatee in wills?
Section 41 AEA 1925 gives PRs the power to appropriate any assets in the estate in or towards
satisfaction of any legacy or any interest in residue provided that the appropriation does not
prejudice any beneficiary of a specific legacy. Thus, if the will gives a pecuniary legacy to a
beneficiary, the PRs may allow that beneficiary to take chattels or other assets in the estate up
to the value of their legacy, provided that these assets have not been specifically bequeathed
by the will. Section 41 provides that the legatee to whom the assets are appropriated (or their
parent or guardian if they are a minor) must consent to the appropriation.
It is common to remove the need for the legatee’s consent. This provision is commonly
included in order to relieve the PRs of the duty to obtain formal consent. Nevertheless, the PRs
would informally consult the beneficiaries concerned.
214
Power to insure assets in wills?
PRs have a duty to preserve the value of the estate. Section 19 TA 1925 (as substituted by the
TA 2000) gives PRs and trustees power to insure assets against all risks, to the full value of the
property, and to pay premiums out of income or capital.
It is not necessary to amend the statutory provision. However, including an express provision
makes life easier for lay PRs who will be able to see from the will itself exactly what they can do.
215
Why have a self-dealing power in wills?
The fiduciary position of PRs and trustees prevents them from entering into any transaction
where their duties and personal self- interest conflict. For example, purchasing property, which
is part of the estate or the trust, would breach their fiduciary duty. An express clause in the will
may permit self- dealing by the trustees. One situation where it is important to include such a
clause is where the executors or trustees are also beneficiaries.
216
Powers to include for trustees in wills?
* Power to appropriate assets
* The power to invest
* Power to purchase land
* Power to sell personalty
* Power to use income for maintenance of beneficiaries
* Power to use capital for the advancement of beneficiaries
* Control of trustees by beneficiaries
* Trusts of land
217
How is an attestation clause written?
Signed by me [testator’s name]
in our joint presence and then by us in [his/ hers]
218
Taking instructions from a third party when drafting a will?
Paragraph 3.1 of the SRA Code of Conduct for Solicitors, RELs and RFLs requires:
You only act for clients on instructions from the client, or from someone properly
authorised to provide instructions on their behalf.
In the case of a will, solicitors should not take instructions from anyone but the client as the
dangers of misunderstanding or deceit are obvious. It would not be in the best interests of the
client to take instructions from an intermediary.
219
When might a client leaving a gift of significant value to the solicitor in a will not be considered an own interest conflict?
If the solicitor is satisfied the client has taken independent legal advice regarding making the gift
If the solicitor’s ability to advise could not be said to be affected by the financial interest, e.g. drawing up parents will where solicitor and siblings are treated equally
220
What should a lawyer do if a client wants to appoint them as an executor?
Principle 7 of the Principles requires you to act in the best interests of each client. In
this context this means not encouraging clients to appoint you or the business you
work for as their executor unless it is clearly in their best interests to do so.
In some cases it might be beneficial for a client to appoint a solicitor to act as an
executor – for example, if their affairs are complex, or there are potential disputes in
the family. However, in other cases there may be little or no advantage to the client –
for example, if their estate is small or straightforward. A professional executor is likely
to be more expensive than a lay person and the client should be advised about this.
Before drafting a will which appoints you or your business (or someone else in the
business) as the executor(s), you should be satisfied that the client has made their
decision on a fully informed basis. This includes:
*
explaining the options available to the client regarding their choice of executor;
*
ensuring the client understands that an executor does not have to be a professional
person or a business, that they could instead be a family member or a beneficiary
under the will, and that lay executors can subsequently instruct a solicitor to act
for them if this proves necessary (and can be indemnified out of the estate for the
solicitors’ fees);
*
recording advice that is given concerning the appointment of executors and the
client’s decision.
221
‘testate’?
* If the deceased’s will covers their entire succession estate
222
Partial intestacy?
* If the will does not cover the entire estate, the deceased is ‘partially intestate’
223
Intestacy?
* A person who dies without making a valid will is said to have died
‘intestate’.
* The intestacy rules apply to their entire succession estate.
224
* The main types of property which will not pass to the succession estate are:
▪ Donationes mortis causa
▪ Discretionary pension scheme benefits
▪ Insurance policies written in trust
▪ Life insurance written in trust
▪ Statutory nominations up to the value £5,000
▪ Property held as beneficial joint tenants
▪ Some other beneficial interests under trusts
225
What is a donationes mortis causa (DMC)?
gift made in contemplation of death.
226
A valid DMC has 3 requirements:
▪ The gift is made because the donor believes they may die imminently of a particular cause.
▪ The donor makes it clear that the gift is conditional upon them dying, and that the property reverts to them if they survive.
▪ The donor either parts with the property or something
representing ownership of it.
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What are discretionary pension scheme benefits?
* Refers to a post-death large sum of money that is paid out because you die before retirement age
▪ Goes to the nominated beneficiary
Commonly, **a lump sum** calculated on the basis of an employee’s salary at the time of their
death is paid by the trustees of the pension fund to members of the family or dependants
chosen at the trustees’ discretion.
* If the deceased was a member of an employer’s discretionary pension scheme then payments made by the trustees will not be included in his or her estate for distribution purposes. These rules only apply to discretionary pension schemes.
* Many pension schemes allow contributors to ‘nominate’ a third party to receive any benefits due after the contributor’s death (often by completing an ‘Expression of Wish’ form). Such a nomination is not binding on the trustees (although in practice they almost always make it). As payment is entirely at the discretion of the trustees, the deceased is not deemed to have any entitlement to any payment from the scheme and any payment which is made does not form part of the deceased’s estate for distribution purposes.
* The benefit of the discretionary pension scheme will be released upon the production of a death certificate.
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What insurance policies form part of the succession estate?
▪ If the deceased had a simple life insurance policy, the proceeds of the policy pass to the succession estate.
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What insurance policies do not form part of the succession estate?
▪ If the benefit of the policy was **written in trust** for another person, the proceeds will not form part of the succession estate. The insured has no beneficial interest under the policy. The proceeds belong to the beneficiaries nominated in the policy and vest on the insured’s death.
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* Life policies can be written in trust in three ways:
▪ Under s.11 Married Woman’s Property Act 1882 for the benefit of
spouse and/or children.
▪ Expressly for the benefit of any nominated third party, e.g. grandchildren.
▪ Into an existing trust for the benefit of the named beneficiaries in the trust deed.
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What do statutory nominations involve?
* A person can make a nomination in any of the following accounts:
▪ Friendly Society.
▪ Industrial Society.
▪ Provident Society.
* The amount nominated **cannot exceed £5,000 **
* On the death of the deceased, the monies in the relevant account(s) pass to the nominee rather than under the will or intestacy of the deceased.
* The benefit of the nominated account will be released upon the
production of a death certificate.
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What beneficial co-ownership forms and does not form part of the succession estate?
If the deceased was a beneficial joint tenant, the property will automatically pass to the other joint tenant(s) by survivorship.
* It therefore does not pass into the succession estate
If the deceased was a beneficial tenant in common, they have a separate, divisible share in the trust property which is not extinguished upon their death.
* Each has a discrete share
▪ This share will pass into the succession estate.
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Does a beneficial interest under a trust form part of the succession estate?
* If the deceased was a beneficiary under a trust, their beneficial interest will not necessarily form part of their succession estate.
* It depends on the nature of the interest and whether it survives their death.
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The statutory order of entitlement for intestacy?
Where there is no surviving spouse or civil partner, or where the spouse or civil partner dies
within 28 days of the intestate, the residuary estate is divided between the intestate’s relatives
in the highest category in the list below:
(a) issue on the ‘statutory trusts’, but if none,
(b) parents, equally if both alive, but if none,
(c) brothers and sisters of the whole blood on the ‘statutory trusts’, but if none,
(d) brothers and sisters of the half blood on the ‘statutory trusts’, but if none,
(e) grandparents, equally if more than one, but if none,
(f) uncles and aunts of the whole blood on the ‘statutory trusts’, but if none,
(g) uncles and aunts of the half blood on the ‘statutory trusts’, but if none,
(h) the Crown, Duchy of Lancaster, or Duke of Cornwall (bona vacantia).
The list works on an all or nothing basis. Working from the top, if anyone falls within the
category, they will receive the whole of the entitlement (divided equally if there is more than
one person in the category) and those in the next and lower categories receive nothing.
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# Intestacy
If the intestate leaves a spouse but no issue?
the spouse inherits the entire succession estate absolutely.
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o If the intestate leaves issue but no spouse
the issue inherit the entire succession estate on the statutory trusts.
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o If the intestate leaves both spouse and issue.....
▪ Spouse:
* Personal chattels absolutely.
* Statutory legacy of £322,000 free of tax and costs plus interest from the date of death to the date on which payment is made.
* One half of the residue (if any) absolutely.
* If the spouse does not outlive the deceased by 28 days, the rules apply as if the deceased was not survived by their spouse at all.
o This rule is specific to spouses. There is no requirement for any other beneficiary to outlive the deceased by 28 days.
▪ Issue:
* Other half of the residue (if any) on the statutory trusts.
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the spouse’s entitlement under the intestacy rules is dependent upon
them surviving the deceased by 28 days
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What happens if the intestate's issue are not alive when they die?
o If they do not survive the deceased, their own issue may still inherit their entitlement under the
‘substitution limb’ of the statutory trusts.
o If they do survive the deceased, there is no
requirement that they do so by 28 days, but they will need to satisfy the ‘contingency limb’ before obtaining a vested interest.
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* The Statutory Trusts limbs?
* Contingency Limb
o Each entitled beneficiary must survive the intestate and reach the age of 18 in order to inherit. Until this requirement is satisfied, the beneficiary has a contingent interest.
o If a beneficiary is already 18 or older when the intestate dies they will inherit absolutely and immediately, as the contingency is already satisfied. In this case the beneficiary has a vested interest.
* Substitution Limb
o If an entitled beneficiary dies before the intestate that beneficiary’s own issue can inherit in their place, provided the beneficiary’s issue themselves satisfy the contingency limb (i.e. reach the age of 18).
o This would also apply in the rare scenario where a beneficiary survives the intestate but subsequently dies before attaining a vested interest,
e.g. before reaching 18.
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# Intestacy
Appropriation of the marital home?
▪ The spouse has no automatic right to receive the deceased’s share of the marital home.
* However, they may make an election which enables them
to appropriate the home in full or partial satisfaction of their statutory entitlements (Schedule 2 Intestate Estates Act 1952). o In effect, they have the right to ‘buy’ the deceased's
share of the property from the personal representatives using the money they would have received from the estate.
o The surviving spouse / civil partner must make an election in writing to the personal representatives within 12 months of the date of the grant. During that period the personal representatives cannot normally sell the home without the spouse’s consent.
▪ Where their entitlement under the intestacy rules is lower than the value they are appropriating (e.g. where the home is the only or main asset of the estate) the spouse / civil partner must pay the difference from their personal funds. The home is valued as at the date of appropriation not the date of death.
▪ There are some restrictions on the right to appropriate. The consent of the court is required where the home is only part of a building owned by the deceased or when the home is part of a farm or other business premises.
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* Section 46 of The Administration of Estates Act 1925?
sets out the statutory order of entitlement to the estate for ineststacy
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The intestacy rules operate in three situations:
*
Where there is no will either because the deceased never made a will at all or all wills
have been successfully revoked (see 3.2) (total intestacy).
*
Where there is a will, but for some reason it is invalid (see 1.4) or it is valid but fails to
dispose of any of the deceased’s estate (total intestacy).
*
Where there is a valid will, but it fails to dispose of all the deceased’s estate (partial
intestacy). This will occur if the will simply omitted a gift of residue or if a residuary gift
fails, for example because the residuary beneficiary has predeceased. In a partial
intestacy the intestacy rules only apply to that part of the estate not disposed of by
the will.
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Meaning of issue in the intestacy rules?
The term ‘issue’ includes all direct descendants of the deceased: ie children, grandchildren,
great grandchildren, etc. Adopted children (and remoter descendants) are included, as are
those whose parents were not married at the time of their birth (see 4.9). Descendants of
the deceased’s spouse or civil partner (‘step’ children) are not issue of the deceased unless
adopted.
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o In order to make an application under the Inheritance (Provision for Family and Dependants) Act 1975, an applicant must:
* Be within the jurisdiction of the IP(F)DA 1975.
* Demonstrate that they fall within a recognised category of eligible applicants.
* Make their claim within the prescribed time limit (cannot be made more than six months after the date the grant of representation was made – but the court can extend this).
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Jurisdiction for Inheritance (Provision for Family and Dependants) Act 1975?
o The IPFDA 1975 only applies where the deceased died domiciled in England and Wales. It is therefore important to establish where the deceased was domiciled at the date of death.
o Domicile is different from nationality or residence. However, most individuals born and residing in the UK are likely also to be domiciled either in England and Wales (and, therefore, subject to its legal system which governs succession to property) or Scotland (which has its own succession rules). It is only possible to have one domicile at a time but a person’s domicile can change during their lifetime.
o The different types of domicile are:
* Domicile of origin: This is determined at birth and is based on the father’s domicile if the parents were married or mother’s if they were not.
* Domicile of dependency: If the relevant parent changes domicile, the domicile of children under 16 changes too.
* Domicile of choice: An individual can choose to sever all ties with their domicile of origin (e.g. by emigrating with the intention of never returning to the UK). The intention to change domicile must be permanent.
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o In order to make an application under the Inheritance (Provision for Family and Descendants Act) 1975, an applicant must show that they come within a recognised category. The categories are
A spouse / civil partner of the deceased.
A former spouse / civil partner who has not remarried or formed a subsequent civil partnership.
A person (other than a spouse/civil partner) who cohabited with the deceased as if they were spouses / civil partners for two years prior to their death.
A child of the deceased. (N.B. Adopted children are recognised as the children of the adopters for all legal purposes. Adoption severs legal ties with the birth family.)
Any person who was treated by the deceased as a child of their family. (This might include a step-child for example).
Any other person who was maintained (wholly or partly) by the deceased immediately before their death.
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What does maintenance mean for Inheritance (Provision for Family and Descendants Act) 1975?
‘**maintenance’ refers to financial maintenance of the applicant.** It is not sufficient that the deceased was providing the applicant with emotional or other forms of support
* Section 1(3): An applicant who falls within this category is treated as being maintained by the deceased **“only if the deceased was making a substantial contribution in money or money's worth towards the reasonable needs of that person, other than a contribution made for full valuable consideration pursuant to an arrangement of a commercial nature**.”
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Time limits for bring a claim under the Inheritance (Provision for Family and Descendants Act) 1975?
o An application under the IPFDA 1975 cannot be made more than six months after the date the grant of representation was made (although an application can be made before the grant is issued).
A potential applicant can make a standing search at the Probate Registry to discover whether
a grant has been issued in the last 12 months. The search also ensures that the applicant is
notified of any grant which issues in the following six months.
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When does the court extend the time limits for bring a claim under the Inheritance (Provision for Family and Descendants Act) 1975?
o The Court has discretion to extend the time limit for making a claim
the onus is on the applicant to show special reasons for having exceeded the time limit. The Court should take into account:
the circumstances surrounding the delay,
whether negotiations were commenced within the time limit,
if the estate had already been distributed before notification of the claim, and
whether a refusal to allow the applicant to bring proceedings would leave them without recourse against anyone else.
* Re Dennis added that the applicant must demonstrate that they have an arguable case fit to go to trial.
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o Any order under the IPFDA 1975 is made out of the ‘net estate’ of the deceased. This is defined in s 25. It includes the following property:
The normal succession estate.
Any property in respect of which the deceased held a general power of appointment which has not been exercised.
Any property which the deceased nominated by statutory nomination or gave by donatio mortis causa (minus any inheritance tax paid by the donee)(ss 8(1) and (2)).
The deceased’s severable share of a joint tenancy. This is only part of the net estate if so ordered by the court under s 9.
* Could make the joint tenancy a tenancy in common
Any other property disposed of during the deceased’s life but which is made available by the court’s anti-avoidance powers under ss 10 and 11.
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* The grounds for making a claim under the IPFDA 1975 are:
o that the deceased’s will did not make reasonable financial provision for the applicant; and/or
o that the distribution of the deceased’s estate under the intestacy rules fails to make reasonable financial provision for the applicant.
o The courts will consider the competing interests of the applicant and intended beneficiary, as well as the original wishes of the testator
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o Section 2(1) of the IPFDA 1975 gives the court power to make the following orders:
Periodical payments.
Lump sum.
Transfer of property.
Settlement of property.
Acquisition of property for transfer.
Variation of marriage settlements.
Variation of civil partnership settlements.
Variation of the trusts on which the deceased’s estate is held (whether those trusts arise by will or intestacy).
* Effect of any order
o Any order is deemed to be effective from the deceased’s death.
o Orders are therefore ‘read back’ for tax purposes and treated as if the deceased had made the dispositions at death.
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o Two-stage test for IPFDA 1975 claims
o An IPFDA 1975 assessment requires the court to consider the following questions:
Did the deceased fail to make reasonable financial provision for the applicant?
If so, what award should the court make?
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What factors affect what the court considers to be a reasonable financial provision?
o It is crucial to know what category the claimant falls into:
Section 1(2) sets out two standards of reasonable financial provision, one of which applies to spouses/civil partners and the other applies to all other applicants.
Section 3 sets out factors that must be considered when assessing claims. Different factors apply depending on the category of claimant.
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* Standards of financial provision for IPFDA claims for surviving spouse?
o Surviving spouse standard
‘Such financial provision as it would be reasonable in all the circumstances for a husband or wife or civil partner to receive whether or not that provision is required for his or her maintenance.’
o Maintenance standard
‘Such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his/her maintenance.’
o Extension of surviving spouse standard (s 14)
The court has discretion to apply the surviving spouse standard where the three following conditions are satisfied:
* An applicant is a former spouse or civil partner of the deceased who has not remarried / entered a civil partnership, or a spouse who is judicially separated from the deceased;
* Divorce, dissolution, nullity or judicial separation occurred within 12 months of the death; and
* No order for financial provision has been made or refused in the ancillary proceedings.
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o Under section 3(1) the court is required to have regard to for IPFDA claims?
The applicant’s financial resources and financial needs
The financial resources and financial needs of any other applicants
The financial resources and financial needs of any beneficiary of the estate
Any obligations and responsibilities which the deceased had towards any applicants or beneficiaries
The size and nature of the net estate of the deceased
Any physical or mental disability of any applicant or beneficiary
Any other matter the court considers relevant in the circumstances (including the conduct of the applicant or any other person)
When considering a person’s financial resources and needs, the court must take into account any resources and needs they are likely to have in the foreseeable future.
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What else does the court consider when assessing spouse's claim undert IPFDA?
o Under s 3(2) the court also considers the following in relation to spouses / civil partners:
The applicant’s age and the duration of the marriage / civil partnership.
The contribution made by the applicant to the welfare of the family of the deceased, including any contribution made by looking after the home or caring for the family.
The provision which the applicant might reasonably have expected to receive in divorce / dissolution proceedings if the couple had ended their relationship at the date of death. (This does not apply if they are judicially separated.) This is guidance only and does not set a limit on the award that can be made.
* The court considers the first two criteria for former spouses / civil partners too. The third also applies if the court exercises its discretion to apply the surviving spouse / civil partner standard under s 14.
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What does the court consider when assessing a cohabitee's claim under IPFDA?
o Under s 3(2A) the court considers equivalents of the first two criteria for cohabitees i.e.
The age of the applicant and the length of the period of cohabitation.
The contribution made by the applicant to the welfare of the family of the deceased, including any contribution made by looking after the home or caring for the family.
The third criterion does not apply to cohabitees.
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What does the court consider when assessing a child of the deceased's claim under IPFDA?
o Under s 3(3) where the applicant is a child of the deceased, the court must also consider the manner in which the applicant was (or might expect to be) educated or trained.
o This section also applies if the applicant was not a child of the deceased, but was treated as such, but the court must also consider:
Whether and on what basis the deceased maintained the applicant, for what time they did so and the extent of their contribution.
Whether and, if so, to what extent the deceased had assumed responsibility for the applicant’s maintenance.
Whether in maintaining or assuming responsibility for maintaining the applicant the deceased did so knowing that the applicant was not their child.
The liability of any other person to maintain the applicant.
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What does the court consider when assessing a someone else's claim under IPFDA?
o Under section 3(4) if an applicant does not fall within one of the previous categories, but was maintained (wholly or partly) by the deceased, the court must take into account:
The length of time for which and the basis on which the deceased maintained the applicant, and the extent of the contribution made by way of maintenance.
Whether and, if so, to what extent the deceased assumed responsibility for the maintenance of the applicant.
Section 1(3): An applicant who falls within this category is treated as being maintained by the deceased “only if the deceased was making a substantial contribution in money or money's worth towards the reasonable needs of that person, other than a contribution made for full valuable consideration pursuant to an arrangement of a commercial nature.”
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What award should the court make assessment?
* Quantum: How much should the applicant receive?
* Form of award: What form should the award take?
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Cohabitants who have not formalised their relationship by marriage or the formation of a civil
partnership can apply for a claim under IPFDA under this category if they satisfy three conditions:
*
they must have been living in the same household as the deceased;
*
as the husband, wife or civil partner; and
*
this must have been for the whole of the two years immediately preceding the
deceased’s death.
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# IPFDA claims
There are two standards for judging
‘reasonable financial provision’:
(i) ‘The surviving spouse standard’ allows a surviving spouse or civil partner such financial
provision as is reasonable in all the circumstances ‘**whether or not that provision is
required for his or her maintenance’.** A relevant factor is how much the spouse or civil
partner might have expected on a divorce.
(ii) ‘The ordinary standard’ applies to all other categories of applicant and allows ‘such financial provision as it would be reasonable in all the circumstances … for the applicant to receive for his maintenance’.
Maintenance connotes payments which enable the applicant to discharge the cost of their
daily living at whatever standard of living is appropriate to them. It therefore addresses
payments required to meet recurring expenses, such as rent, heating and food bills.
The limitation to maintenance in the ordinary standard means that a person who is able
to pay for their living expenses out of their own resources will not obtain an award.
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# IPFDA claims
Protecting the PRs?
If PRs distribute the estate within six months of the grant and the court allows a claim for
family provision, the PRs will be personally liable to satisfy the claim if insufficient assets
remain in the estate (see 9.4.3). PRs should be advised not to distribute the estate until six
months have elapsed from the issue of the grant. Then, if a court permits an application out of
time, the PRs will not be liable personally, but the applicant may be able to recover property
from the beneficiaries.
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PET?
* A PET is a lifetime gift to another individual. It is exempt unless the transferor dies within 7 years, in which case it is charged at the death rate of 40%.
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LCT?
* An LCT is a lifetime gift into a trust. It is an immediately chargeable transfer. An LCT is taxed at the lifetime rate of 20% but reassessed and charged at the death rate if the transferor dies within 7 years.
- Don’t pay this if it is under the nil rate band
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How much is the nil rate band?
£325,000
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* There are three kinds of IHT trigger event that you need to be aware of when advising a client in relation to wills and estates:
- Potentially exempt transfers (‘PET’) – Lifetime transfers of value which could become chargeable to IHT depending on whether the transferor survives for seven years after the transfer. Only failed PETs (i.e. those where the transferor does not survive for seven years) are chargeable.
- Lifetime Chargeable Transfers (‘LCT’) – Lifetime transfers of value which are immediately chargeable to IHT at the lifetime rate.These are also reassessed if the transferor dies within seven years.
- Death – When a person dies there is a deemed transfer of all the assets that they own (s 4 IHTA). IHT is chargeable on this transfer of value.
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Chargeable transfer?
- A chargeable transfer is a ‘transfer of value’ made by an individual which is not an “exempt transfer” (s 2(1) IHTA).
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Transferable nil rate band?
* An individual’s surviving spouse or civil partner can inherit the unused proportion of their basic NRB. This is known as the ‘transferable nil rate band’ (‘TNRB’).
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Resident nil rate band?
* There is an additional nil rate band (currently £175,000) for individuals who die on or after 6 April 2017 if they leave their family home to direct descendants. This is known as the ‘residence nil rate band’ (‘RNRB’)
* An individual’s surviving spouse or civil partner can inherit the unused portion of their RNRB similarly to with the basic NRB.
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* The tax treatment of a PET is
- The transfer is not chargeable at the point it is made. No IHT is payable yet.
- It becomes fully exempt if the transferor survives seven years from the date of the PET.
- If the transferor dies within seven years of making the PET, the PET ‘fails’ and becomes a chargeable transfer and thus subject to IHT.
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Tax treatment of LCT?
- An LCT is a chargeable transfer when it is made. IHT is payable on the chargeable value of the LCT at the lifetime rate of 20%.
· Tax paid only if it is above the nil rate band!!!!!!!!
- If the transferor survives 7 years following the LCT there is no further charge to tax.
- If the transferor dies within 7 years, the LCT will be reassessed to tax at the death rate of 40%, using the NRB at the date of death.
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- Cumulative total?
Total chargeable value of all the chargeable transfers made in the previous 7 years
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Calculating IHT on death estate?
- Step 1
· Calculate cumulative total
- Step 2
· Identify assets included in the taxable estate
- Step 3
· Value the taxable estate
- Step 4
· Deduct debts/expenses
- Step 5
· Apply exemptions & reliefs
- Step 6
· Apply RNRB
- Step 7
· Apply basic NRB and calculate tax
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What is the effect of the cumulative total?
* The effect of the cumulative total is to reduce the NRB available for the transfer under consideration. It is therefore necessary to calculate the ‘cumulative total’ on the relevant date to determine the NRB amount for a particular transfer.
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How much extra transferable nil rate band can someone claim from multiple dead spouses?
* Individuals who have survived more than one spouse can claim the TNRB in respect of all of them, subject to a cap of 100% of a full nil rate band being transferred.
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transferable nil rate band - making a claim?
* No claim needs to be made when the first spouse dies.
* The PRs of the surviving spouse must make a claim for the TNRB in the IHT return within two years of the end of the month of death (or within three months of the PRs first acting, if this is later). If they fail to do so, anyone else who is liable to pay the IHT on the surviving spouse’s death can make the claim after the deadline for the PRs to claim has passed.
* HMRC has discretion to extend the deadline.
* If an individual survives more than one spouse, a separate claim must be made for each TNRB. It is advisable to do this even though the cap means that only one TNRB might actually be needed (in case there is an error discovered in the IHT returns of any of the deceased spouses).
* The PRs of a surviving spouse can also make a claim for any TNRB the deceased spouse was entitled to on the death of a previous spouse (if their own PRs had not made such a claim already).
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* The RNRB was introduced by the Finance (No 2) Act 2015. It provides an additional nil rate band where the following conditions are satisfied:
· The deceased died on or after 6 April 2017
· Their death estate included a ‘qualifying residential interest’ (‘QRI’)
· The QRI was ‘closely inherited’ by a ‘direct descendent’
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* RNRB: Amount
* The amount of a full RNRB is £175,000.
* If the deceased’s share or interest in the property (after the deduction of any mortgage on the property) is worth less than £175,000, the RNRB amount is capped at the value of the property.
* Where the RNRB is claimed it is applied to the death estate as a whole rather than set-off against the gift of the property separately.
* There is a tapered withdrawal of the RNRB for estates with a net value (here this means the value of the assets which comprise the taxable estate, after debts have been deducted, but before exemptions and reliefs are applied) of more than £2 million.
* The reduction in the RNRB is £1 for every £2 above the £2 million threshold.
* There is no RNRB available at all for net estates worth £2,350,000 or more (or £2,700,000 where a full transferred RNRB applies).
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* RNRB: Qualifying residential interest (QRI)
* A QRI is a residential property interest which is part of the deceased’s estate immediately before death.
* Where the deceased had more than one residential property interest in their estate at death, the PRs must nominate one of them as their QRI.
* A residential property interest is an interest in a dwelling-house which the deceased occupied as their residence at some point during their period of ownership.
* It includes property in which the deceased did not live (because they were living in other job-related accommodation) but intended to do so in in due course. It does not include rental investment properties in which the deceased never lived.
* A dwelling-house can include the garden/grounds (if the land is not subject to a woodlands relief election).
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* RNRB: Meaning of ‘closely inherited’
* A QRI must be ‘closely inherited’.
* A beneficiary closely inherits from the deceased if they receive the QRI by:
· gift under the will - either as a specific legacy of the deceased’s home, or by taking a whole or part share of the residue which includes such property
· operation of the law of intestacy
· operation of the rules of survivorship
* There are other circumstances in which a person will ‘closely inherit’ from a deceased e.g. where there are gifts into certain types of trust, or where the deceased has received a GROB, but these rules are beyond the scope of the module.
* Unless a specific exception applies, a beneficiary with a contingent interest following death does not ‘closely inherit’ for these purposes as they are not receiving an absolute interest e.g. it would not apply to a gift to a grandchild who was aged 15 if the gift was contingent on their reaching 25.
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* RNRB: Meaning of ‘direct descendants’
* A QRI must be ‘closely inherited’ by one or more direct descendants. The following are included as direct descendants of a deceased person (s 8K IHTA 1984)
* The deceased’s children, grandchildren, great-grandchildren and other lineal descendants,
* Spouse or civil partner of anyone included in 1) above,
* Widow, widower or surviving civil partner of anyone included in 1) above who has pre-deceased the deceased, provided the survivor does not re-marry or enter a new civil partnership before the deceased dies.
* When considering 1) above: adopted children, step-children (if their parent was married to the deceased), foster children and children for whom the deceased was a guardian or special guardian are included.
* The deceased’s siblings, parents, nieces, nephews are not direct descendants.
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* Transferring unused Residence NRB
* The transfer of the RNRB is relevant when the survivor of a married couple dies and their pre-deceased spouse did not use their own RNRB. This may arise where the first of the couple to die:
· did not own a QRI e.g. they did not own a residential property; or
· they did not qualify for the RNRB because they left a QRI to someone who was not a lineal descendant e.g. they left their entire estate to the surviving spouse.
* A transferred RNRB can only be used if the surviving spouse leaves a QRI to a direct descendant (i.e. conditions for the RNRB must be met on the second death).
* The home that the surviving spouse leaves to their direct descendants does not have to be the same house that they lived in with their deceased spouse(s) (the deceased spouse does not need to have owned any QRI).
* Transferring the RNRB works in the same way as transferring the basic NRB, allowing the surviving spouse to increase the value of their RNRB by up to 100% (based on the percentage remaining of the deceased spouse’s RNRB). Where a full transfer occurs, an estate may qualify for a RNRB of £350,000 (£175,000 + £175,000).
* The tapered withdrawal of the RNRB for net estates worth more than £2 million applies with reference to the total RNRB. Where the survivor’s estate could claim £350,000 RNRB this amount is reduced by £1 for every £2 in excess of £2m, and no RNRB can be claimed for net estates worth £2,700,000 or more.
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* RNRB: Downsizing - what is this?
rules which allow an estate to qualify for a full RNRB even if the deceased did not own a QRI when they died (or the value of their QRI is less than the RNRB). These rules are referred to as the “downsizing” rules and the additional amount of the RNRB referred to as the downsizing addition.
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How to qualify for RNRB downsizing?
* Broadly, to qualify:
- the deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015 (i.e. have lost the benefit of the full RNRB)
- the former home would have been a QRI if it had been retained
- a direct descendant inherits the replacement QRI and/or other assets
- The amount of the addition is calculated with reference to the amount of the RNRB which would otherwise be lost because the former QRI is no longer owned (or a less valuable QRI has taken its place).
- A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of death, not when the sale/gift of the former home takes place. However, details of the lifetime sale/gift will be needed by the PRs to bring the claim.
· The downsizing addition is only relevant if there is no QRI in the estate when the deceased died (but there was historically), or the value of the new QRI following a downsizing move is less than the current maximum RNRB.
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* The downsizing rules are not relevant if:
· there is no loss of the RNRB because the value of any new QRI in the estate is the same/more than the maximum available RNRB, or,
· the RNRB is not available, because the new QRI or assets are not left to a direct descendant
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* Maximum combined NRB
* It is possible for a person’s estate to qualify for a total NRB amount of £1million.
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Assets that are not part of the taxable estate?
* ‘Excluded property’
* Insurance policies written in trust for a third party
* Discretionary pension scheme payments
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* Excluded property for IHT?
o The most common example of excluded property is a remainder interest (sometimes called a reversionary interest) in a life interest trust.
o If the remainderman of a life interest trust dies before the life tenant, the trust fund that would have passed to them on the life tenant’s death is not included in the remainderman’s taxable estate.
o In contrast, where a life tenant dies, the value of the trust fund is included in their taxable estate.
But it would not be in the taxable estate if it is discretionary
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* Insurance policy written on trust?
o If the deceased had an insurance policy on their own life where the sum payable on death was written in trust for another the proceeds of the policy
o If the policy proceeds were payable to the deceased’s estate then the amount would be included in the taxable estate.
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* Discretionary pension schemes?
o If the deceased was a member of an employer’s pension scheme any discretionary lump sum payment made by the pension fund trustees is not included in the taxable estate. As the payments are made entirely at the trustees’ discretion the deceased is not deemed to have any entitlement to the money, and the amount paid out (whether to a third party or to the deceased’s PRs) does not form part of the deceased’s estate for IHT purposes.
o Pension lump sums payable by right to the estate of the deceased are included in the taxable estate.
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o The general rule is that the assets in the estate are valued at market value at the date of death. However, some special rules apply in certain circumstances:
o **Related property**: If assets owed by spouses are worth more when valued together (e.g. because they form a set), each party’s share is valued at their proportionate share of the combined pair.
o **Joint property**: Where land is co-owned (whether as joint tenants or tenants in common) the value of the deceased’s share is reduced (by 10-15%) to reflect the difficulty of selling a share of the property rather than the whole. The deduction is not applied where the co-owners are married, as the related property rules apply and take priority. The valuation of other jointly owned property e.g. chattels does not commonly attract this discount. NB: Although HMRC has discretion as to the amount of the deduction, for the purposes of this module we apply a deduction of 10%.
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What debts can be deducted for IHT?
then deduct the following debts from the value of the estate:
The deceased’s debts due at the date of death:
* This is money the deceased owed e.g. outstanding balance on a credit card or loan at the time of death
Post-death debts/expenses: The only post death debt/expenses that can be deducted for tax purposes are reasonable funeral expenses and the cost of a tombstone.
* Other post-death expenses are payable from estate assets but cannot be deducted from the value of the IHT estate to reduce the overall tax due.
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What happens if a solicitor fials to advise effective use of exemptions and reliefs for tax?
o Failing to advise on the effective use of exemptions and reliefs may mean a solicitor is negligent.
Against professional conduct – SRA requiremtns
* You ensure that the service you provide to clients is competent and delivered in a timely manner (CCS 3.2 and CCF 4.2);
* You maintain your competence to carry out your role and keep your professional knowledge and skills up to date (CCS 3.3);
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Exemptions and reliefs available for lifetime transfers only
* Annual exemption
* Family maintenance exemption
* Small gifts exemption
* Marriage exemption
* Normal expenditure out of income exemption
* Taper relief
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Exemptions and reliefs available on death only
Woodlands relief
Quick succession relief
Available for both lifetime transfers and death estate
Spouse exemption
Charity exemption
Business property relief
Agricultural property relief
Political party exemption
Exemptions for gifts for national purposes or to heritage maintenance funds
Exemption for gifts to EBTs
Exemption for gifts to housing associations
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* Business Property Relief requirements?
o A person must have owned qualifying business assets for the qualifying period of time.
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Qualifying business assets for BPR?
o Business Assets include:
Unquoted shares:
* includes all private company shares (i.e. in a “ltd” company) irrespective of the size of value of shareholding
Quoted shares: shares listed on a recognised stock exchange (i.e. in a UK “PLC”) but these are only business assets if the taxpayer controls the company (50%+)
o Business or interest in a business:
transferor is a sole trader or has a partnership interest
Assets owned by taxpayer but used for business: Land/buildings/machinery owned by a taxpayer but used for business purposes by a company the transferor controlled or a partnership where the transferor was a partner
* Business or interest in a business
o Assets owned by taxpayer but used for
business purposes
Investment Assets
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# BPR
* A business (or interest in a business), or shares in a company, are not business property if the business concerned consists wholly or mainly of:
o dealing in securities, stocks or shares, land or buildings
o making or holding investments
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* BPR - qualifying period of ownership
o To qualify the transferor must have owned the business assets continuously for at least 2 years immediately prior to the relevant transfer.
o The type of business does not need to be the same throughout the 2 year period but there must have been a business for all of that time.
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Exceptions to BPR - qualifying period of ownership
o If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous.
o If a person inherits business assets following someone’s death, they are deemed to acquire the assets on the date of death (even though the assets will have been transferred to them after this date).
o If a person inherits business assets following the death of their spouse, they are deemed to have owned the property from the time it was originally acquired by their deceased spouse irrespective of how long they had been married (the survivor ‘inherits’ the period of ownership).
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o Where a taxpayer makes a PET or LCT of qualifying business assets and this transfer is assessed to IHT following the death of the transferor within 7 years, BPR is only available for the lifetime transfer if the qualifying property transferred (or replacement qualifying property):
- is owned by the transferee; and
-qualifies for BPR when the transferor dies (or on the death of the transferee if earlier).
-There is no minimum ownership requirement of 2 years for the transferee.
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What does agricultural Property Relief do?
o Agricultural Property Relief (‘APR’) reduces the IHT payable on the agricultural value of qualifying assets. The ‘agricultural value’ may not be the same as the market value. The definition of ‘agricultural value’ is outside the scope of the module.
o The effect of APR is to reduce the value of a taxable transfer by the amount attributed to the agricultural property. Although a taxpayer can benefit from APR at 100%, it is considered a relief rather than an exemption.
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Requirements for APR?
o A person must have owned qualifying assets for the qualifying period
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# APR
* Qualifying agricultural property?
Agricultural land and buildings:
used for purposes connected with agricultural activity.
Farmhouses and cottages: may qualify if they are of a ‘character appropriate’ to the associated agricultural land and have been occupied for the purposes of agriculture e.g. farmhouse occupied by a farm worker or their surviving spouse and not someone who occupies for purely domestic reasons.
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Qualifying periods of ownership for APR?
occupied for agricultural purposes by the transferor throughout the two years immediately before the transfer, or, *
owned by the transferor and occupied by them or another for agricultural purposes throughout seven years immediately before the transfer.
o Note the following exceptions which also apply to BPR: *
If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous. * I
If a person inherits qualifying assets following someone’s death, they are deemed to acquire the assets on the date of death (even though the assets will have been transferred to them after this date). *
If a person inherits qualifying assets following the death of their spouse, they are deemed to have owned the property from when it was originally acquired by the deceased spouse irrespective of how long they were married (the survivor ‘inherits’ the period of ownership).
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Rates of relief for APR?
o 100% relief is available if the transferor was the owner occupier (or would be entitled to vacant possession within 12 months from the date of the transfer), or, the property was let on a tenancy beginning on or after 1st September 1995. This is usually the case.
o 50% relief applies less frequently, and usually in respect of tenancies created before September 1995.
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o Where a taxpayer makes a PET or LCT of qualifying agricultural property and this transfer is assessed to IHT following the death of the transferor within 7 years, APR is only available for the lifetime transfer if the qualifying property transferred (or replacement qualifying property):
-is owned by the transferee; and
-qualifies for APR when the transferor dies (or on the death of the transferee if earlier).
-There is no minimum ownership requirement of 2 years for the transferee.
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* Interaction of APR and BPR
o APR is given in priority to BPR in scenarios where both reliefs would apply.
o It is not possible to claim BPR on a business asset if that asset also qualifies for APR.
o Both reliefs may apply in the context of commercial farming enterprises. Some assets may qualify for both relief and others for only one.
o Agricultural buildings may qualify for both – so APR applies in priority
o Livestock is not included in the definition of agricultural property but its value may qualify for BPR
o Farmhouses/cottages are unlikely to qualify for BPR, but may qualify for APR
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Spouse exemption?
o Gifts between spouses during life and following death are completely exempt.
o Provided both parties are domiciled within the UK (which will always be the case in this module) there is no upper limit to the value of the exemptio
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Charity exemption?
o All transfers to registered charities during life and following death are exempt irrespective of the amount given provided the gift is used exclusively for the purposes of the charity.
o The gift can be conditional provided the condition is satisfied within 12 months.
o The gift must be immediate and not in remainder for the exemption to apply. The gift must normally be absolute.
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When can the spouse exemption apply?
o Life Interest Trust
o Life Interest (right to income)
o Remainder Interest (right to capital on end of life interest)
o On a person's death, spouse exemption will apply to the value of assets transferred to a life interest trust if the surviving spouse receives a life interest i.e. named as the life tenant.
o However, spouse exemption does not apply if they receive a remainder interest i.e. named as the remainder beneficiary.
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What charities can qualify for the charity exemption?
o To qualify for an IHT exemption a gift must be made to a charity that is subject to the “jurisdiction of a UK court or that of another EU member state” (FA 2006).
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When can leaving a gift to charity reduce the amount of IHT paid?
a reduced rate of IHT (36% instead of 40%) may be available in respect of the chargeable assets in the estate.
The reduced rate applies where a deceased leaves at least 10% of their estate to charity. When drafting a will that includes a charitable gift, it is worth checking how close it comes to 10% of the net estate. It can be beneficial for the client to increase the amount of the proposed gift in order to ensure that the 36% rate applies.
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o Gifts to political parties (s 24 IHTA) exemption?
Gifts to established political parties are exempt from IHT. In order to qualify for the exemption, one of the following conditions must apply (as at the last general election):
The party had at least two MPs elected
The party had at least one MP elected and at least 150,000 votes given to candidates representing that party.
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o Gifts of land to housing associations (s 24A IHTA) exemption?
A gift of land is exempt from IHT if it is made to a housing association or to a registered social landlord.
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o Gifts for national purposes (s 25 IHTA) exemption?
Gifts are exempt from IHT where they are made for designated ‘national purposes’.
There is a list of bodies institutions in Schedule 3 which are covered by the exemption.
The list includes museums and galleries which exist for specified purposes that are for the public benefit (such as the National Gallery and British Museum).
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o Gifts to heritage maintenance funds (s 27 IHTA) exemption?
A similar exemption applies to gifts to funds which are designated as ‘heritage maintenance funds’.
These are trusts which maintain historic buildings or land of scenic, scientific and historic interest.
Gifts to the fund do not incur IHT, nor is the fund itself required to pay IHT (as long as it continues to be meet the requisite approval criteria).
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* Gifts to Employee Benefit Trusts (s 28 IHTA) exemption?
o There is another exemption for transfers of shares made into Employee Benefit Trusts (known as ‘EBTs’), providing they satisfy strict conditions set out in s28 IHTA.
o However, it is important to be aware of them as you may come across them when advising on corporate transactions or litigation matters, as well as if you work in a specialist tax or employment department.
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Quick succession relief?
o Quick Succession Relief is reduction in the IHT charge following death where assets in the deceased's estate had been transferred to the deceased in the 5 years before their death and those assets were subject to IHT at the time of the transfer.
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o Woodlands relief?
Gifts of woodland following death may qualify for woodlands relief.
Woodlands relief is a deferral of the IHT that would otherwise be payable on the value of the woodland.
To use the deferral those administering the estate should make an election to exclude the value of the woodland from the death estate.
The value of the woodland is the value of the trees (i.e. timber) and not the land itself.
Tax is deferred until the timber, not the land, is subsequently sold or given away.
As woodlands relief only applies to the value of the timber (not the land) and is a deferral rather than reduction of liability it may be preferable to consider alternative reliefs that might apply instead.
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Woodlands relief requirements?
If the deceased had purchased the woodland, they must have owned it for at least 5 years before dying for the relief to apply.
If the deceased had themselves inherited the woodland following someone else’s death, there is no qualifying period of ownership.
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What else could woodland qualify as?
* Business property – so business property relief (‘BPR’) might apply.
o BPR should be considered where woodland is used for commercial purposes e.g. commercial fishing or timber harvesting.
* Agricultural property – so agricultural property relief (‘APR’) might apply.
o APR can be considered if the land is classified as agricultural land or ancillary to this.
BPR and APR are more generous reliefs and if they apply would usually be claimed instead of woodland relief.
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o QSR applies where a person dies and:
their death estate includes assets received by way of gift or inheritance,
in the 5 years before their death, and
those assets were subject to an IHT charge when transferred to the deceased.
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* Calculating IHT on lifetime transfers
· Step A
* Calculate cumulative total
· Step B
* Identify value transferred
· Step C
* Apply exemptions and reliefs
· Step E
* Apply taper relief
· Step F
* Give credit for tax paid in lifetime
· Note that Steps E and F only apply when the IHT is being calculated after death.
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Taper relief rates?
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Who pays IHT on an LCT?
· The general rule is that the person in whom the assets vest (donee) is usually liable to pay IHT.
· For an LCT that will be the trustees of the trust which receives the assets.
· Payment is made using the settled assets i.e. the trust fund.
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Grossing-up?
· If the trustees do not pay the tax the donor becomes liable. Alternatively, the donor may elect to pay the tax.
· If a donor pays IHT using their own funds their loss is effectively “assets settled + IHT liability”. The amount of this figure is calculated by notionally increasing (grossing-up) the original value of the transfer. The IHT payable is then calculated with reference to the grossed-up value not the value settled.
· More tax is paid to HMRC where grossing-up is required.
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General rule for who pays IHT on a lifetime gift?
· The general rule is that the lifetime recipient (donee) is liable to pay the IHT due.
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Who pays IHT on death estate?
· The deceased’s PRs are liable to pay this tax.
· IHT is paid from residue unless a contrary intention appears in the will – s 211(2) IHTA
· The general rule (IHT is payable from residue unless a contrary intention is shown) is the preferred option for most testators.
· As such, it is a general rule of construction that gifts in a will (other than residue) are deemed to be given “free of tax” whether or not these words are expressly stated.
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Who is liable to pay IHT on Joint tenant property?
· Joint tenant property: surviving co-owner
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Who is liable to pay IHT on statutory nomination?
nominated beneficiary
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Who is liable to pay IHT on DMC?
lifetime donee
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Who is liable to pay IHT on trust assets?
trustees
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Who is liable to pay IHT on GROB?
lifetime donee
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Small gift allowance?
· Small gifts allowance applies gifts up to £250 per tax year (but not at all to any gift above this amount). Small gifts can be made to an unlimited number of individuals.
· The small gifts allowance is not available if combined with any other exemption, including the AE.
· If an individual wishes to make gifts of more than £250 to any one person they should rely on the AE instead.
· If a donor wants to give away e.g. £3,250 they cannot give this amount to one person and claim the AE and the small gifts allowance to cover the full value. However, if they gave £3,000 to one person and £250 to another person both reliefs could be claimed.
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* Annual Exemption (s 19 IHTA)?
· The Annual Exemption (‘AE’) allows individuals to make gifts of up to £3,000 each tax year free from IHT.
· The AE is applied chronologically to transfers (PETs or LCTs) when they are made. If more than one transfer is made on one day, the annual exemption is applied pro rata, irrespective of the order in which the gifts were made.
· The AE should be used after any other available exemption or relief is applied to ensure the AE is available for later transfers.
· Once the AE for the current tax year is used first and in full a transferor may look back to the previous tax year (but no further) and use any part of the AE from the previous tax year that was not used at the time.
· Therefore, a maximum of 2 x AE (£6,000) may be available to use against a transfer (assuming no other transfers have been made in that tax year or the previous tax year).
· A tax year runs from 6 April one calendar year to 5 April the following calendar year.
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* Family maintenance (s 11 IHTA)?
· Maintenance payments are not treated as transfers for IHT purposes if made to:
* A spouse (or former spouse if part of a divorce settlement)
* The minor child of either party to a marriage for maintenance, education or training, or if over 18 and otherwise in full time education or training
* A dependent relative to make reasonable provision for their care. ‘Care’ is not defined but HMRC suggest that payments to cover the provision of services, whether privately or in an institution, would be covered (but not payments which go beyond maintenance).
· Practice Alert
* Although the spouse exemption would normally apply for transfers between spouses, the maintenance exemption can be used in cases where the spouse exemption would not apply (e.g. if the recipient is domiciled outside the UK).
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# Marriage exemption
· A gift given in consideration of a marriage to a party of that marriage is exempt up to:
* £5,000 if made by a parent of one of the parties
* £2,500 if made by one party of the marriage to the other
* £2,500 is only for grandparent or great-grandparent; and
* £1,000 in any other case.
- NB: marriage exemption and the annual exemption can both be claimed in respect of the same gift.
* The gift must be made in relation to a specific marriage – contemporaneously, or, before and conditional upon it, or, after if satisfying a previous legal obligation.
* The relief applies to one or both parties to the marriage or civil partnership e.g. a father can give £5,000 to his own son and £1,000 to the bride and claim an exemption of £6,000.
* The relief applies per donor.
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* Normal expenditure out of income (s 21 IHTA)?
· A transfer of value is exempt if made:
* from the donor’s income (not capital)
* as part of a normal/regular pattern of giving, and
* do not affect the donor’s standard of living.
· There is no upper limit to this exemption.
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* Tax avoidance?
the efficient and lawful arrangement of a client's affairs in a manner which minimises their liability to tax.
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* Aggressive tax avoidance?
a form of tax avoidance which often involves the taxpayer entering into complex or artificial arrangements which have the overall effect of reducing their tax liability. These schemes comply with legislation but often do not reflect the intention behind the law. This kind of tax planning may involve exploiting loopholes or inadvertent gaps in drafting. Once HMRC become aware of a particular arrangement, ‘anti-avoidance’ legislation is often introduced to prevent further exploitation.
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* Tax evasion?
where a taxpayer withholds information about assets or income, or otherwise takes steps to avoid paying the tax they are liable for. This is unlawful.
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· Gifts with reservation of benefit (‘GROB’) rules
These rules prevent individuals manipulating the PET rules by giving away property but retaining an interest in it.
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· Restriction on deduction of loans for IHT purposes
These rules prevent individuals manipulating the rules on deducting debts to artificially reduce their IHT liability.
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· Pre-owned assets charge (‘POAC’)
This is an income tax charge which complements the GROB rules by preventing individuals using assets which they have given away (or contributed towards).
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· General anti-abuse rule (‘GAAR’)
This is an extremely wide measure that penalises aggressive tax avoidance.
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· Disclosure of Tax Avoidance Schemes (‘DOTAs’)
– This is a reporting regime that helps HMRC identify and monitor potential tax avoidance at an early stage.
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anti-avoidance rules restrict deductions for which loans?
* Loans made to acquire, maintain or enhance assets that qualify for BPR. (This also applies to agricultural and woodlands relief.)
* Loans which are not repaid from the estate.
* Loans made to acquire, maintain or enhance excluded property (i.e. property which is not subject to IHT).
* Loans which fund a qualifying foreign currency account.
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A lifetime gift will be treated as a gift with reservation of benefit (‘GROB’) in one of two situations:
* The donee does not assume “bona fide possession” of the property at or before the start of the “relevant period”.
* At any time during the “relevant period” the property “is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise”.
* The relevant period is the seven year period before the donor’s death (or a shorter period if the gift is less than seven years before death). Note that it is not simply the seven years after the gift is made. A gift can be caught by the GROB rules many years after it is made if the donor reacquires an interest in the property. (This prevents donors avoiding the GROB rules by temporarily giving up an interest in the property.)
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· For a donee to be treated as having bona fide possession of the gifted property for the purposes of the GROB rules they must:
* Obtain a vested, beneficial interest in the property.
* Have actual enjoyment of the property.
* Assume possession and enjoyment at the start of the relevant period.
· Actual enjoyment of property may consist of:
* physical enjoyment (e.g. occupation of land) or
* receipt of the income produced by the property.
- For example, if a donor transfers legal title to their home but the donee allows them to live in it rent-free, while the donee lives elsewhere, the donee has not obtained bona fide possession. Although they have a vested, beneficial interest, they do not have actual enjoyment of the property. In contrast, if the donor pays the donee market rent to remain in the home, the donee will have actual enjoyment of the property.
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* GROB: Effect of reserving benefit
* If the GROB subsists at the date of the donor’s death, the property is treated as if it were part of the donor’s estate for inheritance tax purposes. It is valued at the date of the donor’s death.
* If the donor no longer retains the benefit at the date of their death, they are treated as having made a PET on the date the reservation ceased. This deemed PET is charged in the same way as any other PET on the donor’s death but because it does not involve an actual transfer of value it will not benefit from the Annual Exemption (‘AE’).
· Because the original gift may also be chargeable as a failed PET (if it was made within the 7 years prior to death) the GROB could end up being charged to tax twice. Relief is available to prevent a double-tax charge in these circumstances.
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* GROB: CGT consequences
· Where a donor makes a GROB the property becomes the donee’s property for the purposes of capital gains tax (‘CGT’).
· This means that CGT may be payable by the donor on the increase in value of the property since they acquired it. If the donee later sells the property, CGT will be calculated based on the increase in the value of the property between the date of the gift and the date of transfer (even though, because it is a GROB, the donee may not have actually obtained any real benefit from the property until the GROB ceased or the donor died).
· In contrast, if the gift is made upon the donor’s death, there is no CGT liability in relation to gains accrued during the deceased’s lifetime for the donor’s estate, and the donee is treated as acquiring the property for its market value at the date of death. This is known as the free CGT uplift and can be a significant justification for leaving it until death to make a gift of valuable property.
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· The POAC is set out in s 84 and Sch 15 Finance Act 2004. It applies to 3 different types of property:
* Land
* Chattels
* Intangible property held in a settlor-interested trust. (For these purposes ‘intangible property’ means any property other than land or chattels. Examples include cash, credits in a bank account and shares.)
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· Two conditions must be satisfied for land to be subject to the POAC:
· Two conditions must be satisfied for land to be subject to the POAC:
* An individual occupies land (either individually or with others). This condition is not always easy to assess as there is no statutory definition of occupation but HMRC’s guidance indicates that it should be construed widely, with each case determined on its own particular facts.
* Either the ‘disposal condition’ or ‘contribution condition’ is met. You do not need to know how to apply these in detail but, broadly, they apply to situations where the individual has either disposed of the occupied land or has contributed (directly or indirectly) towards the acquisition of that land without obtaining a beneficial interest in it.
· If the POAC applies, the benefit that the individual receives through their occupation is treated as income. Broadly, this means the individual will pay income tax on the equivalent of the market rent they would have had to pay in order to occupy the land.
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* POAC: Chattels
· The rules for chattels are similar to those that apply to land except that the occupation condition instead requires that the individual is in possession of or has the use of the property.
· Again, there is no statutory definition of either ‘possession’ or ‘use’ meaning it is a matter of fact for HMRC to assess. There is limited guidance on the meaning of either term, although HMRC does consider that the same de minimis thresholds apply here as they would in an assessment for the purposes of the GROB rules.
· If the POAC applies to a chattel, income tax will be calculated by taking the market value of that chattel and multiplying it by an official rate of interest.
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* POAC: Settlor-interested trusts
· As with land and chattels, two conditions apply:
* The trust must be settlor-interested, meaning there are circumstances in which the trust property is, will or may become payable to or for the benefit of the settlor. Examples include discretionary trusts of which the settlor is an object and trusts in which the settlor has a remainder interest.
* The trust property must include intangible property which was settled into the trust by the individual on its creation or subsequently added by them to the settlement. (It includes the invested proceeds of the original settled property – it doesn’t need to remain in exactly the same form.) The settlement or addition must have taken place after 17 March 1986.
· If the POAC applies, it is calculated by reference to the official interest rate that would be payable on the settled property (with credit for any income tax or CGT paid under other anti-avoidance rules.)
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· The POAC does not apply to ‘excluded transactions’. These only apply to land and chattels and are broadly equivalent to other IHT exemptions. They include:
* Transfers to the individual’s spouse or civil partner are exempt from POAC.
* Dispositions for the purposes of family maintenance: If a gift qualifies for family maintenance allowance it is not subject to POAC (whether it would be caught by the disposal or the contribution condition).
* Annual and small gift exemptions: If a gift qualifies for annual or small gift exemption, it is not subject to POAC (whether it would be caught by the disposal or the contribution condition).
* Arm’s length sales: Disposals at arm’s length to unconnected persons do not meet the disposal condition.
* Occupation seven years after cash gift: If the contribution condition is met more than seven years before the occupation/possession condition, the POAC does not apply.
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* General anti-abuse rule (‘GAAR’)?
· The general anti-abuse rule (‘GAAR’) was enacted in Finance Act 2013 as an attempt to counteract a wide range of aggressive tax avoidance. It applies to a range of taxes, not just IHT.
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· The following conditions must be satisfied for the GAAR to apply:
* There is an arrangement which gives rise to a tax advantage:
- This can include a reduction, deferral or complete avoidance of tax. HMRC will usually compare the result with the tax consequences of the hypothetical transaction the taxpayer would have most likely entered into in the absence of the arrangements.
* The tax advantage relates to a tax to which the GAAR applies: This includes IHT.
* The arrangement satisfies the ‘main purpose’ test:
- This applies where it is reasonable in all the circumstances to conclude that obtaining a tax advantage is the main or one of the main purposes of the arrangement.
* The arrangement is abusive:
- The test requires HMRC to show that entering into the arrangement “cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances”. This is known as the ‘double reasonableness test’.
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* DOTAS?
· The Disclosure of Tax Avoidance Scheme (‘DOTAS’) was introduced in the Finance Act 2004 (‘FA 2004’). It is a reporting regime which is intended to make HMRC aware of potentially unacceptable tax avoidance arrangements at an early stage. It applies to a range of taxes, including IHT.
* DOTAS places duties primarily on ‘promoters’ of arrangements to inform HMRC about notifiable arrangements or proposals. Crucially, this can include legal advisers.
* Once informed, HMRC may allocate a scheme reference number to notifiable arrangements or proposals. Promoters (and their clients) are then required to provide this number to parties to the arrangements.
* Promoters must provide information to HMRC about any clients to whom they provide services connected to the notifiable arrangements.
* Parties to notifiable arrangements must also provide information to HMRC.
* HMRC has investigation and enforcement powers under DOTAS.
· Penalties apply for failure to comply (but non-compliance is not a criminal offence).
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* DOTAS: Notifiable arrangements
· Under s 306(1) FA 2004 arrangements in respect of IHT are notifiable if any of the following conditions apply:
* The arrangements fall within any description prescribed by HM Treasury by regulations. (These are commonly referred to as ‘hallmarks’).
* The arrangements (might be expected to) enable any person to obtain an advantage for a tax to which a relevant hallmark applies.
* The arrangements are such that the main benefit, or one of the main benefits, that might be expected to arise from them is the obtaining of the identified advantage.
· The hallmarks differ depending on the tax concerned. There are three applicable to IHT. In this module we focus on the specific IHT hallmark, but note that there are two more general hallmarks that apply to IHT in practice.
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* DOTAS: The IHT hallmark
· Two conditions must be satisfied for the IHT hallmark to apply:
· The main purpose or one of the main purposes of the arrangements is to enable a person to obtain one or more specific advantages in respect of IHT. The specific advantages are:
* The avoidance or reduction of specified IHT charges relating to trusts and gifts to close companies. (These are outside the scope of this module.)
* The avoidance or reduction of charges arising under the GROB rules (unless the arrangement instead gives rise to POAC).
* A reduction in the value of an individual’s estate which does not give rise to a chargeable transfer or PET.
· 2. The arrangements involve one or more contrived or abnormal steps without which there would be no tax advantage.
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* DOTAS: IHT hallmark examples
· HMRC guidance indicates that ordinary IHT planning will not be notifiable under DOTAS. The following are therefore not notifiable:
* Ordinary outright gifts, even where they are exempt.
* Executing a will, deed of variation or disclaimer which gives rise to an IHT exemption.
* Acquisition of property which qualifies for a statutory relief or a transfer which is specifically provided for in the IHT legislation.
· The guidance indicates that the following are (or may be) notifiable:
* Creation of a reversionary lease to the lessor's children which starts so far in the future that the lessor would not still be expected to be alive.
* Creation of an employee benefit trust to benefit the settlor's children after the settlor’s death.
* Settlement of shares qualifying for BPR with an arrangement to sell them back to the settlor – This may be notifiable, depending on the specific circumstances.
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Spouse exemption and life interest trust?
· If a testator creates a life interest trust by will, spouse exemption can be claimed on the amount passing to the trust provided the testator’s spouse is the life tenant. There is no spouse relief if the testator's spouse is a remainder beneficiary.
* But would be includes in the life tenant’s taxable estate because they are the beneficial owner but the remainder interest is excluded
· Would be good for those who want control over who distributes their money after death
· This means:
* there is tax advantage to the testator (or their estate) compared to the testator making a gift to a non-exempt beneficiary.
* the IHT position would be the same whether a testator left their entire estate to their spouse absolutely, or left their entire estate on a life interest trust and named their spouse as the life tenant.
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Definition of ‘estate’
A person’s estate is defined as all the property to which the deceased was beneficially
entitled immediately before their death, with the exception of ‘excluded property’ (s 5(1)
IHTA 1984).
Property included within this definition falls into three categories:
(a) Property which passes under the deceased’s will or on intestacy.
The deceased was ‘beneficially entitled’ to all such property immediately before death.
(b) Property to which the deceased was ‘beneficially entitled’ immediately before death but
which does not pass under by will or on intestacy.
This applies to the deceased’s interest in any joint property passing on death by
survivorship to the surviving joint tenant(s). In most cases, the deceased will be taken to
have owned an equal share in the property with the other joint tenant(s).
(c) Property included because of special statutory provisions.
By statute, the deceased is treated as having been ‘beneficially entitled’ to certain types of
property which would otherwise fall outside the definition. These rules apply to
(i) certain trust property; and
(ii) property given away by the deceased during lifetime but which is ‘subject to a
reservation’ at the time of death.
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Valuing quoted shares for IHT?
The value of quoted shares is taken from the Stock Exchange Daily Official List for the date
of death (or the nearest trading day). The list quotes two prices. To value the shares for IHT,
take one- quarter of the difference between the lower and higher price and add it to the lower
price.
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Basic rule for when IHT should be paid on death estate?
The basic rule is that IHT is due for payment six months after the end of the month of death
(although PRs will normally pay earlier in order to speed up the administration of the estate
as any IHT due must be paid before the grant of representation can be obtained
If the tax due is not paid on time, interest runs on the outstanding amount.
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Instalment option for paying IHT?
```
Some property, such as land and certain types of business property, attracts the instalment
option. Any tax attributable to instalment option property may be paid in 10 equal yearly
instalments, the first falling due six months after the end of the month of death. The tax on
the estate is apportioned using the estate rate to find how much tax is attributable to the
instalment option property.
The instalment option applies to:
(a) land of any description;
(b) a business or an interest in a business;
(c) shares (quoted or unquoted) which immediately before death gave control of the
company to the deceased;
(d) unquoted shares which do not give control if either:
(i) the holding is sufficiently large (a holding of at least 10% of the nominal value of the
company’s shares and worth more than £20,000); or
(ii) HMRC is satisfied that the tax cannot be paid in one sum without undue hardship; or
(iii) the IHT attributable to the shares and any other instalment option property in the
estate amounts to at least 20% of the IHT payable on the estate.
```
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When is IHT paid for PETs?
Any IHT on a PET that has become chargeable is due six months after the end of the
month of death. The instalment option outlined above may be available depending on the
circumstances.
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When is IHT paid on LCTs?
At the time of the transfer
Any IHT on LCTs made after 5 April and before 1 October in any year is due on the 30 April in
the following year. Inheritance tax on LCTs which are not made between those dates is due six
months after the end of the month in which the LCT is made.
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Do PRs need to follow the funeral wishes in the will?
- There is a moral, rather than legal, obligation to follow funeral wishes set out in a will. The will should be checked for specific instructions
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Do PRs need to preserve the value of the estate?
- The PRs have a duty to preserve the value of the estate and may be personally liable to account for loss or damage to the estate assets.
- The PRs should take steps to ensure valuable items and documents are kept safe. If a property is left vacant it should be secured and the insurers notified. If a vehicle will be left unattended and off road, the insurers and the DVLA should be notified.
- The PRs should consider the security of any digital assets and the possible closure of social media accounts.
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- The PRs need to compile an accurate list of the deceased’s assets and liabilities to:
Identify and value the estate assets
Identify the deceased’s creditors (to whom the PRs owe a duty as well as the beneficiaries)
Work out what steps are required to manage the distribution of the assets
Calculate the IHT due (this is done with reference to the date of death values)
Establish whether the estate is solvent
Estimate what each beneficiary is entitled to
- It is not possible to obtain the grant or calculate the IHT without this information.
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- Once a schedule of assets and liabilities has been prepared the PRs should contact any appropriate organisation to:
- notify them of the death and provide a copy death certificate (if this has not already been done)
- request confirmation of the value of the asst at the date of death
- request instructions for how to close an account / transfer ownership of the items to the PRs
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- To establish the value of the following commonly held assets:
Bank accounts: PRs should request from the bank a summary of the account balance on the date of death plus any accrued interest.
Joint accounts: PRs must establish what proportion of the bank account was owned by the deceased. 50/50 is often presumed but enquiries should be made to ensure that an alternative arrangement had not been made. For example, a parent and child may hold a joint account to allow the child to easily manage their parent’s finances – but the £ in the account may belong entirely to the parent.
Low value chattels: It is usually acceptable to estimate their value. The probate value (what they would fetch if sold) will normally be lower than their value for insurance purposes (replacement cost). Single items worth more than £500 (or unusual items): a formal probate valuation should be obtained. Many commercial organisations specialise in this and the costs are payable from estate funds.
Quoted shares: If the deceased owned quoted shares there are special rules for establishing the date of death value linked to the stock exchange prices on that date.
Private co shares / partnership interests / sole trader business: the valuation process is more complex and a specialist valuer would usually be instructed. If the deceased held shares or other financial investments through a financial services company the broker will provide a list of shareholdings /investments and the date of death values.
Land: PRs will usually instruct estate agents to prepare a valuation. Commonly more than one estate agent is instructed and the average value is used. This helps avoid queries from HMRC later regarding the values for tax purposes. Where land is owned jointly the value of the deceased’s share should be established. A PR may need to view the land registry official copies to establish the basis on which joint property was owned (joint tenants or tenants in common) and the identity of the co-owner(s).
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What should PRs do with regards to debts?
- The PRs need to collect details of the debts owed by the deceased at death. These debts continue against the estate following death and the PRs stand in the position of the deceased and must make repayment. Often there will be evidence in the form of credit card statements and loan documents. When utility and phone companies are notified of the death they will provide a summary of amounts due to be paid (or refunded) at the date of death.
- There are also steps PRs should take to locate possible creditors who exist but are not known to the family or PRs. This notice procedure is considered as a post-grant step.
- Debts owed by the deceased should be repaid by the PRs. Usually the amount of the deceased’s debts are taken into account when calculating IHT (i.e. the value of the debt reduces the value of the estate for IHT purposes). However, this will not be possible in the situations stated below and the PRs should therefore make the necessary enquires to satisfy themselves of the nature of the deceased’s debts as well as the amounts due in case one of following applies: *
the deceased had borrowed money to finance the purchase of an IHT excluded asset. *
a debt owed by the deceased is never actually repaid from the estate funds.
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What happens if an executor dies?
- If a PR dies after having taken out a grant the remaining PRs may continue with the administration. If a sole surviving executor dies before the administration is compete, either s.7 AEA or a grant de bonis non apply
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Executor and will?
- Executors are appointed by will and their authority to act derives from the will.
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When is a Grant of Probate needed?
This grant will be needed if the deceased left a valid will which appoints executors who are going to act. This element considers the appointment of executors.
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- An executor named in a will is unable to act as PR if they:
pre-deceased the testator (or survived but died before taking out the grant). The will may expressly appoint a substitute executor to act in their place. *
are a minor. Although a minor cannot act as PR, their appointment by will is valid. Power can be reserved to the minor who, on reaching the age of 18, can make an application later if the administration remains incomplete. *
lack capacity *
are the testator’s former spouse/civil partner and the divorce/dissolution took place after the will was made. By s.18A/C Wills Act 1837 the former spouse/civil partner is treated as having pre-deceased the testator and therefore cannot be appointed (unless the will expressly overrides the effect of s.18A/C).
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What happens if a grant has been taken out and one of the PRs appointed dies before the administration is complete?
- At least one PR remains: If more than one PR was appointed, following the death of one of them, the remaining PRs may continue with the administration. If, following the death, the number of PRs falls below the minimum needed an additional PR can be appointed.
- If no PR remains: Following the death of the sole/last surviving PR, what happens depends on the estate being administered. Either: *
Chain of representation applies, or *
Grant of letters of administration de bonis non is issued (this happens if a chain of representation cannot apply)
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When does chain of representation apply?
- The chain of representation will apply if the last surviving executor (E1) dies having appointed an executor of their own estate and this person takes out the grant probate for E1’s estate (E2). S.7 AEA 1925 provides that E2 automatically becomes executor of the original testator’s estate as well as being executor for E1’s estate. No additional grant is required.
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a grant of letters of administration de bonis non requirements?
- Three requirements must be satisfied: *
the administration is incomplete; *
there are no remaining personal representatives; and *
there has been a previous grant of representation.
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* What is intermeddling?
- A person intermeddles when they take steps indicating they have ‘accepted their appointment’ and are fulfilling the duty to administer the estate (even if they do not in fact wish to act as executor).
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* Grants of Representation?
- The grant of representation is a court order confirming the authority of those named in it to administer the estate. The type of grant required for an estate depends on the particular circumstances:
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When are Grant of letters of administration (with will) used?
- Estates where the deceased left a valid will but no executors are appointed or those appointed are unwilling or unable to act. The grant will name the administrators.
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When are Grant of letters of administration used?
- Estates where the deceased did not leave a valid will (i.e. died intestate). The grant will name the administrators.
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* Professional Applications for grant of representation?
- A professional application is one made by a solicitor or probate practitioner. This may be because the solicitor or firm is appointed as PR, or where they are instructed by the PRs and submit the application on their behalf.
- Applications by professionals fall into one of three categories:
* Mandatory online application (includes most grants of probate)
* Online application possible but not mandatory (includes some simple applications under NCPR 20 and 22 e.g. sole applicant and no minority or life interests)
* Mandatory paper application (includes non-standard grants, and more complicated applications under NCPR 20 and 22). The full list is shown in Schedule 3 NCPR and includes those noted below:
* o Second grant of probate e.g. to an executor who previously reserved power
* o Grants to a PR where chain of representation applies
* o Grants where original will is missing or there are issues with the will
* o Grants to attorneys
* o Grant under NCPR 20 if life interest arises
- A solicitor must decide whether to make an online or paper application. If a paper application will be made, the solicitor must complete either form PA1A or PA1P:
- When complete, the paper forms are sent to the probate registry.
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When is Form PA1A used?
deceased did not leave a will - NCPR 22 applies
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When is Form PA1P used?
deceased left a valid will (whether or not executors are appointed)
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- All applications, irrespective of the type of grant or whether the application is made online or by PA1A/P, require applicants to:
* confirm the identity of the deceased and the applicants
* justify the type of grant requested and their entitlement to act as PR
* provide information about the value of the estate and inheritance tax (IHT) status of the estate
* complete the legal statement on the probate form confirming the information provided is correct and they will administer the estate properly
- An express statement confirming the type of grant requested must be included.
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* Executor proving entitlement to grant?
- Executors are entitled to act by virtue of an appointment under the will. The deceased’s will and any codicils to it are therefore evidence of this. Original testamentary documents must be submitted so they can be confirmed as valid. This is known as “proving” the will. The original documents are not returned.
- Information about the physical condition of the will is given and confirmation that all of its pages are submitted.
- If an executor’s true name differs to that in the will, this should be explained – e.g. “Francis Donnelly in the will called Frank Donnelly.”
- If anyone named is not applying e.g. because they pre-deceased, renounced or reserved power, evidence is needed. For example, the death certificate, form of renunciation, or confirmation that notice was given to those to whom power is reserved.
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* Applicants under NCPR 20 should:
- * state which category of applicant they fall within (with reference to the will)
- * clear-off anyone with a better right to apply (but not those with equal right) e.g. explaining why executors appointed by will are not acting
- * state whether any beneficiary is a minor or if any life interest arises (in either case, at least two administrators are then required)
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* Applicants under NCPR 22 should:
- * state their familial relationship to the deceased / identify which category of applicant applies, and confirm they are entitled to the whole or part of the estate
- * clear-off anyone with a better right to apply (but not those with equal right) e.g. explaining who surviving family members are
- * state whether any beneficiary is a minor (if so, at least two administrators are required)
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What do PRs need to do before getting grant regarding succession estate and IHT?
- Succession Estate: The value of the gross and net estate passing under the grant (the succession estate) is provided. The grant can only confer power on the PRs to deal with assets that fall within the succession estate and the value of these assets is noted on the grant.
- IHT status: If an IHT 400 was completed, the applicants must confirm this has been sent to HMRC and the IHT due was paid. HMRC will provide confirmation to the Probate Registry using form IHT 421. The Probate Registry will not issue a grant before receiving the IHT 421 from HMRC, which is why IHT must be paid prior to the grant application.
- If the estate is an excepted estate, then applicants do not need to complete a form for HMRC but will need to include the gross and net values of the taxable estate in their probate application.
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What is needed for applications for a grant of representation?
- Needed for all applications:
- Online application or PA1A or PA1P
- Application fee + £ per sealed grant
- Needed for some applications:
- Certified copy of the death Certificate
- Original Will / Codicil (if testator made one)
- Form of Renunciation (if an executor is renouncing)
- IHT 421 (if the estate is not excepted)
- Affidavit evidence
- Power of Attorney (if an attorney is applying)
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* Probate Registry Fees & Death Certificate when applying for grant?
- Applicants must pay the probate registry fee. The amount depends on whether or not a professional is applying and the value of the estate. There is no fee for estates worth less than £5,000.
- There is no “original” grant. The Probate Registry will provide the number of sealed copies as requested by the PRs when making the application.
- The number required depends on the estate assets e.g. one per asset holder and a couple of spare copies. There is a small fee for each sealed copy requested.
- Sealed copies are used when contacting assets holders. For example, if the deceased had an account with three different banks, the PRs would provide each bank with a sealed copy as evidence of their entitlement.
- The PRs state how many sealed copies they want when completing the application.
- A certified copy (not photocopy) of the death certificate should be provided.
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* Testamentary Documents / Renunciation for application for grant?
- If the deceased left a valid will the original will must be submitted with the application. The validity of the testamentary documents is confirmed by the Probate Registry. By issuing the grant the probate registry “proves” the will/codicil.
- The same applies to any codicils to the original will, including those which amended the will but have subsequently been revoked. This is because revoking a codicil does not automatically reinstate the terms of the will it had amended.
- If an executor appointed by the will does not wish to act they may renounce their right to take out the grant of probate. Renunciation is only possible if the executor has not intermeddled. To renounce the executor must complete a form of renunciation and this must be included in the application.
The renunciation is final and from this point the administration is completed as if they had not been appointed (s 5 AEA 25).
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# Grants of representation application
* Inheritance Tax Forms - excepted estates?
If the estate is excepted there will be no IHT payable and the personal representatives are not required to submit an IHT form as part of the grant application.
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# Grants of representation application
Inheritance Tax Forms - non- excepted estates?
If the estate is not excepted an IHT400 will have been completed.
The IHT 400 and any tax due are sent to HMRC (not the probate registry)
HMRC then provide confirmation (by IHT 421) to the Probate Registry
The probate registry will not issue the grant before receiving the IHT 421.
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* Power of Attorney / Affidavits, when are they needed for grant of representation applications?
- Where an executor (or beneficiary) appoints an attorney to make an application on their behalf, the attorney’s details must be provided in the application form along with an express declaration of why the named executor is not applying. The power of attorney (commonly Form PA11) is completed by the donor and also submitted with the application for the grant.
- Affidavit evidence may be required if there is a valid will but there is something about the document which renders its validity uncertain. The requirement for affidavit evidence is considered in detail in a separate element.
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Deadline for paying and submitting IHT?
o The deadline for submitting the account is:
12 months from the end of the month in which the death occurred. If the deceased died on 15 March the IHT account would need to be submitted by 31 March the following year.
o The deadline for paying IHT due is:
6 months from the end of the month in which death occurred, after which interest becomes payable on the unpaid tax. If the deceased died on 15 March the IHT should be paid by 30 September.
o In practice the PRs will submit the account and pay the IHT due as soon as possible because the:
grant will not be issued until information about the estate has been provided to HMRC and any IHT has been paid; the PRs need the grant to carry out the administration
payment of interest on unpaid IHT should be avoided.
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# * IHT payment & account
o The PRs of an estate have a duty under s.216 Inheritance Tax Act 1984 to:
Deliver an account to HMRC regarding the deceased’s estate
Pay any IHT due in respect of the succession estate
PRs should deliver an account to HMRC specifying:
* all of the property comprising the deceased’s taxable estate immediately before death and the value of each item at the date of death (in essence a list of assets and liabilities)
* the exemptions and reliefs that apply.
o The account provides the basis upon which the amount of IHT due (or not) is calculated and the form is submitted to HMRC along with payment for any IHT due.
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* IHT Account – Instalment option
o Under ss. 227-228 IHTA the IHT due in respect of certain assets may be paid by 10 equal annual instalments.
o The first instalment is due by the usual deadline (i.e. six months after the end of the month in which the deceased died). The remaining instalments are due on each subsequent anniversary date, with interest usually charged on any IHT that remains outstanding after the initial deadline date. If interest charges would be incurred instalment option would usually be used only if needed, and only for as long as required.
o Instalment option may be needed if there are insufficient liquid assets available prior to the grant being issued to pay the full amount due. Instalment option could also help avoid or delay the sale of qualifying assets (e.g. family home) which would otherwise be needed if the value of the other assets is insufficient to meet the IHT liability.
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o Instalment option is only available in respect of the IHT attributable to the following assets:
· Land and buildings
· Company shares/securities giving the deceased control
· Some unquoted company shares/securities that did not give control but where payment cannot be made without undue hardship
· Farms or interest in a farming business
· Business or interest in a business
· Timber
o IHT payable in respect of property that does not qualify should be paid in full by the usual deadline.
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When should Form IHT 400 be completed?
o Unless the estate is excepted the PRs report to HMRC about the estate assets and liabilities by completing form IHT 400 (IHT account).
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o For those domiciled in the UK there are two categories of excepted estate:
- Low value excepted estate
- Exempt excepted estate
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What should PRs complete when the estate is excepted?
o If the estate is excepted, the PRs are not required to complete an IHT400. Instead, they provide information about the value of the estate as part of the application for the grant of representation. Key information is then sent by the Probate Registry to HMRC.
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o A low value excepted estate is one where there is:
no IHT payable, and the reason for this is because
* the gross value of the estate is below the NRB.
* The gross value for these purposes is the total taxable estate figure plus the value of certain ‘specified transfers’ plus the value of ‘specified exempt transfers’.
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What are 'specified transfers’ and 'specified exempt transfers'?
o Specified transfers include chargeable transfers made in the 7 years before death comprising cash, chattels, shares or land.
o Specified exempt transfers include exempt gifts to spouses/civil partners and charities.
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o An exempt excepted estate is one where:
- the gross value of the estate is no more than £3 million, but
- no IHT is payable, and the reason for this is because
- after debts are deducted and spouse and/or charity exemption are applied the net value of the estate is below the NRB.(N.B. debts alone cannot bring the estate into exempt excepted status).
o The meaning of gross value and NRB are the same as for the low value excepted estate.
o Only spouse or charity exemption can be considered for these purposes – no other reliefs can be taken into account.
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o Once the PRs have established that an estate may be either a low value or exempt excepted estate they must also check that no additional factors prevent the estate from being excepted. If any of the following apply, the estate cannot be excepted:
o The deceased made a gift with reservation of benefit that subsists at death (or the reservation ended in the 7 years prior to death and the transfer was not exempt)
o The estate includes either more than one trust interest, or, a single trust interest worth more than £250,000 (and is not passing to spouse)
o Foreign assets are worth more than £100,000
o The value of specified transfers exceeds £250,000
o A claim for the RNRB is being made (the claim for RNRB - IHT 435/6 - would accompany the IHT 400).
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IHT 421 (the probate summary)?
It contains details about the deceased and a summary of the gross/ net succession estate (assets passing under the grant rather than the IHT estate).
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o The C4 is used to inform HMRC about:
additional assets/ liabilities discovered after the IHT 400 was submitted
corrections to the value of assets/liabilities originally included in the IHT400
changes to exemptions/reliefs applied – e.g. an increase or decrease in value or where these were not claimed or not due
a variation of the original beneficiary entitlements which affect the IHT liability e.g. changes in the value of what an exempt beneficiary receives
o If the PRs complete a C4 they will also make an adjustment to the calculation of IHT as the liability has either increased or decreased.
o If new assets are discovered, the original value of an asset was too low (or a liability too high), or reliefs were mistakenly claimed - the total value of the taxable estate will increase. The PRs should pay the additional IHT due when sending HMRC the C4.
o If new liabilities are discovered, the original value of an asset was too high (or liability too low), or reliefs due were not claimed - the total value of the taxable estate will decrease. The PRs will claim a refund of IHT already paid.
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o PRs cannot obtain a grant without payment of IHT but in most cases cannot access the deceased’s assets without a grant – so with what money do they pay the tax due?
- Direct Payment Scheme
- Borrowing
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* Direct Payment Scheme?
o Banks or building societies may not be able to release funds to the PRs prior to the issue of the grant but they can be asked to make a direct payment from the deceased’s account(s) to HMRC by telegraphic transfer under the Direct Payment Scheme.
o PRs must complete schedule IHT 423.
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* Borrowing?
o From a beneficiary (often interest free). The main beneficiary of the estate will often fund the payment of IHT using funds outside of the succession estate/ for which the grant is not required e.g. money held in a joint bank account which passed by survivorship, or the proceeds of a life policy written in trust.
o From a bank, where commercial rates of interest will apply.
421
When is NCPR 20 used?
Administrators are appointed under a Grant of Letters of Administration (with will)
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When is NCPR 22 used?
* Administrators are appointed under a Grant of Letters of Administration in accordance with NCPR 22 for estates where the deceased died intestate.
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Minimum and maximum number of administrators?
* The minimum number of administrators required is one, unless there is a life or minor interest, in which case two are needed. The maximum possible is four. *
- Minimum one and max four
- Minimum two if there is a life or minor interest
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Where do administrators derive their authority from?
An administrator is a PR appointed under the Non-Contentious Probates Rules 1987 (‘NCPR’). Their authority to act derives from the grant.
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* NCPR 20?
The statutory order of entitlement to be appointed as administrator under a grant of letters of administration (with will)
- a) executor;
- b) trustee of the residuary estate;
- c) any residuary beneficiary (whether taking absolutely or for life), or, where there is a partial intestacy, a beneficiary of the estate under intestacy;
- d) the PRs of anyone in
- (c) other than a trustee or life tenant of the residue;
- e) any other beneficiary or a creditor;
- f) PRs of anyone in (e).
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Rule 22 NCPR?
* Rule 22 NCPR The statutory order of entitlement to apply to be appointed as administrator under a grant of letters of administration:
- NCPR 22 a) surviving spouse or civil partner
- b) children of the deceased
- c) father and mother of the deceased
- d) whole blood siblings (share both parents)
- e) half-blood siblings (share one parent)
- f) grandparents g) uncles / aunts of whole blood
- h) uncles / aunts of half blood
· Issue of b, d, e, g, and h are included where their parent has pre-deceased.
* If there is no-one who can apply from (a) – (h):
- * The Crown (claiming bona vacantia) may apply (22(2)) *
- If the Crown does not apply, a creditor, or person who does not receive benefit (but would have done if the estate was larger) may apply (22(3))
* Similarly to Rule 20: a person in one category cannot apply in priority to someone in a higher category, those within the same category have an equal right to apply, and applicants must “clear-off” anyone with a better (but not equivalent) right to apply.
* Under Rule 22(4), the PR of any applicant who survived the deceased but died before taking a grant may apply on their behalf, although an application by a living person within the same category is preferred.
* Applicants must demonstrate the nature of their familial relationship with the deceased (to evidence which category they fall within). In addition, they must also have a beneficial entitlement under the estate. Commonly, the applicant next in order to apply will have an entitlement to the estate, but this will not always be the case. Consider the example on the next slide.
427
When are affidavits needed?
* -Affidavits can be needed where there is evidence to suggest a problem with the validity or enforcement of a will or codicil.
* - An affidavit:
- of due execution can be used to confirm compliance with s 9 Wills Act 1837, that knowledge and approval were present, and the date on which the will was signed.
- as to alterations can be used to confirm the timing of alterations made to a will.
- of plight and condition can be used to confirm the physical condition of the will at execution and after death.
- of search can be used to confirm steps taken to locate missing documents.
428
* What is an affidavit?
* An affidavit is a formal written statement of fact which a person signs under oath.
* The person making the affidavit (deponent) ‘swears’ or ‘affirms’ (i.e. makes a formal promise) that the contents of the document are true.
* If the requirements for making an affidavit are met the facts contained within it can be admitted as evidence in support of legal proceedings. The legal requirements for making an affidavit include the requirement that the authenticating statement (known as ‘jurat’) is:
- * signed by all parties and dated
- * completed and signed by the person witnessing (this must be an independent solicitor or commissioner for oaths) and their name, address and qualification must be stated
- * must follow immediately on from the text and not on a separate page
429
How should affidavits be written?
- [Sworn OR Affirmed] by the above named deponent
- [SIGNATURE OF DEPONENT]
- at: [ADDRESS OF SOLICITOR OR COMMISSIONER FOR OATHS]
- this [DATE] day of [MONTH] [YEAR]
- before me: [SIGNATURE] [Solicitor OR Commissioner for oaths]
430
Why apply for a grant of representation?
- A grant of representation is required to confirm the authority of the PRs to administer a deceased person’s succession estate assets.
431
What is a grant of representation?
- The grant of representation is a court order confirming the authority of those named in it to administer the estate.
432
What assets can be dealt with without a grant to collect in, realise and distribute ?
- Some accounts worth up to £5,000 can be released without a grant (but do not have to be) under the Administration of Estates (Small Payments) Act 1965.
More generally, many other banks and financial institutions will release sums up to £15,000 (sometimes more) without sight of a grant and in accordance with their own policies. *
- Household possessions and cash in the home can be dealt with without proof of title so a grant is not required *
- Assets passing outside of the succession estate do not require a grant because these items do not devolve on the PRs.
433
- Estate administration?
process of collecting in the deceased’s assets, paying debts and liabilities and distributing the remaining assets in accordance with the deceased’s will or the intestacy rules.
434
Why do PRs obtain grants of representation?
- The grant is an order of the High Court. It is necessary because it establishes the:
authority of the PRs to act (in particular, their right to collect assets and distribute the estate); and
validity of the deceased’s will, or, that the deceased died intestate.
- The PRs will not usually be able to collect or realise assets in the estate without producing the appropriate grant.
- The power conferred by the grant is limited to the assets passing under the will or intestacy i.e. the succession estate. While the PRs may advise on practical steps to follow regarding assets passing outside the succession estate (e.g. joint tenant property) the PRs have no legal authority to deal with these assets.
- Executors (PR appointed by will) derive authority from the will and, therefore, they may act from death. The grant confirms this authority.
- Administrators (PR appointed by operation of statute) derive authority from the grant. They have no authority to act until the grant is issued.
- Even though executors have a legal right to administer an estate without a grant it would not usually be practical to attempt this as most asset holders require sight of the grant before paying over funds to the executors.
- Obtaining the grant of representation is therefore a priority for all PRs and this should be done as quickly as it is practical to do so.
435
What is the nature of PR's role?
- The role of PR is fiduciary in nature. All duties of a PR must be performed in accordance with their duty of care. What amounts to ‘due diligence’ will depend upon the circumstances and complexity of the estate.
436
* Are PRs also trustees of the estate?
- A PR is not automatically the ‘trustee’ of the estate being administered, although the role of PR and role of trustee are similar, and both are fiduciary in nature. When the estate administration is complete the role of the PR ends (although their duties may continue).
- If any continuing trusts are created, the property which makes up the trust fund should be transferred to the trustees as part of the administration process. The PRs should record the date on which estate assets are transferred from the PRs to the trustees, even if the executors and trustees are the same people.
- However, a PR will be a trustee of some/all of the estate property where:
The will expressly appoints executors to act in capacity of trustee of any trust arising.
There is an intestacy; the PRs hold the estate generally “on trust with a power to sell” (s.33 AEA)
A statutory trust arises under an intestacy; the PRs will be the trustees of that trust on behalf of the minor beneficiary (s.46 AEA).
- Irrespective of whether a PR is formally acting in the role of trustee, many of the statutory powers and duties of a trustee that you will study, including the statutory duty of care, apply equally to PRs.
- s.68 Trustee Act 1925: “the expressions “trust” and “trustee” extend to ….. the duties incident to the office of a personal representative, and “trustee” where the context admits, includes a personal representative”.
- s.35(1) Trustee Act 2000: “this Act applies in relation to a personal representative administering an estate according to the law as it applies to a trustee carrying out a trust for beneficiaries.”
437
- There are three broad ways in which a solicitor may become involved in the administration of an estate:
- The solicitor has been instructed by the PRs for advice on the administration.
- The solicitor has been appointed as executor under the deceased’s will.
- The solicitor has been instructed to act on behalf of a party to a contentious probate matter.
438
- The duties of a PR before the issue of a grant:
* Common law duty to dispose of the deceased’s body (Williams v Williams). This is usually arranged by surviving family members and will have already taken place before a solicitor becomes involved.
* Statutory duty to provide information about the estate to HMRC and pay inheritance tax (IHT) due (Ss 216 and 226 Inheritance Tax Act 1984 (‘IHTA’)). A grant will not be issued unless information required to be reported to HMRC has been delivered and any IHT due has been paid.
439
PR's Duty to inform HMRC and pay IHT
- * The PRs must notify HMRC about the assets and liabilities of the estate (s 216 IHTA).
- * They do so by completing form IHT 400. An IHT 400 will be completed for any estate that is not excepted.
- * The PRs must also pay any inheritance tax due in relation to the estate assets within their control i.e. the succession estate (s226 IHTA). The PRs may use estate funds and are not required to use personal assets to meet this liability.
- * These duties must be complied with before the grant of representation is obtained.
440
- The duties of a PR under the grant (S 25 Administration of Estate Act 1925):
* Collect and get in the real and personal estate of the deceased and administer it according to law
* Provide an inventory and account of the estate assets
These duties are owed to the estate beneficiaries and creditors (Tankard v Midland Bank 1942)
441
PR's Duty to “collect in”
- To comply with this duty PRs must: *
Identify and locate the deceased’s assets (including sums owed to the deceased) *
Identify the deceased’s liabilities and creditors *
Obtain control, possession, or legal ownership of the assets
- The PRs will already have identified and valued the assets and liabilities as part of reporting to HMRC prior to obtaining the grant. The method of obtaining control over the assets will depend on the nature of the asset. Both matters are considered in later elements.
442
PR's Duty to ….”administer estate”?
- Once assets have been collected in, the PRs must ‘administer’ the estate in full by:
* keeping the assets secure *
paying the deceased’s debts and liabilities *
meeting administration expenses *
paying legacies *
and distributing the residue to those legally entitled.
- The duty relates only to assets which devolve on the PRs i.e. the succession estate. Assets which pass outside of the succession estate do not vest in the PRs e.g. joint tenant property.
443
PR's Duty to provide “inventory and account”
- The PRs must keep a list of assets and values (inventory) and a record of the steps they have taken in the administration (account). This information is usually recorded in the ‘Estate Accounts’.
- A beneficiary or creditor may ask to see the estate accounts. If the PRs refuse, or have not maintained adequate records, an application to court (in accordance with the NCPR) for an order to produce an inventory and account may be made.
- While it is usually the beneficiaries who have an interest in seeing the estate accounts, a creditor with a claim against the estate may want to find out more information.
444
PR's Duty of due diligence
- PRs are free to make their own decisions about how best to carry out their duties but must always act within the scope of their powers conferred by the will and/or statute.
- However, PRs do have a general duty to carry out the administration with due diligence and within a reasonable time. What amounts to due diligence will depend on the facts of the case but if the court decides a breach of duty has occurred it can make a declaration as to the breach and direct an inquiry as to damages.
- PRs should complete the administration within 12 months of the date of death (s 44 AEA) known as the ‘executor’s year’ (but applies also to administrators). If the administration takes longer than 12 months this does not necessarily mean a breach has occurred, but from this time PRs are required to justify any delay.
- Although a PR has an obligation to complete the administration within a reasonable time and their role ends once the administration is finalised, the appointment is for life. This means:
* If additional assets are discovered after the administration is complete the PRs have a duty to administer these assets. *
If creditors or beneficiaries, who were not known at the time, come to light after the estate is fully administered and demand their entitlement, the PRs may be personally liable. This matter is not considered in detail in this element.
445
* PR powers
- To carry out their administrative duties PRs require the power to deal with the estate assets e.g. the power to sell.
- When PRs begin the administration, they must determine what powers they have available to them. PR powers derive from two sources: Statute – Will/Codicil
- Whatever the scope of the PRs powers, PRs must always act within them and an ultra vires act will be a breach of duty
446
PR's Statutory duty of care
- The s1 duty of care imposes a higher standard for professional PRs such as solicitors than lay trustees.
- A higher standard is also imposed upon those possessing special knowledge or experience, as well as those who hold themselves out as having such special knowledge or experience.
- The statutory duty of care will apply when PRs exercise their power to invest, delegate, insure and purchase land.
447
PR's Fiduciary Duties
PRs must not, unless authorised by the court or fully informed beneficiaries:
* Place themselves in a position of conflict e.g. a PR may not purchase an asset from the estate even if this is for a fair value
* Profit from their position
* Payment for services will not constitute a breach of the ‘no profit’ rule provided a PR acts in a professional capacity or the payments are authorised under the will.
448
PR's Power to sell, charge or lease (ss 33 & 39 AEA)
- The PRs have wide powers to sell estate assets.
- The PRs may need to do this soon after the grant is issued so they can repay the deceased’s debts and any loan taken out to meet the inheritance tax liability.
449
PR's Power to appropriate (s 41 AEA)
- PRs have the power to appropriate an asset in satisfaction of a beneficiary’s entitlement and PRs can decide which assets are used to meet this.
- The power is subject to the following rules:
· A specific beneficiary must not be prejudiced.
· Consent of recipient beneficiary is required.
· The value of the asset must be considered at the date of transfer/appropriation rather than the date of death.
* If the value of an asset exceeds the beneficiary’s entitlement the PRs may not appropriate.
* If the value of the asset is less than the entitlement the PRs may appropriate and then make a balancing cash transfer.
- It is common for a will to include an express clause removing the need to obtain the consents required by the section.
450
PR's Power to insure (s 19 TA 1925)
- PRs have the power to take out insurance to insure estate assets comprehensively and for full value.
- PRs are authorised to pay the insurance premiums out of either estate income or capital.
451
PR's Power to invest (ss 3-8 TA 2000)
- If PRs retain assets for a period of time they have a duty to preserve the estate and actively invest.
- The general power of investment in s 3 TA 2000 applies to PRs just as it does to trustees. PRs are also permitted to acquire freehold or leasehold land in the UK in accordance with s8 TA 2000.
- PRs must carry out regular reviews of investments (commonly annually).
- When exercising the general power of investment or reviewing their investments the PRs must have regard to the standard investment criteria in s4 TA 2000.
- The s 5 TA 2000 duty to obtain advice also applies unless the PRs reasonably conclude that in the circumstances it is unnecessary or inappropriate.
- Although the general power of investment gives the PRs the power to invest as if they were absolutely entitled, their discretion is not absolute. They must invest having regard to the standard investment criteria and must seek and follow appropriate advice. - The statutory power to invest (s.3 Trustee Act 2000) does apply to PRs - There is no obligation to retain original assets - The statutory duty of care applies to the exercise of investment powers and is applicable to PRs as well as trustees.
452
PR's Power to charge for services (s 29 TA 2000)
- Professional PRs e.g. solicitors may claim reasonable remuneration for their services (i.e. time spent carrying out the administration) provided:
· they are not acting alone, and
· that co-PRs give their written consent.
- A lay PR or, a professional PR who is acting alone, needs to be given express power in the will to charge for their services.
- S 28 TA 2000 makes it clear that payment as remuneration for services is not to be treated as a gift under s 15 Wills Act 1837.
453
* Reimbursement of PR expenses (s 31 TA 2000)
- All PRs (whether or not they are acting in a professional capacity) may reimburse themselves for expenses properly incurred when acting on behalf of an estate. For example, travel costs incurred in the course of carrying out estate administration.
- This is not a power to charge the estate for time spent on the administration process, even if, for example, the PR has had to turn down work to carry out this role.
454
PR's Power to delegate (s 11 TA 2000)
- PRs are permitted to employ agents and delegate their powers, except for the following:
· how and whether assets should be distributed
· whether fees or costs are payable from income or capital
the appointment of trustees /nominees/custodians
- PRs may not appoint a beneficiary as their agent but may appoint one of the PRs if they are sufficiently qualified.
- If delegation is required, the PRs must:
· do so in writing to the agent and
· provide them with a written policy statement which the agent must agree to comply with (s15).
* The use of an agent and the terms of the policy document need to be kept under review (s22).
- It is common to delegate investment powers and law firms often have links with financial advisers to whom they refer work.
455
PR's Power to appoint trustees (gifts to minors) (s 42 AEA)
- Where a legacy is given absolutely to a minor there is no general power to pay the legacy to the beneficiary until they reach 18 because a minor cannot give valid receipt.
- The PRs therefore need to hold the relevant assets on trust for the minor, investing these assets in accordance with the statutory powers and utilising their statutory powers of maintenance and advancement where appropriate, until the minor attains 18. (These powers are held in their capacity as trustee and, therefore, not considered in this element.)
- However, under s 42 AEA PRs could instead appoint trustees (usually the minor’s parent/guardian) of the legacy and give the legacy to the trustees rather than retaining it.
456
PR's Power to accept receipt from parent
- It is thought that under s.3 Children Act 1989 a minor’s parent or guardian has the power to give a good receipt to the PRs on behalf of a minor. However, this power is commonly included expressly for clarity.
- If the testator does not want the parent or guardian to receive the legacy on behalf of the minor, the will can be drafted expressly to give the legacy to trustees to hold until the child reaches majority.
Note that an express clause within a will which permits PRs to accept receipt from a minor beneficiary aged 16 or older is effective.
457
PR's Power to run a business
- If a testator was a shareholder, the ‘company’ as an entity will survive the testator’s death. The company articles and / or shareholders agreement will often contain provisions that apply on the death of a key shareholder.
- If the testator was a partner in a business partnership, the partnership agreement should contain terms which enable the partnership to continue after the death of a partner.
- If a testator ran a business as a sole trader business, there is a limited common law power to enable PRs to sell the business as a going concern within a year of death.
- PRs may only access assets in the business at the date of death (not other estate funds) and are personally liable to business creditors (but may indemnify themselves from the estate for liabilities incurred when running the business for realisation only).
- As the default power is limited it is common to include an express power so PRs can run/manage a sole trader business in accordance with the testator’s wishes.
458
* Can a joint PR act alone?
- If more than one PR is appointed then, similarly to trustees, they are required to make decisions together and should exercise discretionary powers unanimously (unless the PRs are joint executors appointed by will and the will states otherwise).
- However, when exercising a lawful power to sell or transfer an estate asset during the administration, a jointly appointed PR will usually have the authority to act alone. For example: a PR acting alone has authority to pass title to the deceased’s personal possessions to a third party and so bind the other PRs.
- Note that, as an exception, a sole PR may not deal with stocks and shares which are registered in the joint names of the PRs.
459
- A claim of action against a PR for breach of their PR duties is called
a devastavit (wasting of assets) and may be brought where there is loss to the estate because of PR wrongdoing. The claimant will seek a court order that the PR makes good the loss using their personal assets.
460
- A claim against a PR may be based on:
Maladministration
Misuse of assets
Negligence
Breach of fiduciary duty
461
* Maladministration could include:
- * Incorrectly administering the estate by making distributions to the wrong beneficiaries
- * Using the residuary estate to meet liabilities which should have been paid from other parts of the estate
- * Paying legacies before debts without retaining sufficient funds for creditors
462
* Misuse of assets could include:
- * Making personal use of the estate assets
463
* Negligence might include:
- * Unreasonable delay in carrying out the administration
- * Failing to invest or making poor investment decisions in breach of the duty of care
464
* Breach of fiduciary duty could include:
- * Acting as both buyer and seller of estate assets unless the transaction is authorised (breach of ‘no conflict’ duty even where a fair price is paid)
- * Receiving unauthorised remuneration (breach of ‘no profit’ duty)
- * Self-dealing
465
a PR who fails to carry out their duties properly may be effectively removed as PR by:
· A court order under s.50 Administration of Justice Act 1950 appointing a replacement PR
· An administration action, where the court would take over the administration itself
466
- Administration proceedings could take the form of:
* an administration action application to have the estate administered by the court.
* specific relief, an application for guidance on a particular matter.
467
s 48 Administration of Justice Act 1985?
- Although seeking court directions is the most prudent course of action, it is also very expensive and time consuming.
- In cases where there is a question over the construction of the will, the PRs may instead make an application under s 48 Administration of Justice Act 1985 to distribute in accordance with a written legal opinion (providing the opinion is given by a person who meets the criteria in s 48 and there is no dispute making it inappropriate for the court to grant permission to rely on the opinion).
468
* S27 Trustee Act 1925
- PRs who distribute the estate remain personally liable to unpaid beneficiaries and creditors, even if the PRs were unaware of their claim at the time of the administration.
- To prevent liability to unidentified beneficiaries and creditors, the trustees may publish a notice of their intention to distribute to known beneficiaries two months after the date of the advertisement.
- The notice must be placed in the London Gazette, a newspaper circulating in the area in which any land held on trust is situated, and any other newspaper which is appropriate e.g. if the deceased owned a business, the relevant trade paper may be appropriate.
- Section 27 only protects against claims by unknown beneficiaries and creditors.
- It does not protect the PRs if they distribute assets ignoring the claim of a known but missing beneficiary or creditor.
- It also does not protect other beneficiaries who receive more than their entitlement to the estate. A disappointed creditor/beneficiary may still claim against the beneficiaries.
- This means PRs who are also beneficiaries may still be liable to other beneficiaries. S27 protects PRs from claims against them in their capacity as PR but not in their capacity as beneficiary.
469
* Benjamin Order
- In the case of known but missing beneficiaries, the PRs will not be able to rely on s 27 TA 1925 and may instead seek a Benjamin Order permitting them to distribute the estate on the basis that the missing beneficiaries have died.
- Although this is the common situation in which a Benjamin Order is used, it might also be used to permit the trustees to distribute the estate on the basis of a different assumption, such as the assumption that the missing beneficiary had no children.
- The order relieves the PRs from personal liability if they administer an estate in accordance with the court order and the assumption turns out to be incorrect. As with s 27 TA 1925, a disappointed beneficiary or creditor can still make a claim against other beneficiaries to whom the property had been distributed.
- Before an order is awarded the PRs must make full enquiries to attempt to establish the true position (Re Benjamin 1902) and demonstrate there is no reasonable prospect of knowing the true position without disproportionate expense.
470
* Presumption of Death Act 2013
- The PRs may make an application under this act for a court order declaring that a person thought to have died, or not known to have been alive, for seven years or more has died.
- The order will confirm the presumed date of death and relates generally to the deceased’s property and affairs.
- If the criteria for application can be met it may be quicker and easier to use this process rather than requesting a Benjamin Order.
471
* Insurance
- The PRs could purchase insurance to cover the risk that the beneficiary or creditor returns after the administration is complete and makes a claim against the PRs for the share they should have received.
- However, it may not be possible to obtain insurance if the risk is too high. Insurance premiums may also be very expensive (although are likely to be less expensive than seeking a Benjamin Order).
472
* Indemnity
- The PRs could seek an indemnity from the beneficiaries they can trace.
- The beneficiaries promise to reimburse the PRs for any loss the PRs suffer because of being sued by a disappointed beneficiary or creditor.
- An indemnity from the existing beneficiaries is only as good as the person giving it. Also, it may prove difficult in the future to trace those providing the indemnity. As such this may not be a preferred option for the PRs.
473
* Payment to court
- PRs could pay the legacy amount into court and distribute the balance of the estate. Although the person who would otherwise benefit from the share paid into court may not favour this option.
- While the purchase of insurance would be a preferable option re a missing beneficiary, a payment into court may be suitable where a beneficiary can be located but is refusing to accept their inheritance.
474
* Exoneration by the court
- Under s.61 Trustee Act 1925 a PR may apply to the court for an order exonerating them, in whole or part, from personal liability for breach.
- An order will not be made unless the court considers that the PR:
· acted honestly and reasonably,
· ought fairly to be excused for the breach of trust and for omitting to obtain directions of the court in the matter
* [S.61 refers to trustees, which includes a PR for these purposes]
475
* Exemption clauses in a will
- The testator’s will may contain clauses which exclude or restrict liability for a PR's wrongdoing. These clauses may cover a range of scenarios from innocent mistake to gross negligence and may offer different levels of protection to lay and professional PRs.
- See the example below for a clause which exempts lay executors from liability (but still allows claims against professional executors) and also excludes the statutory duty of care for all executors:
- “None of my Executors (other than a professional executor) shall be liable for any act or omission save for an act or omission involving willful fraud or dishonesty and I further declare the duty of care contained in section 1 of the Trustee Act 2000 shall not apply to any of my Executors”
476
When is an estate solvent?
- An estate is solvent where its value is sufficient to meet debts, liabilities and administration expenses (even if legacies cannot be paid in full).
477
# Collecting assets and payment of debts
- Subject to a contrary intention in the will:
an asset subject to a charge bears the burden of the debt secured to it
the application of assets to meet debts/expenses is prescribed by statute.
478
* Money collected in should be paid into:
- a PR’s bank account (opened specifically to hold estate money and to prevent this being mixed with their personal funds), or
- law firm client account.
479
* Payment of debts
- As soon as assets can be collected PRs should begin to pay the deceased’s outstanding debts and funeral expenses.
- PRs have a duty to pay debts with ‘due diligence’ – this is not defined but creditors should normally be paid before the end of the 'executor's year'
- If a PR fails to pay debts even though they have assets available they will be liable to the creditor and to any beneficiary for consequent loss (e.g. costs of proceedings incurred by the creditor to recover the debt).
- An express clause in the will may limit a PR’s liability to the beneficiaries but it cannot relieve them of liability to creditors.
- However, if PRs comply with the s.27 TA 1925 notice procedure, they may obtain protection against personal liability to unknown creditors.
480
* Payment of expenses
- In addition to the deceased’s debts the PRs should ensure that any pre-grant loan the PRs took out to pay IHT is repaid as soon as possible to minimise the expense of interest payments.
- This is particularly important if the PRs have given a ‘first proceeds’ undertaking to a bank in connection with the loan – where PRs promise to use the first moneys raised during the administration to repay the loan. Failure to comply will be a breach of this undertaking.
- PRs should also pay general administration expenses as and when they arise during the administration.
481
* Burden of debts / expenses
- All the deceased's property constitutes assets which can be made available for the payment of the deceased’s debts and liabilities and any clause to the contrary in a will is void (s 32 Administration of Estates Act 1925 (‘AEA’)).
- However, there are rules which determine the order in which estate assets are used for these purposes. The rules differ depending on whether the:
- Estate is solvent or insolvent
- Debts are secured or unsecured
482
How should insolvent estate debts be paid?
- For an insolvent estate debts must be paid in the statutory order in the Administration of Insolvent Estates of Deceased Persons Order 1986.
483
Do debts in a solvent estate need to be paid in a certain order?
- For solvent estates the chronological order in which debts are met is not a primary concern.
484
* Secured Debts
- A debt is secured if it has been charged on part of the deceased’s property during their lifetime. E.g. a mortgage on the deceased’s house.
- Charged property will bear primary liability for payment of the debt secured against it unless a contrary intention is shown in the will (Section 35 AEA).
- If the amount of the outstanding loan is less than the value of the asset secured (usually the case) no other estate assets can be used to repay the secured debt.
485
* Unsecured debts / expenses
- The assets used to repay unsecured debts e.g. credit card debt/utility bills and expenses are taken in the following statutory order (unless varied by the terms of the will). Assets in each category are exhausted in full before moving to the next as required.
- Property not disposed of by a will (i.e. passing by full/partial intestacy) subject to retention of £ for any pecuniary legacies - ‘pecuniary legacy fund
- Residue (subject to retention of ‘pecuniary legacy fund’ if not already done)
- Property the will sets aside (or charges with) the repayment of debts
- £ in the pecuniary legacy fund (if £ is insufficient the legacies abate (i.e. are reduced) proportionately according to value)
- Property specifically given (e.g. gift of chattels)
486
Can the statutory order for paying debts be overridden?
- Express wording in a will can override the statutory order in Sch 1 Part II AEA where a contrary intention is shown.
- Many wills include a general direction for the residue to bear the burden of debts:
“I give my residuary estate to my executors on trust for sale and out of the proceeds of sale to pay my debts …..”
- This type of clause would usually be sufficient.
- Express wording in a will can override the general rule in s 35 AEA that secured assets are subject to the related debt.
- However, a contrary intention is not shown by a general direction for debts to be paid out of residue (such as the example clause to the left). Instead, a clear /specific intention for the beneficiary of the secured asset to receive the item free of debt must be shown.
487
Marshalling?
- If PRs do take assets ‘out of order’ to pay creditors then the beneficiaries whose assets have been ‘wrongly taken’ can use the doctrine of marshalling.
- The creditors are not bound by the rules and are under no obligation to return the money paid to them.
- However, the general principle of marshalling allows a beneficiary who is disappointed that his inheritance has been reduced, because assets to which he was entitled have been wrongly used to pay a creditor, to compensate himself by going against the property which ought to have been used to pay the debts.
488
How to choose which assets to sell?
- Having identified the appropriate part of the estate to use to meet the debts / expenses (most often the residue) the PRs should use the available cash to make these payments.
- However, if there is insufficient cash the PRs may need to sell non-cash assets. (PRs have a general power of sale over the whole of the estate.) When deciding which assets to sell the PRs must comply with the rules discussed previously regarding the appropriate part of the estate to use and the statutory order in which property should be taken.
- Where they have a choice about which assets to sell the following should be considered:
Capital gains tax (‘CGT’) implications of sale
How easily or quickly a sale can be carried out
Wishes of beneficiaries
CGT considerations
- PRs are deemed to acquire assets at their market value on the date of death (probate value). If PRs sell an asset which has increased in value after death the ‘profit’ they make may be subject to CGT if the gain is greater than any tax-free allowance.
- To avoid CGT (or using the tax-free allowance unnecessary) PRs should consider selling assets which have not risen in value. Assets falling rapidly in value should usually be sold in any event to preserve the value of the estate. Assets that have risen in value may be transferred directly to a beneficiary without triggering a CGT charge.
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Do PRs need to comply with the wishes of beneficiaries on what to sell?
- PRs are not bound to comply with the wishes of a beneficiary but should take these into account when reaching a decision. The PRs have the power to appropriate assets in satisfaction of:
A general legacy
an entitlement to the residuary estate
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* PR responsibilities regarding income and capital gains tax?
- Finalise the deceased’s IT and CGT position for the tax year of death:
* The deceased is likely to have died part way through a tax year so will either owe outstanding tax to HMRC or the estate will be due a refund.
- Pay IT and CGT that becomes due during the administration period:
* PRs must pay CGT on taxable gains made following a disposal of estate assets and pay IT on any income received during the administration period.
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* Deceased's income & gains that PRs are liable to pay and when should they pay it?
- PRs are liable to pay any IT and CGT that the deceased owed at the date of their death (or alternatively, the PR must claim any tax refunds the deceased was entitled to).
- The PRs should record information and notify HMRC by submitting a tax return on behalf of the deceased for the period 6 April to date of death.
- These tax liabilities are an estate expense and payable from the estate assets. The liabilities are deductible when valuing the taxable estate for IHT purposes. Conversely, refunds due are an asset of the estate and should be included when valuing the IHT estate.
- The PRs must differentiate between the deceased’s income and gains and the estate’s income and gains because different rates and reliefs apply.
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What will PRs need to account for regarding the deceased's income?
- When working out the deceased’s income tax liability the PRs will need to access the deceased’s financial records. When calculating the IT due PRs should utilise the deceased’s tax-free allowances and pay tax at the rates applicable to the deceased.
- The PRs will need to account for:
* untaxed income due and paid before death
* some income paid after death which relates to a period before death. E.g.
* o Rent due on properties the deceased let, but which had not been paid
* o Final dividends declared before death but not paid.
- No date apportionment is needed for bank interest (CIR v Hendersons Executors). Bank interest paid before death is taxed as the deceased’s. Bank interest paid after death is taxed as the PRs’ (even if part of it relates to a period prior to death).
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What happens if the estate generates income?
- PRs may be liable to pay IT if the estate assets generate income in the hands of the PRs i.e. income arises between the date of death and the date the assets are distributed.
- The estate may receive interest (in respect of bank accounts), dividends (in respect of shares) and rent (in respect of let properties). This income is taxed as estate income in the hands of the PRs.
- PRs pay IT at the basic rate (the % will depend on the type of income). The starting and higher rates do not apply to PRs in the same way they do for individuals.
- PRs are not entitled to claim an income tax personal allowance.
- Income generated by the assets after they have been distributed to beneficiaries is taxed as the beneficiary's income.
- IT will have been collected at source where this income is paid net (e.g. dividends) or paid by PRs for income paid gross (e.g. rent from estate properties).
- If the only source of income is savings interest of less than £500 and, therefore, the tax due would be less than £100, HMRC do not require any reporting of estate income.
- PRs give a Form R185 to beneficiaries when the estate income is distributed. R185 records the IT paid by PRs in respect of the income a beneficiary receives.
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Do PRs need to worry about CGT when selling chattels?
PRs can sell chattels without having to worry about CGT because a gain made on the disposal of a tangible moveable asset is exempt from CGT if the disposal is for a consideration of £6,000 or less
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- If an asset is going to be sold the PRs should consider whether it is more tax efficient for PRs to:
- sell it as part of the administration; or
- transfer it to the beneficiary so the beneficiary sells it.
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Disatribution to beneficiaries?
* Once the PRs have collected in assets and paid debts, funeral, testamentary and administration expenses (or have a sum set aside for their payment) they have a duty to distribute the remaining estate assets to beneficiaries in accordance with their legal entitlement under the will and /or intestacy rules.
497
What do beneficiaries pay first?
* The PRs will make payments of legacies other than the residuary legacy first. It is not possible to identify the exact value of residuary gifts until the administration is complete. Full distribution of the residue is the final step in the administration.
498
* To ensure the PRs fulfil their duty to accurately distribute the estate they must carefully consider:
- Identity of the beneficiaries
- Nature of the interest
- Property to which they are entitled
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How to indentify beneficiaries?
* Review the will to identify those entitled to legacies & apply rules of construction. (Consider the effect of class gifts, substitution clauses, s15 / 18 / 33 Wills Act).
* Apply intestacy rules if full or partial intestacy occurs.
* Nature of the interest
* Establish if a beneficiary has a vested or contingent interest, or, an interest under an express trust in the will.
* Assess what ‘share’ each beneficiary is entitled to.
500
Methods for transferring assets?
* Chattels: delivery to the beneficiary
* £ legacies: cheque or bank transfer
* Shares: stock transfer form
* Land: Assent for a legal estate in land (land registry form AS1)
501
General rule for who should bear the burden of cost of transfer?
* Unless the will specifically provides otherwise, the beneficiary must bear the cost of the transfer of the asset (but inherits the item free of IHT).
502
* In general law, unless the will states otherwise, legacies are paid in the following order:
- 1.specific
- 2.general
- 3.residuary
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What happens if you cannot pay all the legacies?
- If it is not possible to pay all of the legacies they abate (reduce) in reverse order. So:
· - If funds are insufficient to pay all other legacies the residuary beneficiary takes no benefit.
· - If funds are insufficient to pay all specific legacies, the general beneficiaries take no benefit. If there are sufficient funds to meet all specific gifts but not all general legacies, the general beneficiaries take a reduced inheritance. (Demonstrative legacies abate with general legacies once the specific fund set aside has been exhausted.)
· - specific gifts take priority.
o Within each category, if not all of the legacies can be paid, they abate proportionately.
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How does appropriation work?
* When paying general and residuary legacies the PRs are free to choose which assets to appropriate to the beneficiaries in settlement of their entitlement (s.41 Administration of Estates Act 1925 (‘AEA’)).
* The power of appropriation does not allow appropriation where the value of the asset at the date of appropriation exceeds the entitlement of the beneficiary concerned.
* If the value of the asset at the date of appropriation is less than the beneficiary’s entitlement the PRs will need to make a further balancing transfer.
* By will a beneficiary is left “£500”. The beneficiary has asked the PRs if they can be given the deceased’s flute (probate value of £100) instead of a cash sum of £500. The PRs have the power to do this. If the value of the flute at the date of transfer is £70 the PRs should also make a cash transfer of £430 – so the total value received by the beneficiary is £500.
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Wheb to obtain receipt from beneficirary?
* PRs should obtain confirmation of receipt from the beneficiary when making a distribution.
* An issue arises if minor beneficiaries have a vested interest because they cannot give good receipt. Where this applies the PRs have the following options:
* An express clause in the will which gives PRs the power to accept receipt from a minor aged 16 or 17 (but no younger) is enforceable
* By virtue of s 3 Children Act 1989 (where a parent/guardian provides receipt)
* PRs to hold the gifted property themselves until the child is 18
* Appoint trustees to hold the property for the minor (s 42 AEA) and make payment to the trustees
* Pay the legacy into court (s 63 Trustee Act 1925)
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Estate accounts duty?
* PRs have a duty under s 25 AEA to keep an account of the estate assets (a record of the estate assets and how these have been administered). The PRs or their legal advisors will prepare the estate accounts.
* The estate accounts should be signed/approved by both PRs and residuary beneficiaries (who by signing indicate their agreement with how the estate was administered and the residue was calculated). The date the accounts are signed is usually treated as the ‘end’ of the administration.
* There is no prescribed format for the estate accounts, but they should be clear and comprehensible to the beneficiaries. Three component parts usually follow a summary:
- Capital Account
- Income Account
- Distribution Account
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Capital account?
* Sets out the estate assets and liabilities at death.
* Records what has happened to each item during the administration, for example, whether assets have been sold or transferred to a beneficiary.
* Liabilities such as pecuniary/specific legacies and IHT are included, as are any solicitor’s fees for carrying out the administration.
* The capital account will then show a balance which is available for distribution to the residuary beneficiaries.
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Income account?
* Sets out the income received in relation to the estate assets during the administration and summarises how this was spent
* Income expenses are then deducted as liabilities
* The income account will then show a balance which is available for distribution to the residuary beneficiaries
* If the PRs receive rent from the tenant of an estate property the income would be shown in the income account and any income tax payable on the income would be shown as an income liability.
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Distribution account?
* The distribution account sets out the residuary beneficiaries’ entitlement.
* It includes distributions made during the course of the administration of the estate (‘interim distributions’) and the final balance due to be distributed.
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General power of investment
* Section 3 TA 2000 sets out the general power of investment. Under this provision, a trustee may make any kind of investment that they could make if they were absolutely entitled to the assets of the trusts.
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* When exercising the general power of investment, trustees must:
- Consider the standard investment criteria set out in s 4 TA 2000
- Take advice in accordance with s 5 TA 2000
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* Standard investment criteria
Trustees must consider the criteria when deciding whether to make an investment (s4(1)) in the first place. Trustees also have a duty to regularly review investments with reference to the standard investment criteria and decide whether they ought to be varied.
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Components of the standard investment criteria?
* Suitability (s4(3)(a)): Trustees must consider the suitability of the proposed investments. There are two key questions to consider:
- General suitability: Is the investment of a suitable kind?
- Specific suitability: Is the particular investment suitable?
* Diversification (s4(3)(b)): Trustees must also consider the need for diversification of trust investments. The extent to which diversification is needed will depend on the size and nature of the particular trust.
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What else must trustees consider when making investments?
- When considering the suitability of trust investments, the trustee obligation to act in the best interests of beneficiaries means their best financial interests.
- The trustees must balance the interests of all beneficiaries (current and future).
- The personal views of the trustees are not relevant to this assessment. Trustees must exercise their powers fairly and honestly, and not for any ulterior purpose.
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Do trustees need to obtain advice before making an investment?
* Under s 5 TA 2000 trustees are required to obtain and consider ‘proper advice’ before exercising their powers of investment (s 5(1)) and when reviewing their investments (s5 (2)). The advice must relate to how the power should be exercised, with reference to the standard investment criteria.
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Proper advice?
* ‘Proper advice’ is defined in s 5(4) as being provided by a person ‘who is reasonably believed by the trustee to be qualified to give it’ by their ‘ability in and practical experience of financial and other matters relating to the proposed investment’.
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Exception to obtaining advice before investment?
* There is an exception set out in s 5(3) which provides that trustees need not seek advice if they reasonably conclude that in all the circumstances it is unnecessary to do so. This will depend on the circumstances but might, for example, include situations where the cost of the advice outweighs the benefit of obtaining it or cases where the trustee has sufficient knowledge and expertise to make the decision without advice.
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Statutory duty of care?
* The statutory duty of care is found in s 1 TA 2000 and requires trustees to ‘exercise such care and skill as is reasonable in the circumstances’.
- Section 1(1)(a) requires the assessment to take into account ‘any special knowledge or experience’ that a trustee has or holds themselves out as having.
- Section1(1)(b) applies to professional trustees and requires the assessment to take into account the any ‘special knowledge or experience’ that it is reasonable to expect of a person acting in that capacity.
* In other words, the standard of care is always higher for professional trustees, because they are being paid to provide a service.
* It is also raised for lay trustees who may have been appointed on the basis of having (or purporting to have) particular skills that would make them desirable trustees.
* This is why it is important for individuals to think carefully about whether to accept the role of trustee, as their actions will be assessed objectively.
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* Common law duty of care?
it requires trustees to exercise the standard of diligence and care expected of an ordinary prudent business person.
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* Power to acquire land?
* Section 8 TA 2000: Trustees have a statutory power to acquire freehold or leasehold land in the UK (but not overseas). This power may be exercised for investment purposes but also more widely (including for occupation by a beneficiary).
* If the land is acquired for investment purposes, the trustees must consider the standard investment criteria and take advice in accordance with ss 4 and 5 TA 2000 respectively.
* The statutory duty of care applies to all trustee powers to acquire land, whether they arise under s 8 or otherwise, and whether the land is acquired for investment or other purposes.
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* Power of Delegation
* Section 11 TA 2000 provides trustees with broad powers of delegation. Although there are some functions which trustees cannot delegate (such as their distributive obligations) they are permitted to delegate their powers of investment and powers to acquire land.
* Trustees cannot delegate their investment powers except by an agreement evidenced in writing (s 15TA 2000). This agreement should include a term ensuring compliance with a written ‘policy statement’ to be prepared by the trustees. The ‘policy statement’ should give guidance as to how the agent should exercise their functions ensuring they are in line with the best interests of the beneficiaries.
* The agent to whom the function is delegated is bound by any restrictions on the exercise of its investment powers in the same way the trustee would be (s 13(1) TA 2000).
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* There are two primary reasons why a trustee might wish to delegate their functions:
- The trustee may be incapable of discharging their duties for a limited period.
- The trustee lacks the expertise to discharge the particular responsibility and prefers to have an expert do this.
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What should trustees do to ensure they comply with their duty of care when delegating their powers?
trustees should ensure:
- An appropriate agent is selected for the function
- The agreement complies with their requirements under statute
- The arrangement is reviewed regularly
* If trustees comply with their duties when exercising the power of delegation, they will not be vicariously liable for any loss caused by the agent acting negligently.
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* Trustees may avoid or mitigate liability for breach of trust in the following ways:
- · Ensuring the trust instrument contains an ouster of exemption clause.
- · Taking out insurance.
- · Seeking court directions before taking action that might result in liability.
- · Making a s 48 AJA 1985 application to rely on legal advice.
- · Surrendering their discretion to the court (in exceptional cases).
- · Relying on the fully informed consent of beneficiaries.
- · Establishing a defence of beneficiary instigation or acquiescence.
- · Relying on the equitable defence of laches
- Seeking equitable relief under s61 TA 1925.
- · Making a claim against a third party adviser.
- · Making a claim for a contribution from a co-trustee or third party.
- · Taking specific protective action in respect of missing or unidentified beneficiaries (covered in a separate element).
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* Variations?
o A variation is a direction from an original beneficiary, to the deceased’s PRs, to transfer property that the beneficiary is entitled to under the terms of a will or the intestacy rules to another person instead.
o A variation is possible after an inheritance has been accepted
o A variation may be made in respect of the whole or part of an inheritance
o The original beneficiary is free to determine who receives the varied inheritance
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IHT consequences of variations?
If the conditions of s.142 Inheritance Tax Act 1984 (IHTA) (as explained later) are satisfied, the gift from the original beneficiary is read-back to the date of the deceased’s death and treated for IHT purposes as having been made by the deceased to the new beneficiary (instead of being made by the original beneficiary to the new beneficiary).
The consequences are:
* the original beneficiary does not make a Potentially Exempt Transfer (‘PET’). A PET is a lifetime transfer of value to another individual. If the transferor does not survive for seven years after making the PET, it becomes chargeable alongside their death estate. However, with a variation the original beneficiary does not need to be concerned about surviving 7 years from the date of the gift
* IHT due on the deceased’s death estate is re-calculated on the basis the deceased left the property to the new beneficiary.
* A variation must comply with the following conditions for the IHT ‘writing–back’ effect to be achieved:
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How are variations made?
o made by the original beneficiary in writing (a deed is not required but frequently used)
o within the two years following the deceased’s death
o contains an express statement by the beneficiary confirming s142 should apply
o not be made for consideration in money or money’s worth
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What should PRs when beneficiaries want to make a variation?
o A beneficiary can vary their entitlement to the estate assets without approval from the PR’s of the deceased’s estate.
o However, if the variation results in additional IHT being due in respect of the deceased's estate, the PRs should:
Sign the variation
Provide HMRC with a copy of the written variation and pay the amount due.
o The PRs can only refuse to sign the variation/approve the “writing back” under s.142 if the assets held by them are insufficient to discharge the additional tax payable.
o The IHT payable in respect of the deceased's estate may not be affected by a variation.
o However, if the amount an exempt beneficiary receives either increases or decreases, this may result in an increase or decrease in IHT payable. The following examples demonstrate how the estate IHT can be affected by a variation.
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* Variations: CGT consequences
o Cash is exempt from this!!!
o Under normal rules a gift by the original beneficiary to another person would be a disposal by the beneficiary.
o If the assets had increased in value since the date the deceased died a CGT liability can arise if the increase is more than the beneficiary’s tax-free allowance.
o If an estate beneficiary wants to give away their inheritance but avoid a CGT charge the provisions of s.62 Taxation of Chargeable Gains Act 1992 (TCGA) permit a writing-back effect similar to that available for IHT under s.142 IHTA.
o The conditions for s.62 TCGA to apply are the same as for s.142 IHTA.
o The effect of complying with the conditions is that the gift is ‘written-back’ to the deceased’s date of death and treated as having been made by the deceased. The writing back effect means the new beneficiary is treated as inheriting the assets from the deceased, and the original beneficiary has not made a disposal. The new beneficiary is deemed to acquire the assets at their date of death value (not the value at the date of the variation).
o Any increase in the value of the assets since the date of death will be taxed in the hands of the new beneficiary when/if they later dispose of it.
Note that contrary to IHT there is no issue of additional CGT as a result of a variation because no CGT is payable in respect of the deceased’s death estate in the first place.
o Gifts of cash are exempt from CGT so the CGT consequences only need to be considered where non-cash assets are the subject of the variation.
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* Variations: choice to write-back
o The original beneficiary can choose whether or not to use the writing back provisions for either or both of IHT and CGT.
o If no writing-back is required for either IHT or CGT, no formal variation is needed and the beneficiary can simply make a gift to the intended beneficiary.
o The choice about whether to enter a formal variation in order to make use of s.142 IHTA and/or S.62 TCGA will depend on the circumstances.
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* Variations: Restrictions
o Capacity to vary If the original beneficiary is a minor or lacks mental capacity, they cannot make a variation without the consent of the court under the Variation of Trusts Act 1958. Such applications are expensive and time consuming.
o Number of variations possible There is no limit to the number of times a will can be varied, but each asset can only be varied once.
o HMRC stated ‘an instrument will not fall within s142 if it further redirects any item or any part of an item that has already been redirected under an earlier instrument’. Therefore, a second variation in relation to the same property will not be effective for tax purposes.
o Property subject to a variation Property passing by will, intestacy and interests in joint property can all be the subject of a variation. However, the following cannot be varied: *
Property in respect of which the deceased was a life tenant immediately before death. The trust deed will determine where those assets go. *
If the deceased had made a gift with reservation of benefit, this property cannot be varied post death as the deceased was not the legal owner of these assets and, although they are subject to IHT, they do not form part of the distribution estate.
o If the original beneficiary makes a variation of property but continues to enjoy the property – has the original beneficiary made a gift with reservation of benefit? No! Because the effect of the writing back provisions is to treat the arrangement as a disposition by the deceased, the original beneficiary is not the donor of the property and therefore there can be no reservation of benefit by them.
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Disclaimer?
A disclaimer is similar to a variation but operates as a refusal to accept property to which a beneficiary is entitled either under the intestacy rules or under the terms of a will.
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Limitations to disclaimers?
* A beneficiary can only disclaim before acceptance *
A beneficiary can only disclaim the whole gift *
A disclaimer of a beneficiary’s rights under a will does not disclaim their rights under any intestacy which may arise as a consequence of disclaiming their testamentary inheritance *
The inheritance passes as if the gift to the original beneficiary had failed. The ultimate destination is determined by provisions in the will or the intestacy rules. The original beneficiary cannot control who receives the assets they disclaim.
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* Disclaimers: IHT & CGT
Where a beneficiary does disclaim their inheritance, the provisions of s.142 IHTA and s.62 TCGA apply in the same way as they do to variations.
o The original beneficiary is not treated as having made a transfer to the new beneficiary. Instead, the deceased’s estate is taxed as though the person who is ultimately entitled had actually been entitled on death.
o The conditions for the writing back effect are the same as those for a variation. Variations are not subject to the same practical limitations as disclaimers so are usually preferred.
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* Precatory Trusts
o A precatory trust arises where a gift is made to a beneficiary by will with a wish expressed as to how the beneficiary should pass on those assets to others.
o Precatory trusts allow flexibility with regards gifts of chattels as the testator may change their mind and update the letter of wishes without amending their will. Though note that it is important for the subject matter of the gift to be certain.
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* Precatory Trusts: IHT
o A precatory trust does not vary the distribution of an estate directly, but there is a similar legal effect for IHT purpose if the beneficiary acts upon the testator’s wishes.
o By virtue of s.143 IHTA, if the original beneficiary makes the distributions intended by the testator within 2 years of the testator's death, these are treated for IHT purposes as gifts made by the testator’s will and not the original beneficiary.
o The effect of s 143 on distributions under a precatory trust is that the original beneficiary is not treated as having made a PET of these items, which would otherwise be the case.
o However, unlike variations and disclaimers, no written election is necessary for this to apply and the writing back effect for IHT happens automatically.
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* Precatory Trusts: CGT
o There are no equivalent CGT rules and s 62 TCGA does not apply.
o Therefore, a re-distribution in accordance with testator’s wishes would be treated as a disposal by the original beneficiary.
o However, because: *
there is likely to only be a short time between the death of the testator and the distribution by the beneficiary, and *
most chattels are unlikely to increase significantly in value in any event this is not usually an issue.
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Additional documents required in an application for obtaining a grant?
In order to obtain the grant, it will be necessary to send the Probate Registry the deceased’s
will and codicil, if any, plus two A4 photocopies.
In some cases, before issuing the grant, the probate registrar may require further evidence
of the validity of any will. Evidence can take the form of an affidavit sworn before a solicitor
who is not acting for the PRs or a witness statement verified by a statement of truth.
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Procedure for excepted estates?
PRs provide no information directly to HMRC. Instead, they include the following on their
applications for a grant:
(i) the deceased’s full name and date of death; and
(ii) a declaration:
–
that the estate is an excepted estate; and
–
whether they are claiming against the estate the unused proportion of the IHT nil rate
band of a pre-deceased spouse or civil partner (the transferable nil rate band); and
(iii) the following three IHT estate values:
–
the gross value of the estate for IHT plus any specified transfers and specified exempt
transfers made by the deceased in the seven years before their death;
–
the net value of the estate for IHT less any allowable debts;
–
the net qualifying value of the estate, that is, the net value of the estate for IHT less
any spouse, civil partner or charity exemptions.
HM Courts and Tribunals Service will have one month to pass the information to HMRC.
Personal representatives of non-UK domiciliaries will have to provide rather more information.
HMRC will select a random sample to review within 60 days of the application for a grant.
In addition, it ‘will use other information sources to identify those estates nearer to the IHT
threshold’ where it feels that there is a risk that IHT may be payable.
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for certain types of property, there is the right to pay by ten annual
instalments. Instalment option property comprises:
(a) land of any description;
(b) a business or an interest in a business;
(c) shares (quoted or unquoted) which immediately before death gave control of the
company to the deceased;
(d) unquoted shares which do not give control if either:
*
the holding is sufficiently large (a holding of at least 10% of the nominal value of the
company’s shares and worth more than £20,000); or
*
HMRC is satisfied that the tax cannot be paid in one sum without undue hardship; or
*
the IHT attributable to the shares and any other instalment option property in the
estate amounts to at least 20% of the IHT payable on the estate.
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Can minors apply for grant of letters of administration or grant of letters of administration with the will annexed?
Minors (infants) cannot act as administrators with will annexed, nor can they apply for a
grant. Other people entitled in the same category as the minor will apply. If there are no such
persons, the minor’s parent(s) or guardian(s) may apply for a grant ‘for the minor’s use and
benefit’ on their behalf. The grant is limited until the minor attains the age of 18.
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When does the administration period commence?
The ‘administration period’ commences at the moment immediately following the death and
ends when the PRs are in a position to vest the residue of the estate in the beneficiaries, or
the trustees if a trust arises under the will or the intestacy rules.ately following the death and
ends when the PRs are in a position to vest the residue of the estate in the beneficiaries, or
the trustees if a trust arises under the will or the intestacy rules.
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PRs may face three main issues:
(a) There may be creditors of whom they are unaware or unknown relatives (eg children born
outside marriage whose existence has been kept secret).
(b) They may not know the whereabouts of some beneficiaries who may have lost contact
with the deceased’s family.
(c) There could be a successful claim against the estate under the Inheritance (Provision for
Family and Dependants) Act 1975
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Testamentary expenses?
The phrase ‘testamentary and administration expenses’ is not defined in the AEA 1925, but it
is generally considered to mean expenses which are incidental to the proper performance of
the duties of a PR. Testamentary expenses will include:
(a) the costs of obtaining the grant;
(b) the costs of collecting in and preserving the deceased’s assets;
(c) the costs of administering the deceased’s estate, for example solicitors’ fees for acting
for the PRs, valuers’ fees incurred by PRs in valuing the deceased’s stocks and shares or
other property; and
(d) any inheritance tax payable on death on the deceased’s property in the UK which vests
in the PRs (s 211 Inheritance Tax Act 1984). (The inheritance tax payable on property
falling outside this definition, such as property passing by survivorship, is borne by the
beneficiary. The PRs can claim reimbursement of any tax they have paid from the person
in whom the property is vested, although there may be practical difficulties in securing
payment unless the beneficiary is also entitled to other assets from the estate.)
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Adjusting the inheritance tax assessment?
An adjustment to the amount of inheritance tax payable on the instalment and non- instalment
option property in the estate may be necessary for a number of reasons, including:
(a) discovery of additional assets or liabilities since the IHT account was submitted;
(b) discovery of lifetime transfers made by the deceased within the seven years before death;
(c) agreement of provisionally estimated values, for example with the shares valuation
division of HMRC (in the case of shares in private companies) or the district valuer (in
the case of land). Such valuations may require long negotiations and can often delay
reaching a final settlement of inheritance tax liabilities;
(d) agreement between the PRs and HMRC of a tax liability or repayment, in relation to the
deceased’s income and capital gains before the death;
(e) sales made by the PRs after the deceased’s death which have given rise to a claim for
inheritance tax ‘loss relief’.
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Key points on CGT and death:
(1) No CGT is payable on death itself.
(2) If PRs sell assets, they make a disposal. Their acquisition value is the market value at the
date of death. They have an annual exemption equal to an individual’s in the tax year
of death and the two following tax years, so there will often be no tax liability on their
disposals.
(3) The rate of tax payable by PRs is 20% except for gains on residential property which are
taxed at 28%.
(4) If PRs transfer assets to beneficiaries, they do not make a disposal. The beneficiary
acquires the asset at market value at the date of death.
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When should income tax and CGT be paid?
Provided the estate is not complex, income tax and CGT are normally paid in one lump sum
at the end of the administration period. However, CGT on the disposal of UK residential land
must be paid within 60 days of completion.
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What is a caveat and when are they filed?
Following a person’s death, there may be a dispute over the validity of the deceased’s will or
some other reason why family members wish to prevent the issue of a grant. If they have just
cause, they should lodge a caveat at HMCTS. Once a caveat has been entered, no grant can
be issued until the caveat is removed or ceases to be effective
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Executor’s year?
personal representatives have at least one year – the so-
called ‘executor’s year’ – from the date of the deceased’s death before they can be called on to distribute the estate.
549
Removal of PRs?
PRs cannot be forced to accept office; they can renounce their right to the grant (8.7.4; 8.8.5;
8.9.4). Once they have extracted the grant, the office is for life unless the court removes them.
The court has a discretion to remove PRs under s 50 Administration of Justice Act 1985. This
provision is used to remove or substitute a PR (including agreed retirements). Applications
can be made by the PR or a beneficiary. The court has a discretion to replace existing PRs
with others or simply terminate an appointment without replacement. However, the court must ensure that there is at least one PR remaining. The main factor guiding the exercise of the
court’s discretion is the welfare of the beneficiaries.
550
The rights of creditors?
PRs take on all the deceased’s debts and liabilities. Causes of action against the deceased
continue against the deceased’s PRs. Also, PRs must perform the deceased’s contracts.
However, they are liable only to the extent of the deceased’s assets. The limitation period is
generally six years.
However, the PRs may be personally liable to creditors for devastavit – for loss of assets
caused by a breach of their duties. Personal liability means that the PRs would have to pay
the creditor out of their own resources. Examples include: executors paying a legacy before
advertising for creditors so that there was insufficient left to pay all the creditors; failure to
collect and preserve the deceased’s estate; spending an excessive amount on the deceased’s
funeral; paying the debts of an insolvent estate in the wrong order.
The procedure set out in s 27 Trustee Act 1925 should be followed to provide a defence
against creditors of whose existence the PR was unaware at the time of distribution to the
beneficiaries.
551
Limitation period for PRs
The time limit for an unpaid or underpaid beneficiary to bring a claim to recover a share
or interest in an estate is 12 years running from the date on which the right to receive the
estate accrued. There is no time limit laid down in the Limitation Act 1980 to bring actions
for fraudulent breaches of duty or where the PR has taken property from the estate for
their own use.
552
Meaning of liability and burden?
HMRC is concerned with obtaining
payment of the tax (ie liability). Payment will usually be obtained from people who are not
beneficially entitled to the property but who hold property in a representative capacity (ie
PRs and trustees). Those who ultimately receive the property are concurrently liable with such
representatives, but in most cases tax will have been paid before the beneficiaries receive the
property. The concept of ‘burden’ concerns who ultimately bears the burden of the tax. The
testator can change the statutory rules on the burden by making express provision in the will.
However, the statutory rules on liability cannot be varied.
553
Liability for IHT on death
The PRs: tax on the non- settled estate
The PRs are liable to pay the IHT attributable to any property which ‘was not immediately
before the death comprised in a settlement’ (s 200 IHTA 1984). This includes:
(a) the property which vests in the PRs (ie the property which passes under the deceased’s
will or intestacy); and
(b) property (other than trust property) which does not pass to the PRs but is included in the
estate for IHT because the deceased was beneficially entitled to it immediately before
death (eg joint property which passes by survivorship).
Concurrently liable with the PRs is ‘any person in whom property is vested … at any time after
the death or who at any such time is beneficially entitled to an interest in possession in the
property’ (s 200(1)(c) IHTA 1984). This means that tax on property passing by will or intestacy
may in principle be claimed by HMRC from a beneficiary who has received that property.
Similarly, HMRC may claim tax on joint property from the surviving joint tenant. In practice
such tax is normally paid by the PRs and it is relatively unusual for HMRC to claim tax from the
recipient of the property.
554
Liability for IHT on PETs
here a person dies within seven years of making a PET, the transfer becomes chargeable
and IHT may be payable. The transferee is primarily liable but, again, the PRs become liable
if the tax remains unpaid 12 months after the end of the month of death
The liability of the PRs is limited to the extent of the assets they actually received, or would
have received but for their neglect or default. However, PRs cannot escape liability on the
grounds that they have distributed the estate and so they should ideally delay distribution until
IHT on any such lifetime gifts has been paid.
555
Liability for IHT on LCTs
Trustees pay
The transferor is primarily liable for IHT, although HMRC may also claim the tax from the
trustees. In practice, the trustees often pay IHT out of the property they have been given.
6.8.5.2 Transferor pays: grossing up
If the transferor pays, the amount of tax will be more than it would be if the trustees paid.
This is because IHT is charged on the value transferred, ie the loss to the transferor’s estate
brought about by the gift. If the transferor pays, the loss is increased by the amount of tax
he pays.
556
Burden of IHT
Unlike liability, the question of where the burden of tax should fall is one for the transferor to
decide. For example, the burden of tax could fall on the transferees of any gifts (including
PETs and LCTs) or the transferor could choose to relieve them of that burden by paying any
IHT themselves on lifetime gifts and directing that any IHT arising following death be paid
from the residue of the estate. If the will is silent, then the default position essentially is that
the IHT on property which vests in the PRs is payable as a testamentary expense, and that on
property held as beneficial joint tenants is borne by the surviving joint tenant
SQE 2
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Decks in class (17)
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