England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/02/2010

Peter Smith J :

INTRODUCTION

1. This judgment arises out of the hearing of the Claim Form issued by the Claimant in this action. The Claimant ("RSPCA") is the residuary legatee under the will of George Mason (Deceased) dated 19th January 2005. He died on 18th June 2007 and the First and Second Defendants were appointed his executors.
2. At the end of the hearing I indicated that the application for construction of the will in the terms put forward by the RSPCA was to be dismissed and that I would give reasons for that dismissal in writing.

THE WILL

3. By his will after revoking all previous wills and testamentary dispositions he appointed Mr & Mrs Sharp to be his Executors and Trustees. The clauses of the will which are relevant for the purpose of the dispute are clauses 3-6 which I set out below:-

"3. I GIVE the amount which at my death equals the maximum which I can give to them by this my Will without Inheritance Tax becoming payable in respect of this gift:

(a) as to seventy-eight percent (78%) to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one in equal shares absolutely
(b) as to twenty-two percent (22%) to JOHN EDWARD MASON of 4 Jervis Avenue Freezywater EN3 6LT absolutely

4. I GIVE my property situate and known as 39 Malvern Road Gosport in Hampshire PO12 3LH to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one jointly and equally absolutely and I direct that the Inheritance Tax (if any) payable on my death in respect of the property and all costs of the registration of the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as proprietors thereof shall be payable out of my residuary estate.

5. SUBJECT TO the payment of my just debts funeral and testamentary expenses and the legacies given by this my Will or any Codicil hereto I GIVE DEVISE AND BEQUEATH the residue of my estate of whatsoever nature and wheresoever situate (which said estate and property and the property for the time being representing the same and herein referred to as "my residuary estate") unto my trustees upon trust to sell the same or any part thereof or to retain the same or any part thereof in its actual state of investment or condition at the time of my death.

6. MY TRUSTEES shall stand possessed of my residuary estate upon trust for the Royal Society for the Prevention of Cruelty to Animals of Causeway Horsham West Sussex RH12 1HG for its general purposes and I direct that the receipt of the secretary treasurer or other proper officer shall be a sufficient discharge to my trustees."

4. The Deceased and Mr Sharp met in the Merchant Marine in the Second World War and became lifelong friends. Mrs Sharp also became a lifelong friend at a later stage. The Third Defendant John Edward Mason is the Deceased's brother and sole surviving relative.

SIZE OF THE ESTATE

5. The deceased had £771,178 standing in Bank and Building Society accounts and £12,832 in cash. In addition he owned the property ("the Property") 39 Malvern Road Gosport Hampshire the subject of the devise in clause 4 of the will. That was valued at £169,000 for probate purposes.

ADMINISTRATION BY THE DEFENDANTS

6. The First and Second Defendants administered the estate on the basis that the gift in clause 3 amounted to £300,000 (the nil rate band prevailing at the time) and the Property worth £169,000 passed to the First and Second Defendants. That left residue of £482,820.20 for the Claimant subject to inheritance tax ("IHT") of £112,667. That analysis resulted in a residuary legacy to the RSPCA of £370,153. It gave a pecuniary legacy under clause 3 to the First and Second Defendants of £234,000 a pecuniary legacy to the Third Defendant of £66,000 and the Property to the First and Second Defendants (under clause 4) of £169,000.
7. The Claimant does not accept that that is the correct construction of the will.

CLAIMANT'S CONTENTIONS

8. The Claimant's case is that the way in which the Defendants have construed the gift in clause 3 is clearly wrong. It was submitted on its behalf that the gift in clause 3 can only comprise the balance of the unused nil rate band for IHT (if any) at the date of the Deceased's death and in order to ascertain that the gift in clause 4 has to be taken into account. This construction means that the first £169,000 of the nil rate band was to be applied to clause 4. This meant that the balance of the nil rate band was only available for the legacy under clause 3. This meant that the legacy in clause 3 is subject to reduction depending on the value of the Property in clause 4 as at the date of the death.
9. It was accepted by Ms Reed QC who appears for the RSPCA that any increase in the value of the Property between the date of the will and the death would pro rata reduce the amount passing under clause 3. Once the value of the property reached the nil rate band level there would be no legacy passing under clause 3.
10. The effect of this is that at least until the value of the property exceeds the nil rate band the estate as a whole will not pay any IHT.
11. The result of the argument is that the amount of IHT payable on the present figures will be reduced from £112,667 to nil. The competing figures are set out in the schedule below:-

	Per Defendants	Per Claimant
	£	£
D1, D2 – clause 3	234,000	102,180
D1, D2 – clause 4	169,000	169,000
D3	66,000	28,820
C	370,153	651,820
HMRC	112,667	NIL
Total	£ 951,820	£ 951,820

12. It was submitted on the behalf of the Claimant the Deceased would desire to achieve this because this is the most tax efficient way of construing the will and thereby minimising tax. It is important not to overlook however in my view 2 further results. First it meant that by applying the nil rate band first to the devise under clause 4 the pecuniary legacy under clause 3 is correspondingly reduced. Whilst that saves tax as I have said (bearing in mind the fact that the RSPCA residuary devise will not pay any tax) the true "beneficiary" of this argument is the RSPCA which will see its residuary legacy rise from £370,153 to £651,820. This is entirely at the expense of the legatees under clause 3.
13. It was said that this arises because the construction put forward by the Defendants (as set out above) ignores the basis on which IHT is chargeable on a person's death. Under section 4 (1) of the IHT Act 1984 it is provided that :-

"on the death of any person tax shall be charged as if, immediately before his death, he made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death. "

14. It was submitted therefore that IHT is not charged on each gift but on the transfer of value deemed to be made by the Deceased. Consequently it is therefore submitted that in light of that the words "payable in respect of this gift" do not assist in construing the rest of clause 3. Consequentially clause 3 makes clear that the maximum amount which the Deceased could give at his death "by this my will" is the sum that could be paid under clause 3 without IHT being payable. It was therefore submitted that that required the other clauses of the will to be taken into account in seeing what gift could be made without any IHT being payable in respect of the gift in clause 3. Thus it is said regard has to be had to the gift of the Property in clause 4 which is chargeable to IHT.
15. The key submission is apparently based on the words in clause 4 "if any". It was submitted that the words have no meaning at all if the Defendants' case is correct because if the nil rate band is fully applied to the legacy under clause 3 IHT will always be payable under clause 4. Thus it was submitted those key words suggest that clause 4 is taken into account first when applying the nil rate band.
16. In my view this is to over complicate the will and is patently wrong. It seems to me to be clear that the Deceased had in mind 2 categories of people on whom he wished to confer his largesse. First there were his friends the Sharps and his brother (his sole surviving relative). Second he decided to make a large bequest to the RSPCA of the residue. He would be aware that any sum passing to the RSPCA would not be subject to IHT.
17. It seems to me clear that the purpose of clause 3 was to bequeath a legacy of the amount that was the maximum amount without inheritance tax being payable. The draftsman intended by the description to cover the possibility that the nil rate band might increase between the date of the will and the death. In other words it was intended that this legacy would be free of tax and would be an amount equal to the nil rate band at the time of the death of the Deceased. The draftsman therefore anticipated increases by his wording.
18. Equally he contemplated by the devise in clause 4 to ensure that the Property passed to his friends the Sharps free of any tax. It seems to me clear that he anticipated that tax was likely to be payable and if it was then it would fall on the residue clause in favour of the RSPCA. That too in my view reflects a clear contemplation that his family and friends were to take the legacy and the Property free of tax and the RSPCA would take the balance but subject to any tax payable arising out of the fact that the bequest and the devise might give rise to an incident of tax.
19. The RSPCA's argument (as long as the Property is worth less than the nil rate band) ignores the plain fact that the Deceased contemplated IHT would be payable under clause 4. However its argument will ensure no IHT will be payable by using the nil rate band. This boosts the residuary legatee at the expense of the clause 3 legatees.
20. This seems to be perfectly logical. I do not accept that the intention of the Deceased was necessarily to organise his affairs so as to ensure no IHT was payable. This is illustrated by an example I put to Ms Reed QC in argument. If the Property went up in value to £300,000 she accepted on her arguments that it would use the entirety of the nil rate band. She equally accepted that the result would be that no monies at all would pass under the legacy because there would be no nil rate band left to convert into a legacy.
21. I ask myself whether or not the Deceased when being told that his will had this effect would have expected that a rise in the value of the Property (despite the direction that any inheritance tax would be payable out of the residuary bequest to the RSPCA) would in effect mean that the legacy in favour of his friends under clause 3 and his brother under clause 3 would be abated to zero merely because the Property had increased in value. The result of that exercise of course would mean that ultimately his brother would receive absolutely nothing.
22. I cannot believe that that is what the Deceased intended. It is so unlikely as to be incredible. Further it is not logical and gives undue violence to the simple straightforward wording of clauses 3 and 4. The former plainly intended to address any rises in the nil rate band and give a legacy of the appropriate amount. That was intended to be tax free. Clause 4 was equally intended to pass the Property to Mr & Mrs Sharp free of tax. However the clause did not say the nil rate band would be applied to that. It contemplated that any IHT thereby arising would be payable out of the residuary legacy in favour of the RSPCA. The words "if any" are merely to address the possibility that future events (however unlikely) might change the law of applying IHT so that in some way the Property might become exempt or subject to a reduced rate. I do not see it has any other significance whatsoever. The clear intent under clause 4 in my view was that it was not to have applied to it the nil rate band but was subject to IHT (subject to that possible change in the future) and the whole of the nil rate band was to be utilised to give a legacy under clause 3.
23. That does not do violence to the principle of inheritance tax and its application as set out in section 4 IHTA 1984. The purpose of that provision is simply to make the incidence of IHT apply to the whole estate. It is perfectly possible for a Testator by his will to alter the incidence of tax as between the various constituent parts of the will. That of course does not bind HMRC who can levy tax against all of the assets. Sometimes of course the wishes of the Testator as to the incidence of debt might be affected by the size of his estate. In that eventuality of course the provisions of section 34(3) of the Administration of Estates Act 1925 will be applied.
24. The final point in favour of the Defendants in my view is the general direction under clause 5 to pay all the debts funeral and testamentary expenses and the legacies given by the will out of the residuary estate. I agree with the Defendants that as regards IHT that would be otiose because on the Claimant's argument the residuary estate in favour of the RSPCA would not be subject to any IHT unless IHT was chargeable on the residuary estate in respect of other dispositions under the will. This too in my view shows a straightforward and simple approach again that the bequest and devise under clauses 3 and 4 were intended to be tax free. In addition in my view the purported clause 3 is also intended to make the legacy under that clause free of tax to the maximum extent by creating a legacy up to the nil rate band limit.

CONCLUSION

25. I therefore do not accede to the RSPCA's application and construe the will as contended for by the Defendants.
26. It is a matter of regret in my view that this action was ever brought. It clearly caused great distress to the Defendants and I cannot believe the Deceased would have been happy to see arguments by the RSPCA designed to erode the largesse in favour of his friends and relative to their benefit in this way. It is true that IHT is payable according to the Defendants' contentions (but not out of their share) when none is payable according to the RSPCA'a argument. However that fact cannot conceal that the whole purpose and thrust of the RSPCA's argument is to raise its interest under the will by nearly 75%. I know it is said that Trustees of charitable organisations are required to maximise the return for their charity but I really wonder whether the discharge of that duty required this action to be brought. In my view the RSPCA whatever the view as to the will ought really to have considered that the residuary legacy that I have determined it is entitled to was generous and ample provision out of this estate. The impact of the arguments on the size of the bequest to the Deceased's brother was quite stark. This action has plainly caused distress to the Defendants and in my view ought not to have been brought.