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Cite as: [2005] UKSPC SPC00506, [2005] STC (SCD) 863, [2005] UKSPC SPC506

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Judge & Anor v HM Inspector Of Taxes [2005] UKSPC SPC00506 (5 October 2005)

SPC00506

INHERITANCE TAX – will of testator gave his residence to trustees upon trust for sale (such sale only to take place with the consent of his wife) and declared that the trustees should permit his wife during her lifetime to have the use and enjoyment of the residence "for such period or periods as they shall in their absolute discretion think fit"– after the death of the testator the wife lived in the residence for three and a half years and then died – whether, after the death of the testator, the wife had an interest in possession of the property comprising the residence – no - appeal allowed – IHTA 1984 S49(1)

THE SPECIAL COMMISSIONERS

R M JUDGE AND B D JUDGE

as personal representatives of

P I A WALDEN DECEASED

Appellants

- and -

THE COMMISSIONERS OF HM REVENUE AND CUSTOMS

Respondents

Special Commissioner : DR A N BRICE

Sitting in public in London on 27 September 2005

David Rowell of Counsel, instructed by Messrs Leach & Co Solicitors, for the Appellants

Peter Twiddy, Assistant Director of the Capital Taxes Office, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The appeal

Mr Robert Michael Judge and Mr Brian Dermot Judge, the personal representatives of Mrs Pamela Ida Alma Walden deceased, appeal against a Notice of Determination given by the Respondents on 27 April 2005 in the following terms:

"The Commissioners of Inland Revenue have determined:

In relation to:

a) clause 3 of the will of Thomas Joseph Howard Walden who died on 28 January 2000;

b) the continued residence of Pamela Ida Alma Walden ("the Deceased") in 30 Perrymead Street, Fulham, London SW6 3SP, "the Property", from then until her death on 3 October 2003;

c) the deemed disposal for the purposes of inheritance tax on the death of the Deceased.

That, having regard to the provisions of clause 3 above, the Deceased had an interest in possession for the purposes of section 49(1) in the Property, which therefore formed part of her estate."

The legislation

Section 4 of the Inheritance Tax Act 1984 (the 1984 Act) provides that, on the death of any person, tax is charged as if, immediately before his death, he had made a transfer of value and the value transferred was equal to the value of his estate. Section 5(1) provides that a person's estate is the aggregate of all the property to which he was beneficially entitled. The relevant part of section 49 provides:

"49(1) A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists."

The issue

By clause 3 of his will Mr Thomas Walden (Mr Walden) gave to his trustees all his interest in property at 30 Perrymead Street, London (Perrymead Street) upon trust (with the consent of his wife in writing during her lifetime) for sale and further declared that the trustee during the lifetime of his wife should permit her the use and enjoyment of the property "for such period or periods as they shall in their absolute discretion think fit" his wife paying the outgoings. Mr Walden died in 2000 and his wife (Mrs Walden) died in 2003.

The Respondents issued the Notice of Determination because they were of the view that, on the death of Mrs Walden, she had enjoyed an interest in possession in Perrymead Street under clause 3 of Mr Walden's will. The Appellants, however, argued that clause 3 of the will had not created an interest in possession and so Mrs Walden should not be treated, for the purposes of inheritance tax, as beneficially entitled to Perrymead Street at her death.

Thus the issue for determination in the appeal was whether, having regard to the provisions of clause 3 of the will, Mrs Walden had an interest in possession in Perrymead Street on her death.

The evidence

There was a statement of agreed facts and an agreed bundle of documents.

The facts

From the evidence before me I find the following facts.

Mr Walden and his will

Mr Walden was born on 30 May 1914. Mrs Walden, was born on 24 February 1929. At the date of Mr Walden's will they had both lived at Perrymead Street, which was their matrimonial home, "for a good number of years". They had no living children. Mr Walden owned the freehold of Perrymead Street.

On 27 January 1998 (at the age of 84) Mr Walden made his last will. The will was drafted by an Officer with Commercial Union Trustees Limited. The will appointed Commercial Union Trustees Limited to be the sole executor and trustee and declared that the expression "my Trustees" should, where the context permitted, include the executors or trustees for the time being. Clause 2 of the will gave free of tax to Mr Walden's sister the sum of £10,000. Clause 3 provided:

"I GIVE free of tax and of any monies secured thereon by way of legal charge or otherwise to my Trustees ALL THAT my interest in the property known as and situate at 30 Perrymead Street London SW6 OR the property in which I am at my death ordinarily resident or in which I have then last been ordinarily resident UPON TRUST with the consent in writing of my Wife during her lifetime to sell the same with full power to postpone sale for so long as they shall in their absolute discretion think fit and to hold the net proceeds of sale and other monies applicable as capital and the net rent and profits until upon the trusts and with and subject to the powers and provisions of my Residuary Fund (as hereinafter defined) as an accretion thereto AND I DECLARE my Trustees during the lifetime of my Wife to permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending postponement of sale she paying the rates taxes and other outgoings and keeping the same in good repair and insured against fire to the full value thereof in some office of repute nominated by my Trustees in the names of my Trustees."

Clause 4 of the will gave the Residuary Fund (defined as all property to which Mr Walden was entitled at his death except property otherwise disposed of by his will) to his trustee to hold upon discretionary trusts for all or one or more of the beneficiaries who were Mrs Walden, the nephew and niece of Mr Walden and the issue of the nephew and niece. Clause 13 provided:

"THE word "tax" in the expressions "free of tax" and "subject to tax" used in this Will … shall include all taxes and duties … payable on or by reason of my death."

After January 1993 Mr Walden did not make any lifetime gifts. Mr Walden died on 28 January 2000. On 16 February 2000 Commercial Union Trustees Limited wrote to Mrs Walden in the following terms:

"I would confirm that under clause 3 of your late husband's will, 30 Perrymead Street is the sole asset of a Life Interest Trust and you will enjoy the occupancy of the property during your lifetime … you will be responsible for the actual payment of the premiums [for buildings insurance cover] as well as all the household bills etc. including council tax. …

Under Clause 4 of the will the residue of the estate is to be held on a discretionary trust for the benefit of yourself, your nephew and niece and also their children. As trustees we have the responsibility of exercising our discretionary powers under the terms of the will and also under trust law when considering making payment of capital and income to the discretionary beneficiaries. …

This discretionary trust is slightly different in as much that you, as the surviving spouse, is not nominated as the "primary beneficiary". …"

On 7 April 2000 Commercial Union Trustees Limited, as executor of Mr Walden, applied for a grant of Probate of his will and completed the Inland Revenue account for inheritance tax. In the account the value of Perrymead Street was shown as £625,000 and the exemption for transfers between spouses was claimed for the same amount. Other assets totalled £105,623 and other reliefs totalled £99,169. No inheritance tax was paid.

On 19 April 2000 probate of Mr Walden's will was granted to Commercial Union Trustees Limited. The administration of Mr Walden's estate was completed on the basis that the claim to exemption for transfers between spouses was valid. This was consistent with the view that Mrs Walden had been given an interest in possession in Perrymead Street.

The death of Mrs Walden

Mrs Walden continued to reside at Perrymead Street until her death intestate on 3 October 2003. Thereafter solicitors acting for the Appellants, as her personal representatives, made enquiries of Commercial Union Trustees Limited and Norwich Union replied to them on 1 March 2004 to say:

"I would advise that clause 3 of the late Mr Walden's will established a life interest in favour of Mrs Walden to enable her to enjoy the use of 30 Perrymead Street during her lifetime. Discretionary powers were granted to Commercial Union Trustees Limited, Trustees, in connection with the sale of the property but, in view of the fact that Mrs Walden continues to reside there until her death, this would confirm that these discretionary powers were not exercised."

On 8 March 2004 the Appellants applied for a grant of letters of administration to the estate of Mrs Walden and completed the Inland Revenue account for inheritance tax. No mention was made of Perrymead Street; the total of assets less liabilities was £392,344.33.

Further enquiries were then made of Norwich Union by another firm of solicitors. Norwich Union replied on 29 September 2004 to say:

"Investigations have proved unsuccessful in locating any correspondence between Commercial Union Trustees Limited, whilst they were based in Croydon, and the late Mr Walden in connection with the preparation of his Will. The Will was drafted and executed prior to our involvement following the takeover of Commercial Union's trustee functions and their transfer here to Perth following the merger between General Accident and Commercial Union in June 1998.

We have taken preliminary legal advice, which disagrees with Tax Counsel's Opinion that clause 3 of the late Mr Walden's Will established a discretionary trust rather than a life interest. I have, therefore, replied to the Capital Taxes Office that no correspondence is available to support the late Mr Walden's intention but we must rely on the face value of the terms of the Will which we continue to maintain created two different types of trust."

The arguments

For the Appellants Mr Rowell argued that the provision in clause 3 of Mr Walden's will that Mrs Walden's occupation had to be "for such period or periods as [the trustees] shall, in their absolute discretion think fit" clearly indicated that the trustees had a discretion and that clause 3 was not a direction to them. Secondly, he argued that the words "free of tax" at the beginning of clause 3 were consistent with the establishment of a discretionary trust and not an interest in possession. Thirdly, he argued that if Mr Walden had intended to establish an interest in possession much shorter wording could have been used. Next he argued that the trustee could have given Mrs Walden an interest in possession but had failed to do so and he cited Abacus Trust Company (Isle of Man) Limited v National Society for the Prevention of Cruelty to Children [2001] STC 1344 where the trustee did not consider relevant factors. In this appeal the trustee did not apply its mind to exercising its power and never formed the intention of providing Mrs Walden with a permanent home. Finally he argued that the proper approach was to look at the wording of the will and not at what happened subsequently or at hypothetical matters. Mr Rowell distinguished Inland Revenue Commissioners v Lloyd's Private Banking Limited [1998] STC 559 Woodhall v Inland Revenue Commissioners [2000] STC (SCD) 558 and Faulkner v Inland Revenue Commissioners [2001] STC (SCD) 112 where there had been an enforceable right to reside whereas in this appeal he argued that occupation was at the discretion of the trustees.

For the Respondents Mr Twiddy argued that it would be odd indeed if Mr Walden had intended that his wife would have to move out of a house which they had both occupied for "quite a long time". The words "free of tax" were frequently used even where the exemption for transfers between spouses applied. There was no extrinsic documentary evidence but there was evidence of what the trustee had thought and done. If the Appellants were right, and if clause 3 established a discretionary trust, then the trustee would have had to pay inheritance tax on the death of Mr Walden and that might have forced a sale of Perrymead Street without the consent of Mrs Walden. It was unlikely that Mr Walden would have wished that Perrymead Street would have to be sold to pay inheritance tax. He suggested that it was for that reason that the house was dealt with separately from the residue. He relied upon Lloyd's Private Banking and Woodhall and argued that clause 3 meant that there should be no sale of the house so long as Mrs Walden wished to reside there.

Reasons for decision

In considering the arguments of the parties I first consider the nature of an interest in possession. I then consider whether, and to what extent, a right of occupation can constitute an interest in possession. I then consider the principles which should be applied when construing the provisions of Mr Walden's will and finally apply those principles to the words of clause 3.

The nature of an interest in possession

There was no real dispute between the parties about the nature of an interest in possession. In Gartside v Inland Revenue Commissioners [1968] AC 553 at 607 Lord Reid said:

""In possession" must mean that your interest enables you to claim now whatever may be the subject of the interest. For instance, if it is the current income from a certain fund your claim may yield nothing if there is no income, but your claim is a valid claim, and if there is any income you are entitled to get it. But a right to require trustees to consider whether they will pay you something does not enable you to claim anything. It the trustees do decide to pay you something, you do not get it by reason of having the right to have your case considered; you get it only because the trustees have decided to give it to you."

Again, in Pearson v Inland Revenue Commissioners [1980] STC 318 at 323 Viscount Dilhorne said:

"… for there to be an interest in possession, there must be a present right to the present enjoyment of something … ."

Accordingly I conclude that, for Mrs Walden to have obtained an interest in possession in Perrymead Street under clause 3 of Mr Walden's will, she had to have been given a right as against the trustees and she would not have such a right if the trustees had a discretion as to whether or not they would permit her to exercise that right.

Can a right of occupation be an interest in possession?

The judgment in Lloyds Private Banking (1998), which was followed in Woodhall (2000) and Faulkner (2001), established that a right of occupation could constitute an interest in possession. In Lloyds Private Banking a husband and wife owned the matrimonial home as tenants-in-common in equal shares. In her will the wife bequeathed her half share to her trustee, to hold subject to certain trusts, and also provided that, while her husband remained alive and desired to live in the house, the trustee should not make any objection to his residing there and should not take any steps to enforce the trust for sale. Lightman J held that the will conferred an interest in possession on the husband so that, on his death after the death of his wife, his trustee was liable for inheritance tax.

Accordingly a right of occupation can be an interest in possession but Lloyd's Private Banking also makes it clear that a proper construction of the will is crucial to the decision as to whether an interest in possession has been created.

What legal principles should be applied to the construction of Mr Walden's will?

The normal principles of construction which apply to wills also apply to the construction of clause 3. Mr Twiddy also sought to rely upon extrinsic evidence and referred to section 21 of the Administration of Justice Act 1982 which provides:

"21(1) This section applies to a will –

(a) in so far as any part of it is meaningless ;

(b) in so far as the language used in any part of it is ambiguous on the face of it;

(c) in so far as evidence, other than evidence of the testator's intention, shows that the language used in any part of it is ambiguous in the light of surrounding circumstances.

(2) In so far as this section applies to a will extrinsic evidence, including evidence of the testator's intention, may be admitted to assist in its interpretation."

Mr Rowell cited Schneider and others v Mills and another [1993] 2 All ER 377 at 379, 380 and 381 for the principle that, if there were an obvious omission in a document, the court could correct it if it were apparent that there had been an omission and if it were apparent what correction was required in order to carry out the intention of the parties; also the court would consider the document as a whole.

Schneider (1993) concerned the rectification of a deed of variation varying the terms of a will in order to reduce a liability to inheritance tax. The purpose of the deed was stated to be to benefit the testator's wife by reducing the amount of inheritance tax paid on the death of the testator by increasing that part of his estate which attracted the relief for transfers between spouses. Accordingly clause 3(a) of the deed provided that a pecuniary legacy of £900,000 was to be held as to income for the wife for life and thereafter to the three sons absolutely. However, clause 7 went on to provide that income from the assets, money or property subject to the deed was to devolve as if the deed had not been executed. Robert Walker QC, sitting as a judge of the High Court, held that it was clear that one of the purposes of the deed was to reduce inheritance tax and that if clause 7 was construed literally that would not be achieved. The deed was not free from ambiguity as there was a blatant contradiction between clauses 3 and 7. It was apparent that a mistake had been made and the reference to income in clause 7 was to be taken as referring to income from the testator's death to the date of the deed.

From the Administration of Justice Act 1982 I conclude that, if the language used in a will is ambiguous, extrinsic evidence may be admitted to assist in its interpretation. However, I doubt whether the jurisdiction of the Special Commissioners includes the power to rectify a deed or will but the Special Commissioners should give effect to the intention of the testator as expressed in the terms of the whole of the will.

The construction of clause 3 of Mr Walden's will

With those principles I mind I turn to the construction of clause 3 of Mr Walden's will and here I record that both parties agreed that the wording of clause 3 was defective and that, at the very least, the word "sale" should be included after the word "until". With that amendment, and with the deletion of the words which are not in dispute, the clause reads:

"I GIVE free of tax … to my Trustees ALL THAT my interest in the property known as and situate at 30 Perrymead Street London SW6 …UPON TRUST with the consent in writing of my Wife during her lifetime to sell the same with full power to postpone sale for so long as they shall in their absolute discretion think fit and to hold the net proceeds of sale and other monies applicable as capital and the net rent and profits until [sale] upon the trusts and with and subject to the powers and provisions of my Residuary Fund (as hereinafter defined) as an accretion thereto AND I DECLARE my Trustees during the lifetime of my Wife to permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending postponement of sale she paying the rates taxes and other outgoings …"

I have found it convenient to consider the words of clause 3 in the order in which they appear. First I consider the words "free of tax". Mr Rowell argued that these words would only have relevance if a discretionary trust had been created. If clause 3 had given Mrs Walden an interest in possession then the exemption for transfers between spouses would apply and so there would have been no tax on that grant and the words "free of tax" would be otiose. Mr Twiddy, on the other hand, was of the view that the words "free of tax" were frequently used even where the exemption for transfers between spouses applied. In my view the words "free of tax" do not have the significance claimed by Mr Rowell. I note that the same words were used in the same will in the bequest to Mr Walden's sister. Also, at the time of the making of a will it cannot be known what taxes will be chargeable at the date of death; provision has to be made for future possibilities.

I now turn to the words of clause 3 which come after "UPON TRUST" and before "I DECLARE". With the exclusion of the words "with the consent in writing of my Wife during her lifetime" this passage creates a trust for sale of Perrymead Street and provides that the proceeds of sale are to be held as for the Residuary (discretionary) Fund. However, the words "with the consent in writing of my Wife during her lifetime" prevent the sale taking place during the life of Mrs Walden unless she consents in writing. In the absence of such consent, the sale cannot take place but any net rents and profits until sale are to be held on the (discretionary) trusts of the Residuary Fund. In my view, this part of clause 3 manifests the intention of Mr Walden that Mrs Walden, during her lifetime, could unilaterally postpone the sale of Perrymead Street but that, if she did, then the rents and profits were to be held on the discretionary trusts of the Residuary Fund. This part of the clause makes it clear that Mrs Walden had no right to the income of Perrymead Street pending sale,

The next few words, namely "I DECLARE my trustees during the lifetime of my wife to permit her to have the use and enjoyment of the said property" do not make grammatical sense." Mr Rowell suggested that the only amendment which would make sense of the clause as a whole would be "I DECLARE [that] my trustees during the lifetime of my wife [may] permit, or [shall have power to] permit, her to have the use and enjoyment of the said property". However, another possibility would be: "I DECLARE [that] my trustees during the lifetime of my wife [shall] permit her to have the use and enjoyment of the said property". I do not have to decide which version to adopt because either version has to be read with the succeeding words.

The succeeding words are "for such period or periods as they shall in their absolute discretion think fit". In my view these words provide that Mrs Walden had no right to occupy the property but the trustees were given a discretion (but not a duty) to allow her to occupy. Thus the words used give the trustees a discretion as to whether to permit Mrs Walden to reside in Perrymead Street for no period or for any period. The words are clear and unambiguous and effect must be given to them.

At this stage I recall that it is the four corners of the clause, and not just one corner, which has to be considered. I do not think that there is a contradiction of intention between the first part of clause 3 (which evidenced the intention that Mrs Walden, during her lifetime, could unilaterally postpone the sale of Perrymead Street but that for so long as the property was not sold the net rents and profits were to be held on the terms of the discretionary trust) and the second part of the clause (which gives the trustees a discretion as to whether she can reside in Perrymead Street and, if so, for how long). The first part of the clause refers to the sale of the property; the second part refers to the separate concept of occupation. Both parts give an absolute discretion to the trustees.

Finally I look at the remaining words of clause 3. The words "pending postponement of sale" do not make sense but most probably mean "pending the sale" or "during the postponement of the sale". This phrase should be read as defining the term during which the trustees had power to permit Mrs Walden to occupy Perrymead Street. The words "she paying the outgoings etc" should then be read as a condition which applied to any period during which Mrs Walden was in occupation.

If I am right then it would be possible to read clause 3 in the following way:

"I GIVE free of tax … to my Trustees ALL THAT my interest in the property known as and situate at 30 Perrymead Street London SW6 …UPON TRUST with the consent in writing of my Wife during her lifetime to sell the same with full power to postpone sale for so long as they shall in their absolute discretion think fit and to hold the net proceeds of sale and other monies applicable as capital and the net rent and profits until [sale] upon the trusts and with and subject to the powers and provisions of my Residuary Fund (as hereinafter defined) as an accretion thereto AND I DECLARE [that] my Trustees during the lifetime of my Wife [shall] or [may] permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending the sale [if] she pays the rates taxes and other outgoings."