Probate law

Inheritance issues


Green and Another v IRC [2005] EWHC 14 (Ch); [2005] WTLR 75; Marquess of Hertford and Others v CIR [2005] WTLR 85; Re A and B's Undertakings [2005] WTLR1


There are three interesting recent cases on inheritance tax (IHT).


In Green, Mr Justice Mann ruled that the personal debts of an insolvent deceased could not be deducted from the capital value of three settlements in which he had an interest in possession at the date of his death.


Section 5(1) of the Capital Transfer Tax Act 1984 states that the 'estate' is the aggregate of all the property to which the deceased was beneficially entitled, and section 49(1) states that a person with an interest in possession is deemed to be beneficially entitled to the property in which his interest subsists.


As the deceased's interest in possession could only subsist in the property after deduction of liabilities, it was necessary to read section 49 as 'net property'. The same construction applied to section 5, where liabilities were to be deducted from assets to give the deceased's personal estate.


Once the personal estate is reduced to zero, its value cannot decline further and any additional liabilities have nothing against which they can be offset. The zero sum is aggregated with the settled property net of trust liabilities.


In Marquess of Hertford, the special commissioners allowed business property relief on the whole of a historic house which was open to the public, even though 22% was private family accommodation.


The whole of the freehold of the building was one single asset and it was not possible to divide it in any sensible way. The whole of the exterior was essential to the business. Therefore, relief was available on the whole of the value of the house.


In Re A and B's Undertakings, the special commissioner had to decide whether to approve alterations proposed by the Inland Revenue to undertakings about access to items of heritage property given by two separate taxpayers to obtain conditional exemption from inheritance tax.


The Finance Act 1998 made various changes to the heritage property rules (contained in the Inheritance Tax Act 1984) which made the requirements for exemption more rigorous.


First, it introduced a higher threshold requiring items designated on or after 31 July 1998 to be of 'pre-eminent' national, scientific, historic or artistic interest. It also tightened access. So far as new undertakings were concerned, it would no longer be acceptable to have by-appointment-only viewings, and the Revenue could require the terms of the undertakings to be published. Existing undertakings could be varied as regards extended access and publication by agreement or, where no agreement has been reached on a variation proposed by the Revenue within six months, by the direction of a special commi-ssioner, who must be satisfied that it is 'just and reasonable'.


The Revenue proposed changes to the undertakings given by the two taxpayers that would have required them, in addition to the existing by-appointment viewings, to provide the public with access to all the heritage items without prior appointment on a certain number of days per year. There was a proviso allowing any item exhibited at a public gallery or museum for at least three months to be exonerated from this requirement for the year of exhibit plus the next two years.


The taxpayers had acquired conditional exemption shortly before the 1998 changes and might well have not applied had they been aware of the changes to be introduced. Both had decided not to apply for exemption with regard to their houses and had paid the (substantial) IHT due so as not to be under an obligation to admit the public.


The special commissioner held that the accumulated burdens placed on the taxpayers by implementation of the proposals would so outweigh the benefit to the public as to make it neither just nor reasonable to direct that they should take effect. The following matters were relevant:

Both taxpayers had allowed 'special interest' groups to tour the building. The commissioner stated: 'The evident willingness of both owners to facilitate special interest tours is a factor in their favour, and one that I have taken into account.'

The commissioner agreed with the taxpayers that open access would expose them to a higher risk of sanctions under the Disability Discrimination Act 1995 than by-appointment access.

There would be some additional cost in preparing the houses for open access, such as providing barriers.

The taxpayers were concerned that open access would expose them and their families to increased risk. The commissioner accepted this, saying: 'The owner whose dealings with the Inland Revenue on conditional exemption involved his paying IHT in order to keep the house for his family to the exclusion of all outsiders other than those coming under by-appointment viewing arrangements, is I think entitled to have his apprehensions recognised.'

The obligation in the undertakings to provide four tours every access day would impose onerous demands on the guides (who might well be the owners).

Because each taxpayer had a large number of heritage items spread through the house, open access would require the visitors to enter most of the family rooms, including the bedrooms. It would not be possible to arrange items in a limited number of rooms.

The option of exhibiting items in a public gallery or museum was not feasible. Many were large, and difficult and expensive to move. There was a risk of damage. The remaining collection would be impaired and so visitors would derive less benefit. The viewing facilities provided by galleries and museums were in short supply and funding was uncertain.

In brief


Two recent cases on testamentary capacity may be worth a look. The Court of Appeal confirmed the validity of the will in Hoff v Atherton [2004] EWCA Civ 1554, holding that it is not necessary to prove that the deceased had the necessary understanding. It can be inferred.


In Fuller v Fuller Lawtel 8 February 2005, a will was held invalid where it was not rational and there was evidence of mental confusion when made.




By Lesley King, College of Law, London