Probate: nil-rate clarity

Loring v Woodland Trust [2013] EWHC 4400 Ch is a useful first decision on interpreting a clause giving a nil-rate band legacy where the deceased had the benefit of a transferred nil-rate band.

The testatrix made a will in 2001 which included the following nil-rate band legacy at clause 5: ‘MY TRUSTEES shall set aside out of my residuary estate assets or cash of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax and to hold the same for such of the following as shall survive me.’

The residue was left to charity.

After the execution of the will, the transferable nil-rate band was introduced and the testatrix inherited her husband’s full nil-rate band. The effect was that the residue was either £30,805 or £355,805.

Section 8A(3) of the Inheritance Tax Act 1984 provides: ‘(3) Where a claim is made under this section, the nil-rate band maximum at the time of the survivor’s death is to be treated for the purposes of the charge to tax on the death of the survivor as increased by the percentage specified in sub-section (4) below.’

And subsection 7 provides: ‘(7) In this act “nil-rate band maximum” means the amount shown in the second column in the first row of the table in schedule 1 to this act.’

There was no contemporaneous evidence of the testatrix’s intention. The only evidence was a letter written to the family from the testatrix’s  relationship manager at Lloyds TSB Private Banking, which set out the following:

‘In summary, my notes from the meeting show the following:

‘(1) On 27 July 2007 I noted that when Mrs Smith had settled in following her move down to Dorset I would arrange for Mrs Smith to discuss the options available to her with an inheritance tax specialist.

‘(2) On 29 July 2008 I explained to Mrs Smith legislative changes regarding a deceased spouse’s unused nil-rate band (NRB) and that it was now possible to pass the portion of the unused NRB on to the surviving spouse. As a result, her estate should benefit from a double NRB. At the time of the discussion, this would double up the NRB for her estate to £624k, and as we had a value for her estate of approximately £640k we agreed that it was no longer necessary to conduct any further inheritance tax planning (please note there is an error in the notes as they detail that we agreed that it was necessary). I noted that she was appreciative of this conversation.

‘(3) On 9 March 2011 I noted that we discussed that she should have two NRBs available and she was gifting her remaining allowance to charity.’

Mrs Justice Asplin said that the letter was ‘of little assistance in determining the intentions of the testatrix when the will was executed’. At best it evidenced the fact that advice was given as to the effect of the change in legislation brought about by the enactment of section 8A that the testatrix’s estate would be likely to benefit from two nil-rate bands and that, given the value of the estate and the gift to charity, no further inheritance tax planning was necessary.

However, it was of little assistance in determining the intentions of the testatrix as to how her estate should be divided between clause 5 and the residuary gift. She accepted that there might be a very weak inference to be drawn that if the testatrix fully understood the advice and had not intended the family to benefit from changes in the law which had the effect of increasing the nil-rate band when she executed the will and continued to be of that mind in 2008 and 2011, she would have said so.

However, the judge regarded this as speculation and referred to the judgment of Patten LJ in RSPCA v Sharp, where he said at paragraph 22 ‘it is dangerous to approach the assessment of the testator’s intentions other than through the language of his will’.

The judge said she approached the issue as a matter of construction to establish the intention of the testatrix as expressed in the will.

Having considered the will as a whole and examined the language of clause 5 in that context, and giving those words their ordinary meaning and then taking account of the relevant background which informed the meaning of the words used, she concluded that clause 5 should be construed as including the increase. Not only is the statute clear that the effect of a successful claim is retrospective, but also that the effect is that the nil-rate band maximum at the time of the survivor’s death is treated as ‘increased’ as at that date.

It was of no consequence that the increase arises as a result of an election made at the discretion of the personal representatives after the death.

The use of ‘my’ was significant. It indicated that the testatrix’s nil-rate band or, to be precise, the nil-rate band maximum which is increased from the date of her death and no one else’s.

It is worth noting that, in argument, both counsel referred to guidance and examples contained in IHTM43065. Such guidance is not, of course, binding so it is interesting to have some judicial commentary.

The example there of a gift which HM Revenue & Customs considers would carry the enhanced nil-rate band is as follows: ‘I give free of tax to my trustees such sum as at my death equals the maximum amount which could be given to them by this will without inheritance tax becoming payable in respect of my estate.’

Examples given of gifts not carrying the enhancement are:

• ‘To my trustees, such sum as I could leave immediately before my death before IHT becoming payable’ because any nil-rate band that may be transferred is not available immediately before the death.
• ‘I give free of tax to my trustees an amount equal to the upper limit of the nil per cent rate band in the table of rates in schedule 1’ because it refers to a fixed amount.
• ‘To my trustees, an amount equal to the nil-rate band in force in my death.’

The judge commented that clause 5 was very similar to the first HMRC example. Clause 5 was not, as the charity had argued, on all fours with the last HMRC example, which by making express reference to ‘the’ nil-rate band was much the same as the third example, which refers directly to the table of rates in the schedule as at the particular time.

Lesley King, University of Law