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This case is an appeal from a decision of the Chancery Division involving the estate of Valerie Smith, who left her residuary estate between her family members (the Lorings) and the Woodland Trust. Mrs Smith’s will was drafted so as to ensure the entirety of her estate was not chargeable to inheritance tax, increasing the amount available to her respective beneficiaries. However, the Woodland Trust contested the interpretation the executors placed on the nil-rate band legacy, which increased Mrs Smith’s nil-rate band to include her deceased husband’s unused nil-rate band, thereby reducing the amount the Woodland Trust was due to receive by £325,000.
The Woodland Trust case is a prime example of how the construction of pre-2007 ‘nil-rate band’ legacies in wills continue to cause executors issues in correctly interpreting the testator’s wishes in line with the ‘transferable’ nil-rate band introduced by the Finance Act 2008. It serves as a stark reminder to testators to ensure that their wills continue to give effect to their wishes in light of changes to legislation.
Mrs Smith died on 1 September 2011 with a residuary estate worth £680,805, which was left between the Woodland Trust and five individual beneficiaries of the Loring family; namely Mrs Smith’s two sons (who were also her executors), her daughter and her two grandchildren. Mrs Smith had a full nil-rate band of £325,000 available on her death.
Mrs Smith’s will was executed on 2 February 2001. Clauses 5 and 6 of her will provide that:
“(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 and in the case of grandchildren attain 23 and if more than one in equal shares absolutely. [Mrs Smith listed her five individual beneficiaries here.]
(6) Subject as aforesaid my Trustees shall hold the remainder of my estate for the Woodland Trust of Autumn Park Grantham aforesaid absolutely…”
The difficulty in this case came in the interpretation of “such sum as is at the date of my death the amount of my unused nil rate band for Inheritance Tax” and whether this included the ‘transferable’ nil-rate band from her spouse’s earlier death.
The ‘transferable’ nil-rate band, which can be found in s.8A Inheritance Tax Act 1984 (“IHTA 1984”), is only applicable to the death of a testator on or after 9 October 2007 and was introduced after Mrs Smith executed her will. The legislation provides that the executors of an estate are entitled (within two years of the death of the testator) to make a claim to increase the nil-rate band of the testator by the unused percentage of the nil-rate band of the spouse or civil partner who predeceased them.
Mrs Smith’s husband predeceased her on 4 April 1984 and had not used his nil-rate band. The executors therefore claimed a 100% increase on Mrs Smith’s nil-rate band under s.8A IHTA 1984, retrospectively increasing her nil-rate band from £325,000 to £650,000. The executors therefore argued this was the sum which was gifted to them under clause 5, and the amount the Woodland Trust should receive was the remainder of the residuary estate under clause 6 – namely £30,805.
By contrast, the Woodland Trust argued that the effect of the claim was not to increase the clause 5 gift above £325,000 and claimed an entitlement to the remaining £355,805. They advanced that the words “at the date of my death” pointed away from a future enhancement of the nil-rate band by way of a claim subsequently made by her executors, underlined by Mrs Smith’s possessive use of “my” nil-rate band. Moreover, they argued that the “unused” portion only referred to the nil-rate band available to her and could not be seen to include any additional claim made by her executors after her death.
Additionally, the Woodland Trust argued that the effect of allowing the increased nil-rate band was that the amount of Mrs Smith’s legacy to the Lorings was dependant on whether or not the executors chose to make a claim under s.8A, which she could not have intended.
The three judges who heard the case in the Court of Appeal unanimously dismissed the appeal by the Woodland Trust and upheld the judgement of Mrs Justice Aspin in the Chancery Division, namely that the natural meaning of the key words in clause 5 included an increase in Mrs Smith’s nil-rate band and the Lorings should receive £650,000.
Firstly, Judge Sir Colin Rimer considered that the will as a whole did not provide any additional context and there were no “relevant background circumstances that inform the meaning of the words used” (see Royal Society for the Prevention of Cruelty to Animals v Sharp and others  EWCA Civ 1474). Although Sir Colin Rimer was unclear whether Mrs Smith knew about the proposals to increase the value of the nil-rate band, she at least knew that the amount could vary – as the legacy was drafted by way of reference to the amount at the date of her death. Importantly, Lord Justice Lewison said that the “implicit purpose of the will was to give as much as possible to Mrs Smith’s family without incurring IHT and to give the rest to charity”, especially as the purpose of using the nil-rate band is “usually to avoid paying IHT”.
Sir Colin Rimer found the Woodland Trust’s argument “compelling” that Mrs Smith could not have intended the amount of her legacy to vary according to the exercise of a discretion by her executors, who Lord Justice Levison stated would have the “power to alter the size of beneficial interests taken under the will according to whether they do or do not make an election”. Sir Colin Rimer said this was underlined by the fact Mrs Smith could not have had the exercise of such a discretion in her mind at the date she executed her will, as the mechanism for this discretion was only introduced some 7 years later. He also found it compelling that the language Mrs Smith used in her will “appeared to show that all [Mrs Smith] had in mind was the nil-rate band available to her”, namely the £325,000 at the date she executed her will.
Although Sir Colin Rimer agreed that Mrs Smith “may not have contemplated” that such a change could have been effected by her executors exercising their discretion, that was the result of such a claim. When Mrs Smith executed her will, she “plainly did not have in mind a specific amount” to gift to the Lorings under clause 5 but intended the gift to be equal to the amount of her then “unused nil-rate band for Inheritance Tax”. This amount was £325,000 at the date of her death, but the Court found this was retrospectively increased by 100% to £650,000 as a result of the s.8A claim by her executors, and the sum gifted under clause 5 to the Lorings therefore had to be £650,000.
All three of the judges sitting in the Court of Appeal did not find the question raised by the appeal “entirely easy” or “straightforward” and it remains open to the Woodland Trust to seek leave to appeal to the Supreme Court.
Although the wording of Mrs Smith’s will could be interpreted clearly before the legislative changes were introduced, this case provides a stark warning to those who have executed their wills to ensure that they are kept under constant review to ensure their wishes continue to be accurately recorded in light of legislative changes.
The broad approach signalled by the Court of Appeal, focusing on Mrs Smith’s “implicit purpose” to provide the maximum amount possible to her family without incurring inheritance tax, means charities receiving remaining interests under similar clauses could potentially find their legacies substantially reduced. However, not all clauses are drafted in the same way as Mrs Smith’s, and the interpretation of nil-rate band legacies will continue to turn on how such clauses are drafted and the individual facts of the case.