The claimants brought a claim against the first defendant, a firm of solicitors, and against the second defendant, who was a partner in the first defendant firm, for damages for professional negligence in respect of a tax mitigation scheme known as an Estate Protection Scheme (EPS), by which it was intended that a property (the property) owned by the first claimant’s mother (the deceased) would pass on her death to the first claimant, with substantially less Inheritance Tax (IHT) being payable than if the property had been disposed of by will. The property remained registered in the sole name of the deceased, but was subject to a trust, of which the claimants and the deceased were trustees, which was created for the purpose of carrying the EPS into effect. The property was sold in 2010 by the deceased in breach of trust without the knowledge or consent of the claimants.
It had been determined, following an earlier trial and appeal, that the defendants had been negligent in failing to register a restriction at HM Land Registry in order to protect the interest of the beneficiaries of the EPS in the property, and that damages fell to be assessed on the basis that, had the defendant solicitors registered the restriction, no sale could have taken place without the claimants’ consent. The matter came before the court for assessment of damages. It was common ground that, but for the breach of duty of the defendants, the EPS would have taken effect in accordance with its terms and on the basis that the property would have passed to the first claimant on the death of the deceased, subject to any need for it to be sold in order to meet any IHT payable by the deceased’s estate. The deceased died in March 2013.
The claimants applied to amend the particulars of claim to claim loss of rental income after the death of the deceased, in the event that the claimants’ primary loss was to be assessed by reference to the market value of the property at the time of the deceased’s death in March 2013. The application was made late, when the assessment hearing had all but completed, and after counsel for the defendants had concluded her final substantive submissions.
(1) Permission was given to amend the particulars of claim to claim loss of rental income from the date of the deceased’s death, notwithstanding that the application to amend could, and should, have been made at an earlier stage and that the defendants were entitled to proceed on the basis that the claim that they had to meet concerning damages was that which had been pleaded. It was not suggested that (i) any further evidence was or might be required if the amendment were permitted; or (ii) that the defendants did not understand the alternative case that the claimant sought to advance. In any event, counsel for the defendants could be permitted to make any submissions she considered appropriate in relation to the issue.
(2) It was common ground that the first claimant was entitled to recover the value of the property by way of damages. The issue was as to the date at which the property’s value should be assessed. It was common ground that the default position was that damages should be assessed at the date the wrong occurs, which in relation to the tort of negligence, where damages are of the essence of the tort, is when the loss caused by the breach of duty occurs. Equally it was common ground that a court could, and should, depart from that rule where it is necessary in order adequately to compensate the claimants for the damage suffered by reason of the defendants’ wrong. If the default rule applied, damages were to be assessed at the date when the property was sold by the deceased.
(3) It was appropriate to assess loss by reference to the value of the property as at the date of the death of the deceased (agreed to be £875,000) and not at its lower value (£710,000 to £785,000) as at the date of its earlier sale. This approach reflected the fact that, had the EPS taken effect in accordance with its terms, the first claimant would not have been entitled to receive the property or its proceeds of sale until after the deceased died. The object of the assessment of damages is to place the claimant, as nearly as can be achieved, in the position he, she or they would have been in had the breach of duty not occurred. An assessment at the date of sale of the property would not achieve this objective, assuming the property rose in value between then and the date of the deceased’s death, and would overcompensate the claimant in the event that the value of the property dropped. The first claimant would have received the property at the date of the deceased’s death, but for the negligent failure by the defendants to register a restriction against the title of the property. Any sale prior to the death of the deceased had to be by consent. At no stage did any of the claimants consent to a sale and they would not have done so. The first claimant was, therefore, entitled to the property as at the date of the deceased’s death, not the proceeds of a wrongful sale on a date earlier than that or what remained of the proceeds of the wrongful sale at that date.
(4) By the same token it was not necessary or appropriate to assess damages at the primary date contended for by the claimants, namely the date of a valuation report by a single joint expert. It was immaterial when the claimant first knew that the property had been lost. The loss crystallised on the date the deceased died, not on a later date when the claimants discovered that the property had been sold, when they commenced proceedings or when a single joint expert delivered his or her report.
(5) The sum otherwise recoverable in respect of the value of the property was to be reduced by the amount that would have been payable by the estate of the deceased by way of IHT. However, the evidential burden rested on the defendants of proving that (a) IHT would have been payable; (b) the amount that would have been payable; and (c) that such sum as would have been payable could not have been paid by the other assets available in the estate.
(6) It was probable that, had the property remained unsold as at the date of the deceased’s death, HMRC would have challenged the EPS and no one would have considered it sensible to incur the costs and delay involved in resisting that challenge, and that in consequence HMRC’s claim to IHT would have been settled on the basis that the property formed part of the deceased’s estate for tax purposes, but giving credit for the Pre-Owned Assets Tax (POAT) paid by the deceased down to the date of her death.
(7) There was no evidence available during the hearing as to how the POAT that the deceased paid was calculated or how much she paid or when. It was assumed against the defendants that the deceased had regularised her tax affairs prior to her death and had paid POAT for the whole period between 2005 (when she opted to pay POAT) and her death in March 2013. The court carried out a hypothetical calculation based on the notional rent payable by a tenant of the property, giving rise to a liability to POAT of £95,316.70 inclusive of interest.
(8) On the basis of the available documentation and the lack of any evidence that the claimants would have paid the IHT notionally due from their own resources, the property would have been sold following the death of the deceased in order to raise the IHT which would have been payable.
(9) Damages were, therefore, to be reduced by the IHT payable in respect of the property of £220,000, against which £95,316.70 in respect of POAT was to be credited, giving rise to a tax-payable figure of £124,683.30 deductible from the value of the property (£875,000). Together with interest, there would be judgment in the sum of £985,299.45.
(10) Interest should run from the date of the deceased’s death down to the date of judgment, to be calculated conventionally by reference to the rate at which the receiving party could borrow the amount of the judgment. Absent evidence, a court will assume that the cost of borrowing such a sum for an individual will be higher than for a blue-chip company. The whole of the relevant period had been a period of low interest rates and low inflation. Taking those factors into account and also that the claimants were individuals with academic salaries, the appropriate rate to apply was a rate of 3.5% above Base Rate.
(11) While it was true that the defendants had failed to advise the claimants to seek independent advice as and when they should have, that did not justify the payment of a higher rate of interest than would otherwise be appropriate. It was not appropriate to award a penal rate of interest on the basis that the claim had been defended inappropriately. The usual penalty in respect of the conduct of that sort was to award some or all of the costs payable by the defendant on an indemnity rather than the standard basis, rather than penalising a party by requiring it to pay interest at a rate that is higher than would otherwise be appropriate. The circumstances in which it would be appropriate to increase the rate of interest are likely to occur rarely in practice and will be exceptional. It had been open to the claimants to make an appropriate pre-action or post-issue Part 36 offer which would have adequately compensated the first claimant for being kept out of his money longer than would have been the case had the claimants been advised as they should have been. The availability of this powerful tool in the claimant’s armoury together with the availability of indemnity costs to penalise conduct outside the norm will generally be sufficient in most cases to control inappropriate conduct by defendants.
(12) It was highly likely that the property would have been retained and rented out by the claimants following the death of the deceased, unless it had to be sold to meet IHT. However, this part of the claim fell away given the court’s conclusion that the property would have been sold following the death of the deceased in order to meet the charge to IHT.JUDGMENT HHJ PELLING QC: Introduction  This is the trial of the quantum aspects of this claim. The detailed facts are set out in paras 1-59 of my earlier judgment ( EWHC 155 (Ch)) which should be treated as authoritative subject to the contents of the Court of Appeal in its judgment referred to below. …