Bernard Trevor Matthews (testator) died on 25 November 2010 and was survived by the defendants, who were his son, longstanding partner and three adopted children respectively. His estate included a property in France called Villa Bolinha estimated at €15m and property elsewhere estimated at £40m. Although (as he was aware) French law only permitted the testator to leave the second defendant 25% of Villa Bolinha since his children were as of right entitled to 75%, he made a will in France (French will) leaving it to her absolutely. By a letter of wishes, he nevertheless hoped that his children would give up their rights and, while the first defendant did so, the third to fifth defendants did not, with the result that the second defendant could only inherit 43.75%. The third to fifth defendants, who were liable to French inheritance tax at 40% on their 56.25% share of Villa Bolinha, claimed to be entitled, by virtue of a direction contained in the testator’s last will made in England (English will), to have that liability discharged by the claimants, who were his executors, out of his estate in England. Subject to a tax-free bequest of £1m to the second defendant, the entire net residuary estate was left to the first defendant and, by a direction contained in clause 4 of the English will, the claimants were required to pay the testator’s debts funeral testamentary and administration expenses and ‘the tax as defined by clause 5’. This was defined as ‘any probate succession estate or other duties or fees or any tax upon capital income or wealth or any other tax of whatever nature and wherever arising which becomes payable in any part of the world (including France) as a consequence of my death…’ It was common ground that, on its proper construction, this direction operated as a legacy of the inheritance tax payable on Villa Bolinha. The parties only differed as to its incidence. Further, it was contended on behalf of the second defendant that the doctrine of election entitled her to be compensated by the third to fifth defendants, as a result of their having accepted the benefits due to them by law contrary to the provisions of the French will, by an amount equal to the sum directed to be paid by the claimants under the English will to cover their inheritance tax liability in France. The application of the doctrine was disputed by the third to fifth defendants.
Held (on the construction of the English will):
- (1) None of the contentions were accepted. It was at the outset questionable whether the words ‘tax payable… in consequence of my death’ were to be read literally so as to include tax which was payable neither by the executors nor by any beneficiary under the English will, but by those children of the testator who contrary to his wishes insisted on exercising their rights under the inheritance law of France. On the essential question of what the testator intended, expressly or by necessary implication, it was now settled that the principles governing the construction of contracts applied equally to the construction of wills. Similarly, by analogy to evidence of negotiations between parties to a contract as an aid to its interpretation, it was permissible to look at evidence of correspondence with the testator’s lawyers prior to the signing of the English will to show what was known to him at the time of its execution. This showed that the testator knew that there were, by the law of France, inheritance rights that he could not override and again, by analogy to the construction of a contract where terms are implied to supply a meaning left wanting by the express terms where, for example, the parties have not thought through an issue that had since arisen, the same approach should be applied to the construction of wills. It was clear from his testamentary dispositions that the testator wanted to ensure, so far as he could, that Villa Bolinha was inherited by the second defendant free of tax and it was inconceivable that the testator could have intended that his children, were they to insist on exercising their inheritance rights under the law of France contrary to his wishes, should also be paid an amount equal to their inheritance tax liability in France out of his estate in England. He had not thought through the tax position which had actually arisen but, if he had done so, the direction as to the payment of tax in the English will would not apply to the inheritance tax liability in France of any of his children who insisted on exercising their rights of inheritance over Villa Bolinha. Accordingly, and consistent with the rest of his testamentary wishes, a term was to be implied in clause 5 that confined the tax ‘payable… in consequence of my death’ to that borne by the executors or by beneficiaries under the English will. It followed that the third to fifth defendants had no right to have their inheritance tax liability in France discharged, or reimbursed, under the English will.
- (2) If, contrary to this conclusion, the direction in the English will were to be construed as operating as a legacy of an amount equal to the third to fifth defendants’ inheritance tax liability in France on their 56.25% share of Villa Bolinha, notwithstanding the uncertain and unsatisfactory foundations of the doctrine of election, there was a principle of compensation that would be applied. This happened where equity intervened, either by way of limitation on the doctrine of election such as, for example, a beneficiary who retains his own property ‘against the will’ is obliged to compensate only up to its value, or by way of extension of the doctrine of election such as, for example, in analogous cases where no power of election is possible, compensation is payable by a beneficiary under the will who has nevertheless has also taken a benefit ‘against the will’. In this case, equity should intervene because the third to fifth defendants, having taken ‘against the will’ nevertheless received a benefit by virtue of the direction as to the payment of tax in the English will. As they cannot in good conscious keep that benefit, they must use the entirety of it (given that the extent of her loss was greater than the amount of the tax) to compensate the second defendant. It was not necessary for the doctrine to apply that the same property must be capable of being handed over in specie as compensation (Pickersgill v Rodger (1876) 5 Ch D 163 applied).