The claimants were the executors of the will of the deceased dated 8 September 2000 whereby his residuary estate passed to his widow and three sons in equal shares absolutely. The first defendant was the deceased’s widow and the first claimant and second and third defendants were his sons.
Under the will, inheritance tax would be payable on the estate in respect of land and farming assets which did not qualify for agricultural property or business property relief on the three quarters of the residuary estate which had passed to the deceased’s sons. The beneficiaries decided that the widow should receive the residuary estate instead, transfer as much as she could and survive for seven years so as to pay as little inheritance tax as possible. Accordingly, on 13 October 2009 the claimants, in their capacity as executors of the deceased’s estate, and the first claimant and defendants, in their capacity as the beneficiaries of the estate, executed a deed of variation of the will which had been drafted by a solicitor.
The deed of variation amended the will so that the residuary estate would be left to the widow absolutely. Although it was understood that the widow would give financial assistance to the three sons, there was no arrangement whereby she was to give specific sums or assets at any specific times.
Due to a change in the law brought about by the Finance Act 2002, in order for s142(1) of the Inheritance Tax Act 1984 (which applies the Act as if a variation had been effected by the deceased) to apply to the variation, the instrument of variation must include a statement by all the relevant persons to the effect that they intended for it to apply to the variation. A similar change had been made to reading back provisions for capital gains tax purposes. However the deed of variation contained no such statement and was therefore ineffective for inheritance tax and capital gains tax purposes. In correspondence HMRC had taken the point that the deed of variation did not have the necessary reading-back statements required by the relevant legislations and therefore that it did not relate back to the date of death for inheritance tax purposes. The effect of this was that three quarters of the residuary estate was subject to inheritance tax.
Accordingly, the claimants brought this Part 8 claim seeking rectification of the deed of variation to include the necessary statement. They claimed that the whole point of the deed of variation was for it to be backdated to the date of death for the purposes of inheritance tax and other relevant taxes and that it was likely that the error arose because the solicitor was working under time pressures and had used an old precedent. The defendants filed acknowledgments of service stating that they did not intend to contest the claim.
HMRC declined to be joined as a party but requested that the claimants draw the court’s attention to various authorities. Further, HMRC commented that its view was that the deed of variation has been made for consideration in money’s worth (being the agreement of the wife to pay as much of the re-directed benefit as she could to the other three original beneficiaries) such that s142(3) applied disallowing s142(1) therefore making the deed of variation ineffective for tax purposes in any event. In response to this, the claimants argued that the expression ‘any consideration in money or money’s worth’ was a technical expression which required a bargain which was sufficiently definite not, as here, a generalised intention to give sums of an indefinite amount at an indefinite time in the future, which gave rise to no legally enforceable obligation. In any event, the claimants argued that this was a matter for determination by the First-Tier Tribunal not this court.
Held (granting an order for rectification as regards inheritance tax but not as regards capital gains tax, that):
- 1) The court could not rectify a document merely because it failed to achieve the fiscal objectives of the parties to it, or (if the document was of a unilateral nature) of the grantor or covenantor. A mere misapprehension as to the tax consequences of executing a particular document would not justify an order for its rectification. The specific intention of the parties (or the grantor or covenantor) as to how the objective was to be achieved must be shown if the court was to order rectification. The court would order the rectification of a document only if it was satisfied that: (1) it did not give effect to the true agreement or arrangement between the parties, or the true intention of the grantor or covenantor; and (2) there was an issue, capable of being contested between the parties, or between the covenantor or grantor (on the one hand) and the person he intended to benefit (on the other); it being irrelevant, first, that rectification of the document was sought, or event consented to, by all of them; and, second, that rectification was desired because it had beneficial fiscal consequences. Conversely, the court would not order rectification of a document as between the parties, or as between the grantor or covenantor and an intended beneficiary, if their rights would be unaffected, and if the only effect of the order will be to secure a fiscal benefit.
- 2) In the present case there were real issues which fell to be resolved between the parties if an order for rectification was made. There would be repayment of a substantial sum by way of inheritance tax or alternatively, release from liability for inheritance tax in a substantial sum. The gift would also affect the cumulative total of transfers should any of the three sons fail to survive for seven years from the deed of variation.
- 3) The relevant intention for rectification purposes was the intention of all of the residuary beneficiaries including the widow. Further, for the purposes of s142(1) and (2), the court was required to have regard to the intention of the widow and her two defendant sons. The court was satisfied that there was sufficient evidence to satisfy the high burden of proof required in a rectification claim, that there was evidence of mistake on the part of all the relevant parties to the deed in questions. The relevant parties being the first claimant and the three defendants. The court accepted that it was the intention of all parties to the deed of variation and its draftsman that it should be backdated to the date of death for inheritance tax purposes. The mistake was in failing to give effect to the right machinery for achieving that.
- 4) The court was satisfied that that was a sufficient mistake to found jurisdiction in a court of equity to rectify the relevant deed of variation so far as the reading back statement for inheritance taxes was concerned. The mistake was within the terms of the deed of variation and not extraneous to the terms of the document itself.
- 5) The court was not satisfied that there was any relevant intention on the part of anyone to include a reading back statement for the purposes also of capital gains tax. Given the high standard of convincing proof required in a claim for rectification, the court was not satisfied that a case to rectify the deed of variation for capital gains tax purposes had been made out.
6) The question of whether the deed of variation would fall foul of
- was a matter for a future decision of the First-Tier Tribunal and was not an issue that could be decided by this court entertaining the present claim for rectification. The court accepted the submission that, whilst the court should refuse rectification where the relief would serve no useful purpose, here the court should rectify the deed and then allow the claimants and HMRC to argue out the potential applicability of
- before the First-Tier Tribunal.