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6 September 2021 | Comment | Article by Oliver Rees

Nil rate band gift limited by other gifts in the estate

The England and Wales High Court recently held in Royal Commonwealth Society for the Blind v John Wayland Beasant and Benjamin How Davies (as personal representative of the Estate of Audrey Arkell deceased) [2021] EWHC 2315 that a gift in a will should be interpreted to mean a gift of any available remaining nil rate band, as opposed to a sum equal to the full nil rate band at the date of the deceased’s death.

This action was brought by 21 charities against the executors.

What is the nil rate band?

The nil rate band is the amount which a person has which they can pass free from inheritance tax. Each person has a nil rate band which, for those domiciled in England and Wales, currently stands at £325,000 and is set to remain fixed at this amount until 2026. Only once the value of an individual’s estate exceeds this amount, and subject to certain exemptions and reliefs, does their estate have to pay any inheritance tax.

There are additional nil rate bands potentially available including the 'transferable nil rate band' (the nil rate band which a person can inherit from their spouse or civil partner) and the 'residence nil rate band' (an additional amount available for gifts of property to direct descendants, such as children or grandchildren, and currently £175,000 for an individual).

Background

In the present case, the deceased, Audrey Arkell, made her last will in June 2016. Audrey died in August 2017, and probate in her estate was granted in August 2019. The contentious clause in question, clause 4, read as follows:

4. I GIVE the Nil Rate Sum to my Trustees on trust for my said friend JOHN WAYLAND BEASANT.

4.1 In this clause ‘the Nil Rate Sum’ means the largest sum of cash which could be given on the trusts of this clause without any inheritance tax becoming due in respect of the transfer of the value of my estate which I am deemed to make immediately before my death.

The deceased died in 2017 at which time the nil rate band was £325,000, leaving a net estate valued at £3.1 million.

As well as being a beneficiary under clause 4, Audrey’s friend, John, was also appointed as one of her executors. Audrey also left specific gifts to John including main residence and shares worth some £460,000 along with cash gifts totalling £45,000 to six other individuals. The will stated that all of these gifts should be “free of inheritance tax”. However, the total of all these gifts exceeded Audrey’s available nil rate band of £325,000.

The residuary estate, being the balance of the estate remaining once all other gifts, costs and tax was settled, was to be divided between 21 charities, including the lead charity in this case, Royal Commonwealth Society for the Blind, which was appointed to represent all 21 charities.

What was the case put forward by each side?

John argued that the terms of the will meant that a sum of £325,000, being the prevailing nil rate band as Audrey’s death, should be paid to him from Audrey’s estate in addition to the other legacies which Audrey left to him. It was his case that clause 4.1 should be disregarded altogether on the basis that it contained no reference to the other gifts under the will. In his view, clause 4.1 merely defined the nil rate band sum.

The charities disputed this interpretation and instead argued that clause 4.1 had the effect of clarifying the gift clause 4 so that the sum due to John was £325,000 less payment of all other legacies. In that case, the legacy would be zero as the other legacies exceeded £325,000.
John asked the court to follow the approach taken in Re Huntley (Deceased) (2014 EWHC 547 Ch) where a similar clause was disregarded.

What did the court decide?

Master Shuman, hearing the case, disagreed. Citing, among other cases, the leading Supreme Court decision of Marley v Rawlings [2014] UKSC 2 where it was held that the correct approach to the interpretation of a will was the same as that for a contract, with the aim being to identify the intention of the party to the document, so, in this case, Audrey, he found in favour of the charities, meaning John was not entitled to anything under clause 4.

It was held that if Audrey had intended for John to receive the full sum of £325,000 it would specifically have provided for this for instance by way of a specific legacy for that fixed amount instead.

Master Shuman noted the "striking similarity” between this case and the argument by the charities that the gift was only of the available nil rate band, if any, to RSPCA v Sharp and others [2010] EWCA Civ 1474 where the deceased’s will left his residuary estate to the RSPCA and included only two other gifts, which read as follows:

3. I GIVE the amount which at my death equals the maximum which I can give to them by this Will without Inheritance Tax becoming payable in respect of this gift:

a. as to seventy-eight percent (78%) to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one in equal shares absolutely

b. as to twenty-two percent (22%) to JOHN EDWARD MASON of [address] absolutely 

4. I GIVE my property situate and known as [address] to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one jointly and equally absolutely and I direct that the Inheritance Tax (if any) payable on my death in respect of the property and all costs of the registration of the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as proprietors thereof shall be payable out of my residuary estate.

The disagreement between the executors and the RSPCA in Sharp was as to whether the gift in clause 3 was of the full nil rate band (£300,000 at that time) without deducting the value of the gift in clause 4 (similar to the facts of Audrey’s case). While the High Court initially found in favour of the executors’ interpretation of the gift this was overturned by the Court of Appeal who agreed with the RSPCA’s construction of the will that the gift was of the nil rate band after deducting the value of the other gifts.

As with this case, in Sharp the court made clear that the order of the gifts in a will did not necessarily direct that they were to be read and actioned sequentially and, instead, the terms of the will should be read as a whole. If the testator’s intentions were such that a clause should be construed as being subject to an earlier clause, then it should explicitly say so.

Takeaway point

The key takeaway point here is how important it is to understand and clarify a person’s intentions when drafting a will, particularly in regards to the relationship between gifts of the nil rate band and any other gifts in a will. In instances where a gift is being left to a charity, perhaps in favour of other relatives or loved ones it is advisable to keep a record of a testator’s reasons for wanting to do so.

Confusion sadly still abounds when it comes to the wording of clauses in wills which can lead to costly court cases. An individual making a will should be satisfied that they understand the meaning of each clause in the will and what it will seek to achieve and an advisor should ensure that the words used are clear, unambiguous and a thorough attendance note is kept on file. A letter of wishes may also help to avoid litigation in order to assist the beneficiaries of a will with understanding the testator’s intentions.

 


 

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