Analysis
The testator (T) died on 11 January 2005 leaving his share of the farming business they carried on together to the third defendant (PW) together with land. PW wished to exercise the opportunity to vary T’s will by deed of variation so as to pass this inheritance to his son, the claimant (RW) and so avoid the possibility of the disposition being a lifetime transfer taking effect as a potentially exempt transfer (PET) giving rise to an Inheritance Tax (IHT) liability should PW die within seven years of the gift. PW was concerned that opportunity to make such a deed might be swept away in the next budget and therefore instructed the second defendant (M) a solicitor and executor of the will to organise this. M advised PW that he thought a change in the law was unlikely but nevertheless agreed to prepare a deed so that it could be executed before the budget. A draft deed was prepared and M met with PW to discuss it. The final deed was signed by M, as executor of T’s will and sent to PW for signature with a letter stating that it had certain tax advantages viz. it would be treated as a gift to RW under the will for IHT and CGT purposes so there would be any seven year survivorship, reservation of benefit or capital gains tax issues for PW. PW signed the deed and it was thereafter signed by the first defendant as executor of T’s will and dated 14 March 2005. In January 2007, when M was reviewing the deed in connection with another matter, it became apparent that although M was well aware of the need to include the prescribed statements by the relevant persons that they intended subsection (1) of s142 of the Inheritance Tax Act 1984 and subsection (7) of s62 of the Chargeable Gains Act 1992 by mistake, they had been omitted from the final document even though it followed the firm’s standard precedent for deeds of variation which incorporated the relevant clauses. Consequently, the deed would not take effect as a variation of T’s will but only as a lifetime gift carrying with it precisely the IHT risks that PW had sought to avoid. RW, as beneficiary, sought rectification of the deed to include the declarations under IHTA 1984 and CGA 1992. The Revenue indicated that they did not wish to be joined in the action and were content to be bound by the court’s order.
Held:
Rectification granted as sought [28]. It was PW’s intention that was relevant. While there was no evidence that he had intended the deed to include the prescribed statements in relation to either IHT or CGT being unaware of this necessity, it was clear he did intend to make a disposition which would enjoy the special treatment in respect of both taxes and he employed M, a lawyer who would understand the legal requirements to be satisfied, to prepare a deed that would give effect to his commercial and legal intentions. His initial intention had been limited to saving IHT but he was aware that M intend the corresponding CGT provisions should also apply and ‘had no reason to dissent from that’, thus accepting and adopting M’s advice in that respect. The rectification of the deed as sought would therefore give effect to the legal result PW intended which was that the deed should have the effect provided by s142 IHTA 1984 and s62 CGTA 1992, albeit he did not know that these were the statutory provisions governing the matter. He also obviously intended that the deed should comply with the formalities of those sections [25].
Where, as in this case, the purpose of the rectification was to obtain beneficial fiscal consequences, the court would not order rectification if the rights of the parties or their intended beneficiaries were unaffected. Here, in the absence of rectification, the deed amounted to a lifetime PET and the question arose between RW and the first two defendants as executors of T’s will as to whether RW could insist on the immediate transfer of the property as it was still held by them as executors with a concurrent liability for any IHT payable in consequence of the transfer and they would therefore need to retain assets by way of security in respect of any liability arising as a result of PW’s death within the seven-year period. There was also an issue between RW and PW as to whose personal representatives would bear the IHT if PW died within the seven-year period. These were real issues between the parties which would be resolved if the deed were rectified as sought [26-28].
JUDGMENT MR JUSTICE RIMER: Introduction [1] This is a claim by Richard Wills, by a claim form dated 17 May 2007, for the rectification of a deed of variation dated 14 March 2005. The deed varied the dispositions taking effect under the last will and first codicil of the Honourable Edward Wills (the testator), who …Continue reading "Wills v Gibbs & ors [2007] EWHC 3361 (Ch)"