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Case law: Wills made before 2007 should be reviewed following Court of Appeal ruling
Anyone who made a Will before 2007 which includes legacies calculated by reference to the inheritance tax nil-rate band should consider changing it, following a Court of Appeal ruling.
In 2001, a married woman (the testatrix) made a Will giving family members 'such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax', and the remainder to a charity. The nil-rate band is the inheritance tax threshold above which inheritance tax becomes chargeable on the estate of the deceased. At the time the Will was made, each person had their own nil-rate band for inheritance tax purposes.
However, in 2007 the law changed. It became possible for any unused part of a person's 'nil rate band' to be transferred to their spouse or civil partner when they died so that, when the spouse or civil partner subsequently died, their nil-rate band was increased by the value of the unused 'nil rate band' of the person who pre-deceased them.
In this case, the testatrix's husband died first and his entire nil-rate band was available to pass to her when she subsequently died. Executors have to make a specific election, known as a section 8A claim, in order to benefit from a transfer of a former spouse or partner's nil-rate band. The testatrix's executors duly made a section 8A claim.
The question arose whether the reference to 'my' unused nil-rate band in her Will meant only her own nil-rate band, before the addition of her late husband's unused nil-rate band, or both her own nil-rate band and the unused nil-rate band passing on her husband's death.
The charity argued the former, claiming it was therefore entitled to £355,805 from the estate. If it the charity was wrong it would only be entitled to £30,805. However, there was no evidence as to what the testatrix had intended.
The Court of Appeal ruled that 'my' nil-rate band meant both her own nil-rate band and her husband's unused nil-rate band. The charity therefore only received £30,805. However, it did not find it an easy decision. For example:
- It decided the testatrix did not have a specific amount in mind for her family when she made her Will. She knew that if the government changed the amount of the nil-rate band (as it does periodically), the amount going to her family would change too. She also knew that if the nil-rate band changed so it equalled or exceeded the value of her estate when she died, the charity could end up with nothing.
- The Court decided that the fact her executors had made a section 8A claim supported the view that the reference to 'my' nil-rate band in her Will should be treated as including her husband's unused nil-rate band too. This was because there were many instances where executors (or trustees of trusts set up by wills) gave executors/trustees discretion whether or not to do certain things which could affect beneficiaries' entitlements under the Will (or trust). It had to assume that she would trust the executors to exercise their discretion in the way she would have wanted. However, the charity had argued that she could not have intended the amount her family and the charity received to depend on whether her executors made a section 8A claim or not. The court acknowledged this was a powerful argument
- One of the appeal judges said the Will had to be considered as a whole. A Will-maker's aim was usually to give as much to the family as possible without an inheritance tax liability arising. In this case it could be inferred that it was only when the amount that could be given tax-free to the family had been used up that the charity was intended to benefit. However, the charity argued this could mean a reference to 'my' unused nil-rate band would be interpreted differently, depending on who the beneficiaries were. What of a case where a sum equal to 'my' nil rate band was to go to adult children of a first marriage, and the remainder to a surviving spouse of a second marriage? In that case the inference may have been that the surviving spouse was to benefit over the children. Again, the charity had made a good point.
- People who made a Will before 2007 which includes legacies calculated by reference to the nil-rate band should consider changing their Wills to make it clear whether this is intended to mean the Will-makers' own nil-rate band, without the addition of that passed on from a deceased spouse or civil partner, or the two added together.
Case ref: Loring v Woodland Trust  EWCA Civ 1314
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