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Charity loses challenge to executors' interpretation of nil-rate band

Monday, 20 October, 2014

The executors of Valerie Smith were entitled to interpret the expression 'nil-rate band' (NRB) in her will to include the nil-rate band transferred from her predeceased husband, the England and Wales Court of Appeal has ruled.

Mrs Smith executed a professionally drafted will in 2001 leaving her children and grandchildren sufficient assets to use up the inheritance tax nil-rate band in force at the date of her death. The residue was left to the Woodland Trust.

She died in 2011, without having amended the will to take account of the transferable nil-rate band provisions of section 8a of the 2008 Finance Act (although she was aware of it). Her husband having died many years previously, this increased her available nil-rate band to GBP650,000 at the date of her death.

Her executors, Barrie and Terry Loring, who are her sons and thus are beneficiaries, used this number as the amount to be distributed among the family. This reduced the amount of the residuary estate destined for the Woodland trust from GBP355,805 to GBP30,805.

The charity challenged this interpretation of the NRB, claiming that the effect of the executors' decision to claim the transferable nil-rate band was not to increase the nil-rate band gift above GBP325,000. The wording of the relevant will clause states: 'My trustees shall set aside out of my residuary estate assets or cash of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil rate band for Inheritance Tax and [...] hold the same for [the named beneficiaries].' The charity contended that the use of the word 'my' was a clear indication that the relevant legacy was limited to GBP325,000.

The charity lost its challenge in the England and Wales High Court in November 2013, the judge ruling that the word 'my' supported the idea that the testatrix's maximum nil-rate band had been increased from the date of her death by section 8a FA 2008.

The charity then appealed, essentially on the grounds that Mrs Justice Asplin in the High Court was wrong. Mrs Smith had intended to bequeath her family no more than GBP325,000, said the charity's counsel Penelope Reed QC. The testatrix could not, she said, have intended the amount of her legacy to her family to vary according to the exercise of a discretion by her executors – who were also beneficiaries.

The Appeal Court has now given its judgment and unanimously dismissed the appeal – although the three judges admitted they were torn by Ms Reed's arguments. Their reasoning for finding in the Lorings' favour was, in brief, that Mrs Smith had evidently intended to give the family the maximum possible without incurring any inheritance tax, with the remainder going to the charity also tax-free.

Sources