Rectification of Wills and Deeds of Variation

1.       Drafting errors which affect the inheritance tax position can be costly for both solicitor and client. As will set out below there may be opportunities to correct the position later but they will also involve expense.

2.        Errors relating to inheritance tax which are encountered in Wills and Deeds of Variation will usually involve

2.1      using the intended wording but drafting the document in a tax inefficient way

2.2      using incorrect wording to achieve the result intended.

ERRORS

3.        Drafting the Will or Deed of Variation in a tax inefficient way usually involves a failure to make maximum use of available reliefs. For example, giving property to a spouse which also attracts agricultural property relief (“APR”) or business property relief (“BPR”) will waste the relief. It is better to gift the relievable property by a specific gift to a chargeable beneficiary or by a specific legacy to be held on discretionary trust so that the property can be appointed out within 2 years to a chargeable beneficiary once relief has been established.

4.        In relation to gifts of relievable property attracting APR or BPR, it is necessary to consider the attribution of value rules under section 39A of the Inheritance Tax Act 1984. Where such property is left by way of a specific legacy, the legatee alone receives the benefit of the relief (see section 39A(2)). However, where a nil rate band legacy is left, this is not a specific gift of property and an appropriation of relievable property to such a legacy does not render it a specific gift for this purpose unless (possibly) there is no choice but to appropriate those assets to the legacy.

5.        If the relievable property is not given specifically, the benefit of the relief is apportioned between the different gifts being made using the formula set out in section 39A(4) of IHTA 1984 (see section 39A(3)). Effectively part of the relief can be wasted as it can be attributed to assets which are subject to another exemption. It may also have the effect that more property passes under a nil rate band gift than was intended.

6.        The most common form of tax error in the drafting of Wills and Deeds of Variation relates to the burden of tax, that is whether particular gifts are to be subject to or free from inheritance tax. It is fairly common to encounter Wills where, whilst some gifts are expressed to be free of tax, nothing is said about the burden of tax in relation to other gifts. Often it will not be evident whether this is due to carelessness or the draftsman thought silence would render a gift subject to tax. If a clause is silent as to the burden of inheritance tax, it is generally free of tax if it is UK property which vests in the personal representatives (see section 211(1) of the Inheritance Tax Act 1984) unless contrary intention is shown in the Will. Silence when the other gifts are expressly made free of tax is usually not sufficient to show a contrary intention.

7.        The main reason this form of error matters (aside from affecting the allocation of the burden of tax) is where it will lead to the grossing up of free of tax gifts having to be undertaken. The consequence will be a higher overall tax bill. The usual occasion for grossing up is where free of tax gifts of more than the nil rate band have been made to chargeable beneficiaries and residue passes to an exempt beneficiary.

8.        However, the provisions of the Will or Deed could even lead to double grossing up in accordance with section 38(5) of IHTA 1984. That section applies where specific free of tax chargeable gifts are not the only gifts in respect of which the transfer of value is chargeable. These attribution of value rules apply where there is at least one specific free of tax chargeable gift and one specific subject to tax chargeable gift and/or chargeable residue. In such a case, the value transferred which is taken as being attributable to each specific free of tax chargeable gift is equal to the value of that gift grossed up at the assumed rate. This is extremely complicated and costly.

CORRECTION

9.        Can errors in Wills or Deeds of Variation be rectified? The position is different in relation to each.

10.      Where there is an error or tax inefficient provision in a Will then the parties may be able to correct this by use of a Deed of Variation with backdating effect (and made within 2 years of death) if they are all adult and competent. Otherwise, whilst the parties could agree to correct an error by use of a Deed of Rectification, this cannot have full retrospective effect and it cannot bind HMRC (see Persimmon Homes v Woodford [2011] EWHC 3109). HMRC’s view is that generally a deed must be rectified by the Court to have backdating effect (see IHTM35086) save possibly to correct a minor typing error. Rectification ordered by the Court is totally retrospective in effect (see Craddock Brothers v Hunt [1923] 2 Ch 136).

Wills

11.      In relation to Wills, the ability to rectify is narrower because of the statutory wording which allows it. Section 20 of the Administration of Justice Act 1985  provides that the Court may order that a Will be rectified where it is satisfied that the Will fails to carry out the testator’s instructions in consequence of

                        (a)      a clerical error or

                        (b)      a failure to understand the testator’s instructions.

13.      In this context “clerical error” means an error made in the process of recording the intended words of the testator in the drafting of his Will, that is an inadvertent error in drafting or transcribing the intended words of the testator where the instructions have been understood. Often this will involve the misuse of a precedent. It does not matter whether it is a clerical error made by the testator or his solicitor or a typist and it includes a wholescale rewriting of the Will where the testator signed another’s Will (see Marley v Rawlings [2014] UKSC 2).

14.      Subsection (b) will not cover the testator’s failure to appreciate the legal effect of the words used in his Will , or, where the draftsman understands his instructions but negligently selects the wrong wording to achieve what was intended. This will preclude rectification for many tax errors.

15.      The usual civil standard of proof applies to a rectification claim. In practice the Court will not rectify unless there is convincing evidence as to the testator’s true intention and as to the relevant clerical error or the failure to understand instructions. In Fielden v Christie Miller [2015] WTLR 1689 the Court commented that “what is sought is rectification of a will...the claimant has to overcome a presumption and it is one of some weight that the will as executed reflects the testator’s instructions.”

Deed of Variation

16.      On the other hand, rectification of any other form of document is made under the equitable jurisdiction which is wider. The following is needed to secure rectification

16.1    there must be convincing evidence to counteract the intention shown in the written document

16.2    there must be an operative mistake in the written document which does not give effect to the parties’ intention. It was stated in Tankel v Tankel [1999] 1 FLR 676 that “it is not enough for the Court to consider that it would have been better if the original document had been differently worded...”

16.3    the intention of the parties must be shown with some degree of precision as to what was intended and the mistake which has failed to carry this out

16.4    there must be an issue capable of being contested even if all parties to the proceedings consent to rectification.

It remains unclear as to what extent, if any, the concept of unconscionability as set out in Pitt v Holt [2013] 2 AC 108 is relevant here.

17.      The jurisdiction to rectify a Deed of Variation which has had backdating effect is clear. Whilst it is considered that a redirection of the same property cannot occur more than once by the use of such a deed, this does not preclude it being rectified (see Lake v Lake [1989] STC 865).

18.      Many rectification cases are brought to secure a taxation advantage. In Racal Group v Ashmore [1995] STC 1151 it was stated that the Court will rectify to give effect to the true agreement and it is irrelevant that rectification was agreed to by all and that it had fiscal advantages. However, it would not be given if the only effect was to secure a fiscal benefit. “What is rectified in not a mistake in the transaction itself but a mistake in the way in which the transaction has been expressed in writing.” The distinction was between cases where the meaning or effect of the document was in issue ,or ,where the issue related to the consequences of the document. The dividing line was discussed in two cases from 2007.

19.      In Wills v Gibbs [2007] EWHC 3361 a Deed of Variation had been entered into which did not include an appropriate tax election for inheritance tax purposes. It was held that seeking rectification to include the election was not done solely for tax purposes. The intention had been that the gift made would not become subject to inheritance tax.

20.      In Allnutt v Wilding [2007] WTLR 941 the settlor wished to save tax but it was his adviser who selected the form of trust to be used. The settlor had been wrongly advised that he was thereby making a PET. It was held that the mistake was not as to the language, effect or meaning of the Settlement itself but as to its separate consequences. The Court could only rectify if the wording used included or excluded wording which defeated a tax saving purpose.

21.      Precisely where the dividing line lies has been made clearer in the recent decision in Bullard v Bullard [2017] EWHC 3. In that case, the settlor had been advised to enter into a double trust scheme and, as part of the scheme, it was intended that the second trust created would be an interest in possession trust. This was explained to the settlor and this was what she intended to do. The draftsman overlooked the operation of section 31 of the Trustee Act 1925 which prevented this. It was held that the settlor had believed that what she was signing was an interest in possession trust. Rectification could be ordered even though the error was as to the legal effect of the words used, not their meaning. The Court stated that the case in Allnutt was different because the settlor had left it to the adviser to select the form of trust used and he had no relevant intention.

22.      In Ashcroft v Barnsdale [2010] EWHC 1948 H’s wife had died and left all of her land (including property attracting APR) to him with residue passing to their children. Therefore, APR was wasted due to the availability of the spouse exemption. A Deed of Variation was entered passing ￡410,000 to the children and residue to H. Aside from the wrong amount being inserted, the gift to the children was free of tax and this led to grossing up. The Court agreed that the Deed should be rectified to insert the words “subject to tax” as no one had intended residue to be reduced by the additional tax.

23.      HMRC’s practice has been that they do not wish to be joined into rectification proceedings provided certain authorities are cited to the Court. They should be sent the proceedings in draft and asked whether they wish to be a party. In Kevern v Ayres [2014] EWHC 165 they were actively involved but that is not the norm.

Sarah Harrison

St Philips Stone

41 Park Square

5th February 2018