Ever since the transferred nil-rate band was introduced in 2007, the construction of ‘nil-rate band’ legacies in wills made before 2007 by testators who by the date of death had acquired transferred nil-rate band has presented problems. Whether the amount passing is equal to one or two nil-rate bands depends on what exactly the will says.
In Loring, the testatrix made her will in 2001 and at clause 5 gave ‘such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax’ to family members and the residue to the Woodland Trust.
Her estate benefitted from the transfer of her husband’s entire nil-rate band. The effect was that the residue was either £30,805 or £355,805. There was no admissible extrinsic evidence of the testatrix’s intention.
The transferred nil-rate band has to be claimed by the executors. The executors (who were two of the family members entitled to the legacy) claimed the transferred nil-rate band.
The charity argued that the reference to ‘my’ nil-rate band limited the legacy to the value of the deceased’s single nil-rate band and excluded any transferred nil-rate band.
At first instance ( EWHC 4400 Ch), Asplin J considered the legislation: section 8A of the Inheritance Tax Act 1984:
‘(3) Where a claim is made under this section, the nil-rate band maximum at the time of the survivor’s death is to be treated for the purposes of the charge to tax on the death of the survivor as increased by the percentage specified in sub-section (4) below…
(7) In this act, ‘nil-rate band maximum’ means the amount shown in the second column in the first row of the table in schedule 1 to this act…’
She concluded that the statute is clear that the effect of a successful claim is retrospective, and that the effect of a claim is that the nil-rate band maximum at the time of the survivor’s death is treated as ‘increased’ as at that date. Hence the testatrix’s nil-rate maximum was increased to £650,000 and that was the value of the legacy.
The Court of Appeal agreed although it did not find it an easy matter to decide. The following points were significant.
(1) When the testatrix made her will she plainly did not have in mind a specific amount that she intended to pass. She intended that the gift should fluctuate with changes in the legislation. Had the nil-rate band been increased by more than inflation, the residuary gift might have diminished or even fallen away entirely.
(2) There was much to be said for regarding ‘such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax’ as meaning the amount which, at the moment of death, was attributable to the testatrix alone without regard to any increase in that amount resulting from any subsequent decision by her executors to make a claim for transfer. However, once a claim is made, the nil-rate band maximum at the time of the survivor’s death is to be treated as increased.
The result is that the sum which was at the date of the testatrix’s death ‘the amount of my unused nil-rate band for inheritance tax’ is to be treated as increased to the same extent. To hold that such sum was limited to the testatrix’s unincreased nil-rate band would not be the treatment prescribed by the statute.
(3) The effect of the judge’s conclusion was that the amount of the legacy to the family was dependent on whether or not the executors chose to make the section 8A claim. Counsel for the charity argued that the testatrix could not have intended the amount of her legacy to depend on the exercise by her executors of a discretion to make, or not to make, such a claim.
Both Rimer LJ and Lewison LJ regarded this as a powerful argument.
Counsel for the charity had postulated the example of a will drafted in similar terms which left ‘my unused nil-rate band’ to the children of a first marriage with the residue going to a surviving spouse. She contended that it would be surprising if in those circumstances a testator intended that the scale of provision made for a surviving spouse could depend on the choice of the executors or trustees, unless the will made it clear that they had that choice.
Moreover, the correct interpretation of clause 5 should not depend on the identity of the residuary beneficiary. So if an anomalous result would be produced in those circumstances, an equally anomalous result would be produced on the facts of the present case.
Trustees are, of course, often given express powers to affect the extent of a testator’s or settlor’s bounty, for example in a discretionary trust and, to a lesser extent, in relation to powers of maintenance and advancement. Lewison LJ said that where, as here, the testatrix had appointed her two sons as executors and trustees, it was reasonable to infer that she trusted their judgement. Counsel for the charity said this was mere speculation.
However, since the clause was (unsurprisingly) silent about elections there was no guidance either way.
(4) Lewison LJ said it was, therefore, necessary to look at the will as a whole to establish its meaning. In his judgment, the implicit purpose of the will was to give as much as possible to Mrs Smith’s family without incurring inheritance tax and to give the rest to charity. As Lord Neuberger had explained in RSPCA v Sharp  EWCA Civ 1474 at , the purpose of using the nil-rate band is usually to avoid paying inheritance tax.
The most significant part of the judgment is probably (3) which suggests that a testator is likely to be regarded as having authorised the executors to use their discretion in deciding whether or not to claim transferred nil-rate band. It will clearly be helpful when drafting such legacies in future to include a statement making clear the testator’s intention.
Lesley King, University of Law