Probate law

Reservation of benefit

IRC v Eversden (Executors of Greenstock) [2002] STC 1109

This was an appeal from the decision of the Special Commissioners which many practitioners will have seen under the name Essex (Somerset's Executors) v IRC (see Law Reports).

Ms Greenstock (the settlor) created a settlement in 1988.

Her husband was the life tenant and after his death the property was to be held for a class of discretionary beneficiaries, which included the settlor, for 80 years.

Thereafter, it was to be held on trust for the settlor's daughter and her issue.

The trustees had power to acquire property for the use and enjoyment of the beneficiaries.

The settlor also transferred the matrimonial home to the trustees to hold as to 95% on the trusts of the settlement and as to 5% for her.

The husband occupied the matrimonial home as life tenant of the trust with the settlor until he died in 1992.

The trustees then sold the matrimonial home and used the proceeds to acquire a replacement property and an investment bond.

The settlor had a 5% interest in the replacement property and the bond.

From the date of the purchases until her death in 1998, the settlor was in sole occupation of the replacement property but had no benefit from the bond.

The Inland Revenue argued that, as a result of the reservation of benefit rules, the whole of the trust fund was included in the settlor's estate.

This was because she was included in the class of discretionary beneficiaries and had occupied the replacement property.

The issues for the court were: Was the inclusion of the settlor in the class of discretionary beneficiaries a reservation of benefit? Was the occupation of the replacement property a reservation of benefit? Did the transfer of the property to the husband for life exempt the trust fund from the reservation of benefit rules for all time or only for so long as the life interest continued?

Mr Justice Lightman found as follows: It was clear that the inclusion of the settlor in a class of discretionary beneficiaries was a reservation of benefit.

The trustees must be presumed to have given the settlor a right to occupy the replacement property rent free and to the exclusion of the other beneficiaries in return for the settlor allowing the full proceeds of sale to be used in the purchase.

However, the transfer by the settlor had to be looked at with regard to the date it was made.

The transfer was at that date an exempt transfer between spouses.

It therefore, completely excluded the reservation of benefit rules for all time.

The last point is obviously valuable when trying to arrange the affairs of spouses in an inheritance-tax-efficient manner.

Is it possible to avoid reservation of benefit problems by creating a brief interest in possession for a spouse?

Proprietary estoppel

Chan v Melodious Corporation (2002) LTL, 29 July

The Court of Appeal upheld the first instance decision on proprietary estoppel.

The claimant had relied on promises made by the defendant and had acted to her detriment.

She was entitled to an interest in property.

Undue influence

In re Rochelle deceased (2002) LTL, 1 August

The court found that an agricultural tenancy entered into by the deceased seven weeks before his death was void for undue influence.

There was a relationship of trust and confidence between the deceased and the 'tenant'.

The deceased had received no independent advice as to the detrimental effect the grant of the tenancy would have on the value of the rest of the estate.

Statutory instruments

The Inheritance Act (Delivery of Accounts) (Excepted Estates) Regulations 2002 No 1733 make substantial amendments to the requirements for qualification as an excepted estate, increasing the financial limits, changing some definitions and introducing a new category of excepted estates for non-domiciliaries.

The regulations came into force on 1 August 2002 but apply to deaths occurring on or after 6 April 2002.

The conditions for qualification are as follows:

- The limit on the aggregate of the gross value of the deceased's estate and of the value transferred by any 'specified transfers' made by the deceased is raised from 210,000 to 220,000;

- Up to 100,000 of this value can now be attributable to settled property in which the deceased had an interest in possession;

- The limit on the value of non-UK property which can be included in the deceased's estate is increased from 50,000 to 75,000;

- The limit on the aggregate value of 'specified transfers' made during the period of seven years ending with the deceased's death is increased from 75,000 to 100,000;

- The definition of 'specified transfers', which used to be limited to cash and quoted securities, is extended to include a transfer of an interest in land (plus furnishings and chattels intended to be enjoyed with the land) unless the property is subject to a reservation of benefit or becomes settled property, and;

- A new category of excepted estates is introduced for persons who have never been domiciled in the UK.

There will be no need to deliver an account if the deceased's UK estate is attributable to cash and quoted shares or securities which do not exceed a gross value of 100,000.

Provided an estate complies with these conditions, it is not necessary to deliver an account unless the Inland Revenue requires one within 35 days of the first grant of representation (within 60 days of confirmation in Scotland).

Except in cases of fraud or failure to disclose material facts, there will be an automatic discharge from liability for all persons within that 35 (or 60) day period and any Inland Revenue charge will be extinguished.

There are also new regulations dealing with reporting lifetime transfers - (The Inheritance Tax (Delivery of Accounts)(Excepted Transfers and Excepted Terminations) Regulations 2002 No 1731) - which contain mainly drafting amendments.

There is no need to report lifetime chargeable transfers where the total value of an individual's transfers in any one year does not exceed 10,000 and his cumulative total does not exceed 40,000.

Trustees now do not need to deliver an account where the termination of an interest in possession is wholly covered by the annual or marriage exemptions.

Lastly, The Court of Protection (Enduring Powers of Attorney) (Amendment No 2) Rules 2002 No 1944 came into force on 31 August 2002.

They substitute a new version of Form EP2, the form prescribed for an application to register an enduring power of attorney.

By Lesley King, College of Law, London