Mere chattels?

During our lifetimes, we collect many chattels, from our breakfast bowl and jewellery, to cars and perhaps even works of art. We also dispose of some as they wear out or we lose interest in them.

Some chattels will have sentimental value and so, when we die, we may want specific individuals to receive particular items. If we list such wishes in our will, this could create a very long document which would need to be revised regularly to reflect changes in what we own, as well as any changes in our relationships with intended beneficiaries.

To counter the inconvenience (and cost) of re-writing wills for this reason alone, it is not unusual to gift chattels to the executor, in a clause along the following lines:

“I give all my personal chattels (as defined by section 55 of the Administration of Estates Act 1925) not otherwise specifically disposed of by this will or any codicil thereto to my executors and ask them (but without imposing any trust or binding obligation) to give effect to any wishes which may come to their attention as to the disposal of such chattels (whether the wishes are contained in any memorandum placed with this will or found amongst my papers or indicated by words or marks on the chattels themselves or communicated orally or expressed in any other way).”

As such a gift is not a secret, or half-secret, trust – the imposition of a trust being specifically excluded – there is no requirement for the executor to be aware of the testator’s wishes for the disposition of their chattels before death. Also, if the executor gives effect to the testator’s wishes, section 143 of the Inheritance Tax Act 1984 (IHTA 1984) will look through the executor and ascribe the gifts to the deceased. The form of wording above is just one example of the many adopted by will drafters.

This type of arrangement is relatively popular and seen as very convenient, especially with the level of informality by which the list of chattels and their destination can be revised / updated. However, they all have a common feature: the chattels are gifted to the executor absolutely, as confirmed in Re Stirling (deceased), Union Bank of Scotland Ltd v Stirling and others [1954] Ch D 113. But is this a matter of concern?

Usually, it should not be. The named executor will normally give effect to the latest of any letters of wishes that is found, without any particular concerns other than correctly identifying both the chattel and the intended recipient. If a particular chattel cannot be found, or the named recipient cannot be identified (or has died), effect cannot be given to that particular wish.

However, is it all as straightforward as it seems? Below, I consider some specific issues that may arise.

Issues in gifting to the executor absolutely

1. The letter of wishes does not deal with all of the chattels gifted to the executor

As identified in Re Stirling, the gift is to the executor beneficially. To the extent that items are distributed other than in accordance with the testator’s stated intention, then that is a gift by the executor personally. If the will includes a clause similar to the above example and the testator fails to deal with all of those chattels passing to the executor, then, on the face of it, section 143 of the IHTA 1984 cannot apply to those items not listed, or otherwise identified. If, for example, the executor passes such items to the residuary legatees, the executor is making a gift of them personally for inheritance tax (IHT) purposes.

In general, this may have little consequence. But, what if:

(i) any of the chattels which are not listed or otherwise identified by the testator turn out to be valuable (it is not unheard of for that dusty “doorstop” to turn out to be a Ming Dynasty vase worth over £1m), or

(ii) the executor is a company?

In (i), if challenged by HM Revenue & Customs (HMRC), the executor might argue that it is implicit from the letter of wishes that the testator “wished” that those chattels not specifically identified fell into residue. Depending upon the circumstances, the executor might consider entering into a variation effective under section 142 of the IHTA 1984 dealing with the chattels in question, thus avoiding any untoward IHT (or capital gains tax (CGT)) issues.

As regards (ii), this is discussed in (4), below.

If, unusually, the will includes provision that a beneficiary can disclaim a legacy in part (without such a specific provision, “all or nothing” applies to the disclaimer of any gift), the executor might disclaim those chattels in respect of which no wishes have been communicated to them.

Of course, it may be that the testator intended the executor to retain personally those chattels which are not subject to a letter of wishes or other direction.

2. No letter of wishes can be found

Where no letter of wishes, or other direction, can be found after the testator’s death, the gift to the executor does not fail. However, the executor may be in a quandary as to what to do with the chattels. If satisfied that the testator had intended to identify their wishes in respect of various items, the executor could canvass those close to the testator to try to identify what their wishes might have been. If that elicits no, or insufficient, information, the executor might consider disclaiming the chattels (although they will need to be careful that they understand the effect of such a disclaimer in the circumstances of the will / estate), or enter into a variation to rewrite, or extinguish, the gift.

3. There is a delay in commencing the administration of the estate

Section 143 of the IHTA 1984 applies only where “the legatee transfers any of the property in accordance with (the testator’s) wish within the period of two years after the death of the testator”. Accordingly, a delay in commencing the administration of the estate could undermine the effectiveness of the testator’s planning.

If the validity of a will is being challenged, any direction in relation to chattels might also be challenged, so it may be unwise to give effect to any declared wishes of the testator until the position is beyond doubt. However, if those wishes are not implemented within two years of the death of the testator, there is the risk that section 143 of the IHTA 1984 will not apply. If the executor complies with the testator’s wishes outside the two-year period, they will be making the gifts themselves and the IHT and CGT consequences will apply, as discussed elsewhere in this article.

4. The executor (or one of the executors) is a company (whether or not a trust corporation)

Where the executor is an individual, they can usually deal with the chattels without any constraints (see (6), below, for examples of situations where this might not be the case). However, where a company or other corporate entity is the executor, things are not so straightforward.

As identified in Re Stirling, where the gift is expressly stated not to create a trust, the executor – the Union Bank of Scotland Ltd in that case – is absolutely and beneficially entitled to the legacy of chattels. Section 143 of the IHTA 1984 will still apply if the corporate executor complies with any wishes expressed by the testator.

However, the existence of a corporate executor may have other, unexpected, consequences, including the following.

• The chattels, being an asset of the company, will need to be reflected in its annual accounts.
• Authority to comply with the wishes of the testator will need to be given by the board, either on a case-by-case basis, or by formal delegation to, say, a manager.
• If the chattels are considered a “capital” item, rather than a “revenue” item, can they be distributed other than to members of the company?
• If the value of the chattels is significant, specific shareholder approval, or a court order, may be needed to protect the directors passing significant company assets to non-members.
• Where section 143 of the IHTA 1984 does not apply (for instance, because the testator has not expressed any wishes in relation to all those items given to the executor), and the company is a “close company” (as defined in section 439 of the Corporation Taxes Act 2010), the distribution of any such items may result in the “participators” in that company having an IHT liability, as HMRC will look through the company and attribute such distributions to the participators as chargeable lifetime transfers.
• The company may be liable to corporation tax on receipt of the legacy.
• It is not unusual for corporate executors owned by, say, law firms or accountancy firms, to be registered as “dormant” at Companies House. If such a company accepts the legacy, even if it redistributes it in full in accordance with the testator’s wishes, does it need to convert to “active” status and file accounts and so on?

5. The executor (or one of the executors) is tax-resident outside the UK

If chattels are given to an executor who is non-UK-tax-resident, section 143 of the IHTA 1984 and section 62(4) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) will still apply, to avoid any tax consequences within the UK. However, they will not affect the tax consequences of inheriting and disposing of assets in the jurisdiction in which the executor is tax-resident. Even a disclaimer of the gift may have tax consequences for non-UK-tax-resident individuals or companies.

6. The executor (or one of the executors) is in receipt of means-tested benefits, or is bankrupt

On first glance, as the chattels are given absolutely to the executor, where the executor receives means-tested benefits (which can include the provision of care by a local authority), compliance with the testator’s wishes could be deemed “deprivation”, impacting the individual’s right to benefits. While the relevant authority might treat the executor merely as a cipher of the testator and ignore the gift when assessing the executor’s right to benefits, there is no established case law on this point.

Similarly, there seems to be no established case law on whether the gift would vest in a bankrupt’s trustee in bankruptcy, or if such a trustee could apply to set aside compliance with the testator’s wishes if the executor is subsequently made bankrupt.

Capital gains tax

Usually, CGT has little relevance to the disposal of chattels, as they are generally considered “wasting assets” and therefore exempt. However, if any item, or set of items, is valued at over £6,000, a disposal by the executor other than in accordance with the testator’s wishes could result in the executor needing to return any such disposal to HMRC for CGT purposes.

In most cases, there will be no perceptible change in value between the date of death and the date the executor gifts a chattel. However, the value of a work of art or “collectable” could change significantly, and gains (or losses) may arise even over relatively short periods.

The named executor will normally give effect to the latest of any letters of wishes that is found, without any concerns other than identifying both the chattel and the intended recipient

Where section 143 of the IHTA 1984 applies, it is understood that the recipients will be treated as acquiring the chattels as “legatee” under section 62(4) of the TCGA 1992 – the same as if such items had been gifted directly to them under the terms of the will.

While CGT will not be an issue if the executor is a company, the chattel will be subject to corporation tax. Unlike with CGT, any change in value of the chattels may be subject to tax.

Conclusion

When considering how chattels might be dealt with after the testator’s death, it is important to also consider the position / status of the beneficiaries in the will. As identified above, issues may arise if beneficiaries are:

• a corporate body
• non-UK-tax-resident
• elderly and in receipt of, or potentially in receipt of, means-tested benefits, or
• bankrupt, or could potentially be declared so.

If the gift is similar in form to the example at the start of this article, it is important that the testator’s letter of wishes (or such other direction by the testator) deals with all items that might be included within the gift, whether specifically listed or included within a ‘mopping up’, so as to avoid the consequences discussed at (1), above.

A possible variation could be merely(?) to give the executor, or some other third party, a right to choose chattels which, without imposing any binding trust or other obligation, they can then distribute in accordance with the testator’s stated wishes. Provided that the items chosen are limited to those in respect of which the testator has expressed their wishes, this should avoid many of the above issues.

An alternative strategy?

Since the original version of this article was published in December 2019, it has been suggested that some of the issues I identified could be avoided by giving the chattels to the executors, or a third party, subject to a power to distribute in accordance with the testator’s wishes, failing which the chattels fall into residue. This seems an attractive proposition, as it would negate many of those concerns.

(It’s worth pointing out that there could still be an issue where the person to whom the power is given is subject to a jurisdiction that treats a power as property, so the tax and bankruptcy questions could still arise. To mitigate this, appropriate consideration should be given to the identity of the holder of the power at the drafting stage.)

Below is a suggested precedent to use if this alternative strategy is adopted. This includes a two-year period for distribution of the chattels, with a discretion to reduce this period. However, testators might prefer to specify a shorter period, to provide certainty that the administration of the estate will not be held up in dealing with the chattels. (My thanks to Thomas Dumont QC of Radcliffe Chambers for his invaluable input in the crafting of the draft precedent.)

Draft clause: Choice of chattels and distribution in compliance with testator’s wishes

I GIVE [my executors / name(s) of beneficiaries]

(i) such of my personal chattels (as defined by section 3 of the Inheritance and Trustees Powers Act 2014) not otherwise disposed of by this my will or any codicil thereto

(ii) together with the power to dispose of any such chattels in accordance with any wishes of mine that come to their attention within [two years] after my death or such shorter period as [my executors / name(s) of beneficiaries] might in their absolute discretion declare in writing (whether such wishes are contained in any memorandum placed with this will or any codicil thereto or found amongst my papers or indicated by words or marks on the chattels themselves or expressed orally or in any other way)

(iii) any chattels which they have not disposed of in accordance with this power shall be held by them on the trusts, and subject to the provisions, of my residuary estate.

Notes:

1. This clause may not be appropriate where the named beneficiary is a corporate entity or an individual who is non-UK-tax-resident.
2. The period of two years from the date of death is the maximum period allowed under section 143 of the IHTA 1984 for compliance with the testator’s wishes, and should allow more than sufficient time for the person(s) named within the clause to identify any wishes left by the testator and the individual items in question, mindful that the testator’s description of chattels might identify more than one item, or might not obviously correspond with any particular chattel. The two-year period suggested is included as a long-stop, and those drafting a will might prefer to incorporate a shorter period to take account of the particular circumstances / wishes of individual testators.