Drafting errors which affect the inheritance tax position can be costly for both solicitor and client. However, there are opportunities to correct things, explains Sarah Harrison
Errors relating to inheritance tax (IHT) which are encountered in wills and deeds of variation will usually involve using the intended wording, but drafting the document in a tax-inefficient way, or using the incorrect wording to achieve the intended result. All is not lost, however – you may have a chance to correct the errors, but there will be costs involved.
It is fairly common to encounter wills where, while 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 if the draftsman thought remaining silent would render a gift subject to tax
What are the common errors?
Failure to use available reliefs
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 to a spouse property 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 two years to a chargeable beneficiary once relief has been established.
In relation to gifts of relievable property which attract APR or BPR, it is necessary to consider the attribution of value rules under section 39A of the Inheritance Tax Act 1984 (IHTA 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, if a nil-rate band (NRB) 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.
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 the 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 any another exemption. It may also have the effect that more property passes under an NRB gift than was intended.
Burden of tax
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 will be subject to or free from IHT. It is fairly common to encounter wills where, while 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 if the draftsman thought remaining silent would render a gift subject to tax. If a clause is silent as to the burden of IHT, it is generally free of tax if it is UK property which vests in the personal representatives (see section 211(1) of the IHTA 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.
The main reason this form of error matters (aside from affecting the allocation of the burden of tax) is that 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 point at which grossing up occurs is where free-of-tax gifts of more than the NRB have been made to chargeable beneficiaries and the residue passes to an exempt beneficiary.
However, the provisions of the will or deed could even lead to double grossing up in accordance with section 38(5) of the IHTA 1984. That subsection 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.
Can errors in wills or deeds of variation be rectified? The position is different in relation to each.
Where there is an error or tax-inefficient provision in a will, the parties may be able to correct this by using a deed of variation with backdating effect (and made within two years of death), if they are all adult and competent. Otherwise, while the parties could agree to correct an error by using a deed of rectification, this cannot have full retrospective effect and it cannot bind HM Revenue & Customs (HMRC) (see Persimmon Homes Ltd v Woodford Land Ltd  EWHC 3109 (Ch)). HMRC‘s view is that, generally, a deed must be rectified by the court to have backdating effect (see IHTM35086), except possibly to correct a minor typing error. Rectification ordered by the court is totally retrospective in effect (see Craddock Bros v Hunt  2 Ch 136).
In relation to wills, the ability to rectify is narrower because of the statutory wording which allows it. Section 20(1) of the Administration of Justice Act 1982 (AJA 1982) 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.
In this context, ‘clerical error’ means an error made in the process of recording the intended words of the testator in the drafting of their 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 their solicitor or a typist, and it includes a wholescale rewriting of the will where the testator has signed another person’s will (see Marley v Rawlings  UKSC 2).
Section 20(1)(b) of the AJA 1982 will not cover the testator’s failure to appreciate the legal effect of the words used in their will, or where the draftsman understands their instructions but negligently selects the wrong wording to achieve what was intended. This will preclude rectification for many tax errors.
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 the relevant clerical error or the failure to understand instructions. In Fielden v Christie-Miller  EWHC 87 (Ch), 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
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.
- There must be convincing evidence to counteract the intention shown in the written document.
- 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  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…’.
- 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 the intention.
- There must be an issue capable of being contested, even if all parties to the proceedings consent to rectification.
The jurisdiction to rectify a deed of variation which has had backdating effect is clear. While 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 from being rectified (see Lake v Lake  STC 865).
Many rectification cases are brought to secure a taxation advantage. In Racal Group Services Ltd v Ashmore  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, the court said it would not be given if the only effect was to secure a fiscal benefit: ‘What is rectified is not a mistake in the transaction itself, but a mistake in the way in which the transaction has been expressed in writing.’ The distinction is between cases where the meaning or effect of the document is in issue, or where the issue relates to the consequences of the document. The dividing line can be seen by comparing two cases from 2007.
In Wills v Gibbs  EWHC 3361 (Ch), a deed of variation had been entered into which did not include an appropriate tax election for IHT 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 IHT.
In Allnutt v Wilding  WTLR 941, a settlement had been made in the form the settlor intended, but they did not intend the tax consequences of it. The settlor had been wrongly advised that they were making a potentially exempt transfer. It was held that the mistake was not as to the language, effect or meaning of the settlement itself, but its separate consequences. The court could only rectify if the wording used included or excluded wording which defeated a tax-saving purpose. The issues in this regard have been clarified further in the recent case of Bullard v Bullard  EWHC 3 (Ch).
In Ashcroft v Barnsdale  EWHC 1948 (Ch), H’s wife 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 £410k to the children and the 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.
HMRC’s practice has been that it does not wish to be joined into rectification proceedings, provided certain authorities are cited to the court. It should be sent the proceedings in draft and asked whether it wishes to be a party. In Kevern v Ayres  EWHC 165 (Ch), HMRC was actively involved, but that is not the norm.