Plenary: Good as golden

As usual, there was a mixed bag of items to cover.

Issues with the residence nil-rate band

The residence nil-rate band (RNRB) has been with us for some time now, but it continues to throw up queries.

The Trust Discussion Forum had this question posted on 9 May 2019: “Am I correct in thinking that a will leaving a large pecuniary legacy to the deceased’s son with residue to surviving spouse will NOT attract RNRB, even if (1) the legacy exceeds £325,000 and (2) the bulk of the estate comprises the deceased’s house?”

Where, as here, there is a legacy to a child and the only asset from which the legacy can be paid is a residence, it may seem like hair-splitting to suggest that the child is not inheriting an interest in the residence, but I would put money on that being correct, for the following reasons.

Meaning of “inherited”

To obtain the RNRB, a residence or interest in a residence must be closely inherited. Section 8J (2) of the Finance (No. 2) Act 2015 says: “B inherits the property if there is a disposition of it (whether effected by will, under the law relating to intestacy or otherwise) to B” (my italics).

HM Revenue & Customs (HMRC) says in the Inheritance Tax Manual at IHTM46033 that there is no requirement for a residence left to lineal descendants to be retained. It can be sold by the personal representatives (PRs) so long as lineal descendants receive the sale proceeds.

Appropriations are not dispositions

The same paragraph of the manual makes it clear that HMRC does not regard an appropriation as a disposition. If PRs appropriate a residence or interest in a residence to lineal descendants in or towards satisfaction of a pecuniary legacy, the lineal descendant is taking as “by virtue of the PRs [sic] administrative powers, not directly under the terms of the will”.

Where there is a legacy to a child and the only asset from which the legacy can be paid is a residence, it may seem like hair-splitting to suggest that the child is not inheriting an interest in the residence, but I would put money on that being correct

Although lineal descendants will be regarded as inheriting where they end up with the proceeds of sale, this is where there is an initial disposition of the residence to them, and not where the initial disposition is of a legacy which the PRs have funded by selling the residence.

A solution, so long as the beneficiaries agree, is a post-death variation to leave an interest in the residence to the lineal descendant, and other assets to the residuary beneficiary. Variations are read back to the date of death for all inheritance tax (IHT) purposes.

Nil-rate band or RNRB on first death

Unused RNRB and nil-rate band (NRB) are transferred to a surviving spouse or civil partner. The RNRB increases by £25,000 per annum until it reaches £175,000 in 2020/21, but the NRB is frozen until then.

Hence, where the first death occurred when the RNRB was £100,000, and the survivor lives to 2020/21, the survivor will benefit from a double RNRB of £175,000.

Unfortunately, spouses or civil partners cannot choose which of the RNRB or ordinary NRB is used on the first death. The RNRB must be applied before the ordinary NRB (see IHTM46003). Nor does it have to be claimed. IHTM 46004 says: “There is no requirement for a claim to be made for RNRB. If the conditions for RNRB are in point then it is due automatically.”

To see how this plays out in practice, consider the following example.

Harry dies in May 2019, survived by his wife, Wanda. He leaves to his daughter a flat which is worth £100,000 and qualifies for the RNRB, and everything else to Wanda. His estate is worth £500,000, and he has made no lifetime transfers.

The flat is covered by the RNRB, which is £150,000 in 2019/20. Therefore, £50,000 is unused, and so 33% will be transferred to Wanda. The whole of his ordinary NRB is unused, so 100% is transferred to Wanda.

In this situation, if the family wants to transfer the RNRB, they can vary the disposition of the estate to give a pecuniary legacy to the daughter, and the residue to the spouse. The PRs could then appropriate the flat to the daughter without affecting entitlement to RNRB.

Note, though, that there are risks here.

• Will Wanda have a residence when she dies? If not, the transferred RNRB is useless. She would have done better with transferred NRB.
• Will the RNRB exist when Wanda dies?

Court of Protection settlement of property held for minor

LCN v CJF [2019] EWCOP 1 was an urgent application for a settlement of the remains of a substantial damages award on behalf of P, who had only a few days to live. P had suffered serious brain injuries as a result of a traumatic birth, which had also damaged the health of his 18-year-old mother. P was cared for initially by his birth mother, but this became too much for her, and he was then cared for by devoted foster parents. His biological father denied paternity and played no part in his life.

At the time of the application, P’s estate was worth around £660,000. It included a residence, valued at around £350,000, which had been purchased for P from the award and specially adapted for his needs. P lived at the property with his foster parents and their two young daughters, who regarded P as their brother.

Under the intestacy rules, P’s estate would be divided equally between his birth parents, with the foster parents taking nothing. A statutory will for P was not possible because he was a minor, so a settlement (or gift) was the only option. There was general agreement that the settlement should give the residence to the foster parents and the rest to the birth mother. The issue was the burden of IHT on the residence (£40,500). Should the gift be subject to or free of IHT?

The following points are of general interest.

• There was an element of urgency as, once P died, the powers of the Court of Protection to make orders in relation to his property would cease.
• Applications of this type require notice to be served on anyone who will be adversely affected if the order is made. Obviously, the father would be adversely affected. His current address was not known.

In general, permission to dispense with service or notification should only be made in exceptional circumstances where there are other compelling reasons for doing so: see District Judge Batten in Re AB (2013) EWHC B39 (COP), and I v D [2016] EWCOP 35, where Senior Judge Lush warned that those making inappropriate applications would risk a personal order against them for costs.

Permission to dispense with service or notification should only be made in exceptional circumstances where there are other compelling reasons for doing so

The decision as to whether to dispense with service is not a best interests decision; it is a question of procedural fairness. The person who is not served is deprived of a property right without having a chance to offer argument, and the decision to deprive is made on the basis of a one-sided version of events. Article 6 of the European Convention on Human Rights (right to a fair hearing) is engaged. The judgment noted that different factors may apply where there is genuine urgency and a need to balance the prejudice of proceeding in the absence of an affected party against the prejudice to the incapacitated person or another party of not proceeding at all.

In this case, there were exceptional circumstances justifying proceeding without notifying the father. These circumstances were his complete lack of involvement in P’s life and care, and his denial of paternity. There was a genuine urgency, and, balancing the prejudice of proceeding in the absence of the father with the prejudice to the foster parents of not proceeding, the hearing had to take place, despite the lack of service on the father.

Even so, the court ordered that attempts should be made after the hearing to locate the father and serve him with a copy of the final order, so that it would be open to him to apply to set aside or vary it.

The decision on the terms of the settlement is a good illustration of the way in which the court approaches a best interests decision where P has never had capacity. The court is required to consider, under section 4(6) of the Mental Capacity Act 2005, the beliefs and values that would be likely to influence P’s decision if P had capacity, and the other factors that P would be likely to consider if able to do so. It must also consider under section 4(7) the views of those involved in P’s care.

In this case, the court found that the beliefs and values that would have been likely to have influenced P’s decision were a wish to provide for those who loved and cared for him. That included his mother, as well as his foster parents. He would also have wanted their daughters to be able to remain in their home and to be able to continue attending their local school.

It was not in P’s best interests for there to be any risk to the security and stability of the foster parents’ home, and therefore they should inherit the residence free of IHT.

Failure to comply with the ‘golden rule’

In James v James and Others [2018] EWHC 242 (Ch), Mr Justice Matthews did not order costs against the claimant, who had unsuccessfully challenged his father’s will on the basis of lack of capacity; instead, he allowed costs to lie where they fell. He said of the claimant: “He pursued the challenge to the will because there was a reasonable basis for doing so. There was medical evidence and factual evidence tending to suggest that the testator’s capacity was doubtful. The expert medical evidence (on both sides) reinforced that view. The fact that the so-called ‘golden rule’ was not followed was also significant. There being no contemporary medical evidence, all that was left was for the court to decide.

“In my judgment, it was reasonable for the claimant to pursue the will challenge, even though, at the end of the day I have held that the testator had capacity to make his will when in fact he made it.”

The testator had been diagnosed with dementia some years before making the will. The judge agreed with the solicitor’s conclusion that the testator had sufficient capacity to make the simple will that was under dispute. However, the decision in James not to award the costs because of the lack of a contemporaneous medical report is an additional reason for suggesting the advantages of obtaining a report to a client whose capacity may be challenged.