This recent case involved a dispute between the family of the late Valerie Smith and a charity, the Woodland Trust.
What’s the background?
The current inheritance tax threshold (‘Nil Rate Band’) is £325,000. This amount is available to the estate of each individual, free of tax, in England and Wales on their death.
In order to protect against payment of inheritance tax, many people choose to leave a gift in their Will, which is equal to the value of the Nil Rate Band, with the balance being left to charity.
When someone dies leaving the whole of their estate to their surviving spouse or civil partner, regardless of the size of the estate, there is no tax to pay. Their Nil Rate Band remains unused. It used to be the case of ‘use it or lose it.’ However, since 2008, the unused Nil Rate Band of the first to die can be added to the Nil Rate Band of the second to die. Therefore, on current figures, up to £650,000 is available, free of tax, following the second death.
What was this case about?
The decision of the Court of Appeal in the case of Woodland Trust v Loring and Others  provides important clarification on the definition of ‘Nil Rate Band’ so far as it applies to the actual gift as referred to in the Will.
Under the terms of her Will, made in 2001, Mrs Valerie Smith, a widow, left her estate between three of her children, two of her grandchildren and the Woodland Trust.
Under Clause 5 of the Will, the children and grandchildren were to receive:
‘Such sum as is at the date of my death the amount of my unused nil rate band for Inheritance Tax.’
Under Clause 6, Mrs Smith left the remainder of her estate to the Woodland Trust.
Mrs Smith died in 2011 leaving an estate of £680,805, her husband having died in 1984 leaving everything to Mrs Smith. Her executors claimed for the transfer of her late husband’s unused Nil Rate Band to her estate meaning that £650,000 of her estate would be free of tax.
The dispute concerned whether the actual gift to the children and grandchildren in the Will also included the transferable Nil Rate Band from the estate of the late Mr Smith.
The children and grandchildren claimed that the legacy to them under the Will should be £650,000 meaning that only £30,805 would be available to the Woodland Trust. The Woodland Trust claimed that the gift to the family should be limited to £325,000 with the remainder passing to them.
What did the Court decide?
The Judges involved in that case admitted that they did not find the issue easy to decide. However, all three Judges in the Court of Appeal decided that the gift in the Will did include the transferable Nil Rate Band from Mr Smith’s estate and so the family were entitled to the higher amount.
The Court found that the purpose of the gift of the Nil Rate Band in the Will was to give as much as possible to the family without incurring Inheritance Tax with the remainder of the estate going to charity.
What does this decision tell us?
The implication from this judgment is that, in circumstances such as these, where the exact meaning of wording of the Will is unclear, it is likely that the Court will assume that the deceased intended to give the greater amount to the family than to the charity.
So, what can charities learn from this case?
It is usually beneficial to both sides in a dispute to avoid going to court, not least because the losing party generally pays the costs of both sides – which can run to tens, if not hundreds of thousands of pounds.
At Kitsons we are experienced in conducting high-value litigation and we will not hesitate to fight your corner all the way to trial if appropriate. However, it is often beneficial to our clients to negotiate a settlement which avoids the risk and uncertainty of a court hearing. If you become involved in a dispute concerning a Will, we can advise you about your options and chances of success at trial. In difficult cases such as the one outlined in this note, charities would be sensible to look to negotiate settlement of the claim somewhere between the competing amounts.
If you have any queries concerning a potential dispute regarding a Will or Trust, where your charity features as a beneficiary, please contact John Clarke on 01803 206223 or by email at email@example.com