RSPCA v Sharp
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lady Justice Black,The Master of the Rolls |
| Judgment Date | 21 December 2010 |
| Neutral Citation | [2010] EWCA Civ 1474 |
| Docket Number | Case No: A3/2010/0538 |
| Court | Court of Appeal (Civil Division) |
[2010] EWCA Civ 1474
Peter Smith J
Before: The Master of the Rolls
Lord Justice Patten
and
Lady Justice Black
Case No: A3/2010/0538
HC09C02731
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Lord Justice Patten:
This is an appeal by the Royal Society for the Prevention of Cruelty to Animals ("the RSPCA") against a decision of Peter Smith J ( [2010] EWHC 268 (Ch)) on the construction of a will. The judge dismissed their claim on construction and ordered the respondents' costs to be paid out of the estate on an indemnity basis. Both parts of his order are under appeal.
The RSPCA is entitled to the residuary estate of Mr George Mason ("the Testator") who died on 18 th June 2007. By his will dated 19 th January 2005, which was professionally drawn, he appointed Norman James Sharp and his wife Patricia Daphne Sharp as his executors and trustees. His will then went on to provide as follows:
"3. I GIVE the amount which at my death equals the maximum which I can give to them by this my Will without Inheritance Tax becoming payable in respect of this gift:
(a) as to seventy-eight percent (78%) to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one in equal shares absolutely
(b) as to twenty-two percent (22%) to JOHN EDWARD MASON of 4 Jervis Avenue Freezywater EN3 6LT absolutely
4. I GIVE my property situate and known as 39 Malvern Road Gosport in Hampshire PO12 3LH to the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as shall survive me and if more than one jointly and equally absolutely and I direct that the Inheritance Tax (if any) payable on my death in respect of the property and all costs of the registration of the said NORMAN JAMES SHARP and PATRICIA DAPHNE SHARP as proprietors thereof shall be payable out of my residuary estate."
Clauses 5 and 6 of the will contain conventional provisions for the payment of debts and expenses followed by the gift of the Testator's residuary estate in favour of the RSPCA.
At his death the Testator's estate comprised some £771,178 held in bank and building society accounts and £12,832 in cash. His other main asset was his property at 39 Malvern Road, Gosport ("the Property") which was valued for probate purposes at £169,000. At the time of his death the nil rate band for inheritance tax ("IHT") purposes was £300,000. The executors proceeded to distribute the estate by paying to Mr and Mrs Sharp 78% of this sum (£234,000) and by paying the remaining 22% (£66,000) to Mr Mason. The Sharps had, on the evidence, been lifelong friends of the Testator and Mr Mason was his brother and sole surviving relative. The Property was transferred to Mr and Mrs Sharp free of IHT or other charges. After payment of IHT on the estate in the sum of £112,667 some £302,241 was payable to the RSPCA out of residue after the other debts and liabilities of the estate had been discharged.
The RSPCA challenged the executors' interpretation of the will. They contend that the gift in clause 3 is effective to pass to Mr and Mrs Sharp and to Mr Mason only the unused nil rate band as at the Testator's death. To calculate this the value of the Property passing under clause 4 has to be taken into account as part of the transfer of value made on death. Had there been any lifetime gifts within seven years of death (which there were not) they would also have had to be aggregated with the other assets passing on death.
There is no dispute that this is how IHT falls to be assessed. Section 1 of the Inheritance Tax Act 1984 (" IHTA 1984") provides that IHT shall be charged on the value transferred by a chargeable transfer. This is defined in s.2 as a transfer of value: i.e. a disposition as a result of which the value of the transferor's estate immediately after the disposition is less than it would be but for the disposition. The amount by which it is less is the value transferred: see s.3(1). Transfers of value to charities (such as the gift of residue to the RSPCA) are, of course, exempt from inheritance tax.
Section 4(1) provides that:
"(1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death."
A person's estate is defined by s.3(1) as the aggregate of all the property to which he is beneficially entitled. Once calculated IHT is payable on the amount of the chargeable transfer at the rates set out in the applicable bands in Schedule 1 to the Act. The first of these is the nil rate band which, as I mentioned earlier, applied as of the Testator's death to the first £300,000 in value of the estate.
Ms Reed QC submits (as she did to the judge) that "the maximum" which the Testator could give to the legatees under clause 3 "by this my Will without Inheritance Tax becoming payable in respect of this gift" depended on the value of the Property. If it was worth less than the amount of the nil rate band then the amount of the difference would be the maximum sum that could be given under clause 3 without IHT becoming payable "in respect of this gift". She has to accept that, on this construction of the will, the legacies under clause 3 could be reduced to nil depending on whether the value of the Property exceeded the nil rate band. But she places some reliance on the fact that Mr and Mrs Sharp are the beneficiaries under clause 4 and any decrease in their entitlement under clause 3(a) will be matched by an increase in the value of the gift under clause 4. This does not, however, apply to Mr Mason.
Simply in terms of the language of the will, Ms Reed also refers to the direction in clause 4 that the IHT "if any" payable in respect of the Property should be met out of the residuary estate. This, she submits, is a further recognition of how clauses 3 and 4 were intended to work. On her construction of clause 3, no IHT could ever become payable as a result of the pecuniary legacies but tax would become chargeable on the Property if the value exceeded the amount of the nil rate band. The words "if any" are therefore appropriate to cover this eventuality whereas, on the executors' construction of clause 3, they are meaningless. There would always be IHT payable "in respect of" the Property because of the amount passing under clause 3.
The executors' construction of clause 3 requires one to read it as a gift equal to the amount of the nil rate band at death free of tax so that the incidence of IHT on the combined value of the Property and the £300,000 falls to be paid out of residue. Ms Reed submits that if this was the intention then it is striking that clause 3 contains no direction to that effect (unlike clause 4) even though the combined effect of the two gifts would, on the executors' argument, mean that both are necessarily chargeable transfers. It would have been very easy for the draftsman to have given the clause 3 legatees in express terms a share of a sum equal to the nil rate band at the relevant time free of tax had that been his intention. What he in fact gave them was something quite different.
The judge endorsed the executors' construction of the will. He rejected Ms Reed's submission that the Testator had created (and intended to create) a tax efficient will which excluded any charge to IHT unless the value of the Property exceeded the nil rate band.
In relation to Miss Reed's submissions about the words "payable in respect of the gift" in clause 3 and "if any" in clause 4, he said this:—
"16. In my view this is to over complicate the will and is patently wrong. It seems to me to be clear that the Deceased had in mind 2 categories of people on whom he wished to confer his largesse. First there were his friends the Sharps and his brother (his sole surviving relative). Second he decided to make a large bequest to the RSPCA of the residue. He would be aware that any sum passing to the RSPCA would not be subject to IHT.
17. It seems to me clear that the purpose of clause 3 was to bequeath a legacy of the amount that was the maximum amount without inheritance tax being payable. The draftsman intended by the description to cover the possibility that the nil rate band might increase between the date of the will and the death. In other words it was intended that this legacy would be free of tax and would be an amount equal to the nil rate band at the time of the death of the Deceased. The draftsman therefore anticipated increases by his wording.
18. Equally he contemplated by the devise in clause 4 to ensure that the Property passed to his friends the Sharps free of any tax. It seems to me clear that he anticipated that tax was likely to be payable and if it was then it would fall on the residue clause in favour of the RSPCA. That too in my view reflects a clear contemplation that his family and friends were to take the legacy and the Property free of tax and the RSPCA would take the balance but subject to any tax payable arising out of the fact that the bequest and the devise might give rise to an incident of tax.
19. The RSPCA's argument (as long as the Property is worth less than the nil rate band)...
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