Why Gifts in Wills Might Fail
| Author | Lesley King/Peter Gausden |
| Pages | 85-99 |
Might Fail
8.1 Reasons for failure
There are many reasons why gifts in a will can fail:
(a) disclaimer;
(b) ademption (property matching description not owned at death);
(c) lapse (beneficiary predeceases testator);
(d) forfeiture (beneficiary convicted of killing the testator);
(e) section 15 of the WA 1837 (beneficiary or spouse/civil partner of beneficiary witnesses will);
(f) uncertainty;
(g) gift contrary to public policy;
(h) gift induced by force, fear or undue influence;
(i) doctrine of satisfaction (lifetime gift satisfying gift in the will).
If the gift cannot take effect, its subject matter will pass with the residue of the estate. If the residuary gift fails, the property is undisposed of and passes under the intestacy rules to the deceased’s next of kin.
A gift can also fail, in whole or in part, due to abatement if there are insufficient assets left to fund the gift once the debts of the estate have been paid.
8.2 Disclaimer
8.2.1 Refusal to accept property
Those making wills need to know their wishes may not take effect.
No one can force another to accept an inheritance. Beneficiaries are free to disclaim (that is, refuse to accept) property given to them. However, it is not usually possible to pick and choose; unless the will provides to the contrary, the whole of a gift must be disclaimed or accepted. If, however, a will gives one person two separate gifts, one may be accepted and the
86 Wills: A Practical Guide
other disclaimed. Once a person has accepted any benefit from property (e.g. income from, or interest earned, by it), it is too late to disclaim.
Subject to the above, there is nothing to stop a beneficiary disclaiming, nor (for reasons given below) accepting the property and then giving it away by re-directing to someone else, called a ‘post-death variation’, but there are potential tax consequences unless statutory requirements are satisfied (see para 8.2.2).
A voluntary disclaimer made during the testator’s lifetime is ineffective (see Smith v Smith [2001] 1 WLR 1937) because, until death, a will has no effect. The beneficiary has nothing to accept or disclaim.
A disclaimer does not need to be in any particular form. According to Re Cook [2002] STC (SCD) 318, it can be by conduct. However, it is preferable for the disclaiming beneficiary to write a short statement to the deceased’s PRs who should insist on having something on the file before distributing the property in reliance on the disclaimer.
A person disclaiming has no control over the destination of the disclaimed property. It passes to whoever is next entitled by application of normal succession rules; a disclaimed non-residuary gift falls into residue and if residue is disclaimed, it passes on partial intestacy.
However, there is potential for uncertainty. For example, a substitutional gift expressed to apply if the principal beneficiary ‘predeceases or fails to survive me by 28 days’ does not on the face of it take effect if that beneficiary disclaims as they have neither predeceased nor failed to survive. Section 2 of the Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Act 2011 now says a person disclaiming is deemed to have died immediately before the testator, suggesting the disclaimed property should now pass to the substitute beneficiary. However, the wording of section 2 is not clear and the fictional pre-deceasing may apply only if the disclaiming beneficiary is a child or remoter issue of the testator. Given the potential uncertainty as to how disclaimed property should be dealt with in some cases, coupled with the fact the disclaiming beneficiary has no say in where the property goes, a beneficiary wanting to give up a benefit will normally prefer to enter into a post-death variation (see para 8.2.2). This allows the beneficiary to determine not only who gets the disclaimed property, but also the terms on which it is taken.
8.2.2 Tax implications of disclaimers and post-death variations
Although this chapter is primarily concerned with failure of gifts, it would be wrong not to mention the tax implications of disclaimers and post-death variations as they are very important to beneficiaries.
Normally when someone makes a lifetime gift of property (which includes refusing to take property or redirecting it), they are treated as:
(a) making a potentially exempt transfer for inheritance tax purposes which becomes fully chargeable to tax if they die within 7 years of the transfer; and
(b) making a disposal which could give rise to a charge to capital gains tax if it is of an asset which has increased in value between acquisition and disposal.
EXAMPLE
Ben is left a seaside cottage by his aunt; she leaves the rest of her estate to charity. The cottage was valued at £400,000 when she died. Ben does not want the trouble of maintaining a second home but knows his son, Sam, would like the property. One year after the death, Ben transfers the cottage to Sam when it is worth £420,000.
Ben makes a potentially exempt transfer for inheritance tax of £420,000 and a disposal for capital gains tax purposes, realising a chargeable gain of £20,000.
However, there are two statutory provisions which allow Ben to have the gift read back into his aunt’s will for inheritance tax and/or capital gains tax. For the purpose of these two taxes, the aunt is then treated as having left the property directly to Sam.
The provisions are section 142 of the Inheritance Tax Act 1984 (IHTA 1984) and section 62(6) of the Taxation of Chargeable Gains Act 1992. Both provisions apply if property is disclaimed or the destination is varied in writing within 2 years of death.
In the case of a disclaimer, there are no other requirements. In the case of a variation, it must include a statement that the gift is to be treated as the deceased’s for the purposes of one or both of the two statutory provisions. If a variation favours a charity, evidence must be obtained to show the charity has been informed, for example, its written acknowledgement, before it is effective for inheritance tax purposes – such a variation allows a claim for the charity exemption and a refund of inheritance tax in appropriate circumstances.
In the above example, a disclaimer will not achieve Ben’s purpose as the cottage would pass as part of the residue to charity. A variation allows Ben to ensure the cottage goes to Sam.
Ben will certainly want the gift treated as his aunt’s rather than his for inheritance tax purposes as he will not want to risk a liability to tax should he die within 7 years.
88 Wills: A Practical Guide
On these figures he will also want the gift treated as his aunt’s for capital gains tax purposes as the £20,000 gain exceeds his annual exemption. However, if the cottage had decreased in value by £20,000, he might prefer to treat the gift as his for capital gains tax to give him a £20,000 loss which he can set against any gains he makes in the current tax year or may make in future tax years. If that is what he wants, his variation should omit the statement under the Taxation of Chargeable Gains Act 1992.
8.3 Ademption
Section 24 of the WA 1837 provides that:
… every will...
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