Jemma Trust Company Ltd v Lewis & Ors

This is my judgment in relation to two actions for professional negligence against the First Defendants, Kippax Beaumont Lewis ("KBL").

KBL acted as solicitors for the Second Defendant, Peter d’Arcy Liptrott ("Mr Liptrott"), and the Third Defendant, John Forrester ("Mr Forrester"), as executors and trustees of the will of Sir Geoffrey Alan Hulton Bt. ("Sir Geoffrey") dated 5 July 1991 ("the Will").

One of the actions concerns the conduct of KBL in relation to a deed of variation of the Will dated 16 November 1995 ("the DOV Action").

The other action ("the CGT Action") concerns the advice given, or not given, by KBL in relation to capital gains tax ("CGT").

The Claimant, Jemma Trust Company Limited, claims to be beneficially interested in property which vested in Mr Liptrott and Mr Forrester, as executors and trustees of the Will. The Claimant asserts in the DOV Action and the CGT Action causes of action which the Claimant alleges Mr Liptrott and Mr Forrester have, as executors and trustees, against KBL.

Background Facts

The facts surrounding the allegations in the DOV Action and the CGT Action are complex. The following is a brief summary sufficient to understand the broad factual setting for the allegations.

The Hulton family is a long established family, which has owned land in Lancashire for several centuries.

Sir Geoffrey and his wife, Lady Mary Patricia Hulton ("Lady Hulton") had no children.

As I have said, Sir Geoffrey appointed Mr Liptrott and Mr Forrester to be the executors and trustees of the Will. In the remainder of this judgment, I shall refer to Mr Liptrott and Mr Forrester together as "the Executors" and, where appropriate, "the Trustees".

By the Will, Sir Geoffrey gave certain property, which has been referred to in the proceedings as the Hulton Land Fund ("the HLF"), to the Trustees on trust for Lady Hulton during her life, with power to advance capital to Lady Hulton, and, after her death, to his nephew, Hugh Alan Butterfield ("Mr Butterfield"), provided he survived her.

Sir Geoffrey devised and bequeathed the residue of his estate upon trust to pay expenses, debts and tax payable at his death, and, subject thereto, on trust to pay a number of specific legacies, and, subject thereto, for Lady Hulton during her life, and, after her death, to Mr Butterfield, provided he survived her.

By clause 11 of the Will Sir Geoffrey directed that there should be paid out of his residuary estate all inheritance tax ("IHT"), CGT and any other taxes payable on his death and on the death of his wife in respect of, among other things, the assets comprised in the HLF.

Sir Geoffrey also provided, by clause 11 of the Will, that the Trustees should, if requested by Lady Hulton, advance her capital of up to £250,000.

Mr Liptrott was at all relevant times a solicitor and a partner in KBL. Mr Forrester was Sir Geoffrey’s land agent. Both of them had worked for Sir Geoffrey for many years.

In November 1993 Sir Geoffrey entered into a conditional contract for the sale of part of the land comprised in the HLF ("the Hulton Land") to P E Jones (Contractors) Limited ("the Jones Land").

Sir Geoffrey died on 20 November 1993. At the time of Sir Geoffrey’s death, Lady Hulton was suffering from severe senile dementia, and required full-time care at home.

At all relevant times, at and following Sir Geoffrey’s death, Mr Butterfield was resident and ordinarily resident, for CGT purposes, outside the UK.

At all times between the death of Sir Geoffrey and August 2000, KBL acted for the Executors and the Trustees. Within KBL, advice to the Executors and the Trustees was principally given by Mr Stephen Marriott, who is qualified as a barrister and was, during that period, employed as an associate by KBL. Mr Liptrott also acted and gave advice, principally in relation to conveyancing matters.

In February 1994 the Executors met to consider tax planning possibilities in respect of Sir Geoffrey’s estate ("the Estate").

They instructed Robert Venables QC and Mr Robert Grierson to advise on various tax planning matters, including whether or not business property relief would be available in respect of the Hulton Land and, if so, what form a deed of variation of the Will should take in order to enable the Executors and the Trustees to utilise such relief. Mr Venables and Mr Grierson advised in consultation on 9 February 1994. They were subsequently instructed to advise in writing.

On 8 April 1994 the Executors signed the Inland Revenue account for the Estate, showing the net value of the Estate at £8,280,386.

On 19 April 1994 probate of the Will was granted to the Executors.

On 26 April 1994 Lady Hulton’s brother, Major Reynolds, was appointed her receiver by the Court of Protection ("the CP").

On 24 August 1994 the sale of the Jones Land was completed for £3,750,000, subject to a retention of £800,000.

On 25 November 1994 Mr Venables and Mr Grierson produced a substantial Opinion on tax planning in relation to the Estate, including, in particular, the mitigation of the liability of the Estate to IHT.

In early February 1995 the Executors decided to pursue a particular course of action to attempt to mitigate the liability to IHT prospectively payable on the HLF on Lady Hulton’s death. That course of action required the execution of a deed of variation of the Will, by which Lady Hulton would release her life interest in the HLF, thereby converting the transfer of that portion of the Estate on Sir Geoffrey’s death from an exempt transfer into a chargeable transfer, and the utilisation of business property relief and agricultural relief, if and to the extent the same were available, in respect of such chargeable transfer.

On 20 July 1995 KBL sent the CP an application by the Executors for an order that such deed of variation ("the DOV") be executed on Lady Hulton’s behalf ("the Application").

The Official Solicitor was joined to the Application to represent the interests of Lady Hulton. Major Reynolds was notified as her receiver.

The Application was accompanied by an affidavit of Mr Liptrott and an affidavit of Mr Forrester.

From time to time various amendments were made to the draft DOV. Several affidavits opposing the Application were filed by Major Reynolds and others, principally members of Lady Hulton’s family ("the Reynolds' family") or persons acting at their request.

Mr Forrester and Mr Liptrott swore further affidavits.

In about August or September 1995 Mrs Monica Cooke, one of the sisters of Lady Hulton, was appointed to act, with Major Reynolds, as Lady Hulton’s joint receiver.

The Application came before the Master of the CP, Mrs MacFarlane, on 24 October 1995. The substance of the proposed DOV, at that stage, was that, if the Trustees advanced Lady Hulton £435,000 pursuant to their discretionary powers of advancement out of the capital of the HLF, the Will would be varied by the elimination of Lady Hulton’s life interest in the HLF. Notwithstanding the Official Solicitor’s support of the Application, the Master dismissed the Application in view of the opposition of Major Reynolds and Mrs Cooke.

The Executors appealed, and added Mr Butterfield as appellant.

The appeal came before Mr Justice Lightman in early November 1995. He adjourned the appeal in order that further evidence could be provided in support of the appeal.

Further affidavits were sworn by Mr Liptrott and Mr Forrester.

The appeal was restored before Mr Justice Ferris on 15 November 1995. Between the conclusion of the first day of the hearing and the commencement of the second day, an agreement was reached between all the parties to the appeal that opposition to the Application and to the appeal would be withdrawn if the sum of £750,000 was inserted as the capital sum to be paid to Lady Hulton as the condition for the variation of the Will. In the light of that agreement, Mr Justice Ferris ordered on 16 November 1995 that the DOV, containing those terms, be executed by Major Reynolds on behalf of Lady Hulton.

On 17 November 1995 the Trustees advanced £750,000 to Lady Hulton.

On 18 October 1996 the Capital Taxes Office ("the CTO") expressed the conclusion that the DOV was not a deed of variation within the Inheritance Tax Act 1984 ("IHTA") s.142, but gave rise to a potentially exempt transfer ("PET") by Lady Hulton.

On 19 December 1996 KBL informed the CTO that the Executors accepted the official view of the CTO that the DOV effected a PET, and requested a certificate of discharge under IHTA s.239 in respect of IHT on Sir Geoffrey’s death.

On 28 October 1997 the CTO issued the certificate of discharge ("the Certificate of Discharge").

On 29 November 1997 Mr Liptrott and Mr Forrester, as Executors, executed an assent in favour of themselves, as Trustees ("the 1997 Assent"). The 1997 Assent was expressed to relate to "the Hulton Land", which was described by reference to a vesting deed of 24 February 1926. There is uncertainty as to whether the 1997 Assent included only land comprised in the HLF or whether it included other assets comprised in the HLF at that time, such as, for example, the proceeds of sale of the Jones Land and other properties following the death of Sir Geoffrey.

Lady Hulton died on 19 January 1998.

On 29 July 1998 KBL sent the Inland Revenue Form IHT100 to the CTO. It was stated in the schedules that the Executors had accepted the official view of the CTO that the DOV had created a PET. It was also stated that the Executors had vested the assets of the HLF in the Trustees, but the Trustees did not accept that Lady Hulton had made a PET, and they contended that the DOV was effective (for the purposes of IHTA s.142).

In November 1998 the Executors/Trustees consulted Kevin Prosser QC in consultation on the taxation position.

In April 1999 the CTO indicated informally that the opinion of the Inland Revenue’s solicitor was that IHTA s.142 did apply to the DOV, and that Lady Hulton had not made a PET.

Notwithstanding that the Revenue had initially stated, on 7 October 1998, that the Revenue would not be bound by the Certificate of Discharge, the CTO confirmed on 28 September 1999 that the Certificate of Discharge stood, even though the premise upon which it was issued was mistaken.

Between about July 1999 and December 2000 the Executors/Trustees were in discussion with the Inspector of Taxes as to the proper basis for tax returns for the years 1994/95 to 1997/98.

In August 2000 KBL was replaced by Brabners as solicitors to the Executors and the Trustees, following Mr Marriott’s move from KBL to Brabners.

On about 12 December 2000 the Inspector of Taxes agreed with the Executors to treat disposals of land included in the HLF during the tax years 1994/95 and 1995/96 on a no gain/no loss basis.

The parties

As I have said, the Claimant claims to have a beneficial interest in the Estate and the HLF, and, in that capacity, to be entitled to enforce against KBL the causes of action which the Claimant alleges the Executors and the Trustees have against KBL.

The Claimant claims that it acquired its interest pursuant to an assignment to the Igloo Trust by Mr Butterfield of his interest in the HLF and Sir Geoffrey’s residuary estate by a deed of acceptance and appointment dated 23 December 1999. The Claimant claims that the Igloo Trust is a settlement governed by the laws of Jersey made by Mr Butterfield on 13 December 1999, the original trustee of which was Bedell Cristin Trustees Limited, and the current trustee of which is the Claimant.

KBL do not formally accept that the Claimant has a sufficient interest in the HLF and the Estate to bring the DOV Action and the CGT Action.

The parties agreed, however, early in the trial of the two Actions before me, that the Claimant would be regarded as having a sufficient interest to bring the two actions provided that Mr Liptrott and Mr Forrester were joined as Defendants to the proceedings in their capacity as Executors and Trustees, and the Claimant’s Particulars of Claim were amended in both Actions to make clear that the causes of action are prosecuted by the Claimant on a purely derivative basis, with no relief being sought against Mr Liptrott and Mr Forrester, whether personally or in their capacity as Executors or Trustees.

Accordingly, on that basis and for those reasons, I added Mr Liptrott and Mr Forrester as Defendants to the two Actions, with liberty for them to apply to set aside my order. Ms Amanda Hardy, counsel, appeared on their behalf, to seek, and accept, assurances by the Claimant that Mr Liptrott and Mr Forrester were joined purely for procedural and practical purposes, without any relief being sought against them. On receiving those assurances, she informed the Court that they did not seek to challenge their joinder.

Appearances

The Claimant was represented by Mr Robert Ham QC and Mr Paul Emerson.

KBL was represented by Mr Justin Fenwick QC and Mr Alex Hall-Taylor.

As I have said, Ms Amanda Hardy appeared briefly for Mr Liptrott and Mr Forrester, purely to deal with the question of their joinder to the two actions. She has played no further part, and did not appear for the rest of the hearing.

The evidence

There was a considerable amount of documentary evidence before me.

In addition, witness statements were made, and oral evidence of fact was given, on behalf of the Claimant, by Mr Butterfield, and, on behalf of KBL, by Mr Forrester, Mr Marriott and Mr Liptrott.

Expert evidence was given, on behalf of the Claimant, by Mr John Pollock, an actuary, and by Mr Colin Sharp, an accountant.

Expert evidence was given, on behalf of KBL, by Mr Keith Harbage, an accountant.

I am satisfied that all the witnesses were doing their best to assist the Court to the best of their recollections, knowledge and abilities.

Although the evidence of Mr Sharp and Mr Harbage contained much relevant and helpful information, there was a tendency, at critical points, for their evidence to stray into points of law or matters which were really for the Court to determine, namely whether the conduct of KBL or the Executors or the Trustees was improper or negligent. For this reason, I have not found it necessary in the rest of this judgment to refer to their evidence to any significant extent.

Retainer, duty of care, causation

It is common ground that, between the death of Sir Geoffrey and about August 2000, KBL were retained by the Executors and the Trustees to advise in connection with the Estate and the trusts created by the Will, including the trusts of the HLF.

It is also common ground that it was part of the retainer of KBL to advise the Executors and the Trustees as to tax matters relating to the Estate and the trusts of the Will, including, in particular, IHT and CGT.

The legal principles relating to the DOV Action and the CGT Action are not in dispute. The standard of care owed by KBL to the Executors and the Trustees was the standard of care to be expected of reasonably competent solicitors, holding themselves out as having expertise to advise on the matters on which KBL advised the Executors and the Trustees: Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582. Not every error of judgment amounts to negligence.

In relation to causation of loss resulting from negligence, the burden is on the Claimant to establish, on a balance of probabilities, what the Executors would have done, but for any negligence of KBL. Where loss depends on what a third party would have done, but for such negligence, the Claimant must satisfy the Court that there is a real or substantial, rather than a speculative, chance that the third party would have acted in the way which the Claimant asserts: Allied Maples Group Ltd. v. Simmons & Simmons [1995] 1 WLR 1602.

The DOV Action

The allegations

The Claimant’s case against KBL, in respect of the DOV, rests on two principal allegations, and a large number of secondary allegations.

The two principal allegations are that, (1) by virtue of the negligence of KBL, the execution of the DOV could only be procured on terms for the payment of £750,000 to Lady Hulton, which was substantially in excess of the amount that ought to have been specified in the DOV; and, (2) unnecessary costs were incurred in the Application, which could and should have resulted in an order by the Master for execution of the DOV, without the necessity for any appeal.

The supporting allegations of negligence may be summarised briefly as follows:

i.

failure to advise the Executors to obtain up to date valuations of assets within the HLF;

ii.

failure to advise the Executors to obtain an actuary’s report prior to making the Application;

iii.

failure to make the Application promptly;

iv.

failure promptly to obtain accounts;

v.

failure to act in a manner likely to secure the co-operation and support of Major Reynolds and other members of the Reynolds’ family for the Application;

vi.

failure to respond to reasonable requests for information by Major Reynolds in connection with the Application;

vii.

failure to explain the basis of the Application to the Reynolds’ family;

viii.

failure to negotiate the terms of the proposed DOV with Major Reynolds;

ix.

failure to present all the relevant material to the CP, or, alternatively, failure to present all of the relevant material in a clear and cogent manner;

x.

failure to obtain full and up to date medical evidence of the condition of Lady Hulton and, in particular, her life expectancy;

xi.

failure to arrange for the Executors to be represented by counsel at the hearing before the Master on 24 October 1995;

xii.

failure to present the case properly before the Master;

xiii.

the preparation of affidavits that were unclear, contradictory and incomplete;

xiv.

failure to keep Mr Butterfield informed as to the progress of the Application, and the reasons for the failure of the Application in the first instance;

xv.

failure to obtain, and place before the CP, proper evidence of Lady Hulton’s estate or assets, and to consider their possible impact on the Application;

xvi.

failure to provide the CP with a proper statement of the value of the assets and liabilities of the Estate;

xvii.

failure to identify the appropriate lump sum to be paid in respect of Lady Hulton’s life interest, and causing confusion in the minds of the Executors, the advisers to Lady Hulton, and Mr Butterfield, by putting forward several different figures;

xviii.

failure to supply in a timely manner sufficient relevant information to Mr Butterfield to enable him to consider the proposal and its implications;

xix.

failure to provide a skeleton argument to the CP.

I shall consider, in relation to each of those allegations of negligence, the defence of KBL.

Before doing so, it is necessary to give further details of the background to the DOV and the Application.

Further background

As I have already said, following Sir Geoffrey’s death, the Executors/Trustees were concerned to minimise the payment of IHT.

On Sir Geoffrey’s death, on the then terms of the Will, there was, for IHT purposes, an exempt transfer of both the HLF and Sir Geoffrey’s residuary estate in view of the life interest of Lady Hulton and the exemption from IHT in respect of transfers to a surviving spouse. IHT would, however, be payable on the death of Lady Hulton.

In February 1994 the Executors/Trustees consulted Mr Venables as to possible arrangements that might reduce or eliminate the IHT prospectively payable on Lady Hulton’s death in respect of the HLF. One of the matters that was discussed at the consultation was the possibility of invoking business property relief.

Mr Venables and Mr Grierson were instructed to advise further in writing. Their written Opinion was produced on 24 November 1994.

The Opinion of Mr Venables and Mr Grierson is long, complex and detailed. It is not necessary, for the purpose of this judgment, to attempt to summarise its principal features.

It is sufficient to say that, following discussions with counsel and following receipt of the Opinion, KBL and the Executors/Trustees conceived a tax planning arrangement under which the Will would be varied within two years of Sir Geoffrey’s death in such a way as to eliminate Lady Hulton’s life interest in the HLF, so that, by virtue of IHTA s.142, the IHTA would apply on Sir Geoffrey’s death as though a life interest in the HLF had never been conferred on her. Whilst this would mean that the surviving spouse exemption on Sir Geoffrey’s death would be lost in relation to the HLF, it was thought that the arrangement would have the advantage of eliminating IHT that would otherwise be payable in respect of the HLF on Lady Hulton’s death, while leaving the Executors/Trustees free to attempt to invoke business property relief or agricultural relief, so reducing or eliminating the charge to IHT on Sir Geoffrey’s death.

Even if the claim to business property relief was not successful, the Executors/Trustees considered that the proposed tax planning arrangement would still be beneficial in that it would provide some protection in the event oft IHT rates increasing between Sir Geoffrey’s death and Lady Hulton’s death, and also in the event of a significant increase in the value of the HLF between the dates of those deaths.

Although the DOV went through a number of drafts, the basic concept throughout was that, if a capital sum was paid to Lady Hulton by the Executors/Trustees out of the Estate, Lady Hulton would, in effect, release her life interest. It was important that the capital sum should not be presented as consideration for the release, since such "extraneous" consideration would preclude the retrospective deeming provisions of IHTA s.142: see s.142(3). Accordingly, at least in the final form of the DOV, the elimination of the provisions of the Will conferring a life interest on Lady Hulton in the HLF was contingent upon an exercise by the Trustees of their discretionary power under clause 7(A)(ii) of the Will to advance capital of the HLF to Lady Hulton.

In order to give effect to the proposed arrangement, it was necessary for the CP to direct that the DOV be executed on behalf of Lady Hulton. The CP had power to make such an order under the Mental Heath Act 1983 ("MHA") ss.95 and 96(1)(b) and (d).

MHA s.95 provides, so far as relevant, as follows:

"95 (1) The Judge may, with respect to the property and affairs of a patient, do or secure the doing of all such things as appear necessary or expedient –

a.

for the maintenance or other benefit of the patient,

b.

for the maintenance or other benefit of members of the patient’s family,

c.

for making provision for other persons or purposes for whom or which the patient might be expected to provide if he were not mentally disordered, or

d.

otherwise for administering the patient’s affairs.

(2)

In the exercise of the powers conferred by this section regard shall be had first of all to the requirements of the patient …"

MHA s.96(1)(b) and (d) provide as follows:

"96(1) Without prejudice to the generality of section 95 above, the judge shall have power to make such orders and give such directions and authorities as he thinks fit for the purposes of that section and in particular may for the purposes make orders or give directions or authorities for –

(b)

the sale, exchange, charging or other disposition of or dealing with any property of the patient;

(d)

the settlement of any property of the patient, or the gift of any property of the patient to any such persons or for any such purposes as mentioned in paragraphs (b) and (c) of section 95(1) above."

Under Rule 20 of the Court of Protection Rules 1994 (which were the Rules then applicable) an application under MHA s.96(1)(d) could be made only by:

"(a)

the receiver for the patient, or

(b)

any person who has made an application for the appointment of a receiver which has not yet been determined, or

(c)

any person who, under any known will of the patient or under his intestacy, may become entitled to any property of the patient or any interest in it, or

(d)

any person for whom the patient might be expected to provide if he were not mentally disordered,

(e)

an attorney acting under a registered enduring power of attorney, or

(f)

any other person whom the court or, where it relates to a function to be exercised by him, the Public Trustee, may authorise to make it."

The Executors took it upon themselves to procure the implementation of the tax planning arrangement involving the DOV and the Application. The Application was made by them pursuant to Rule 20(f) of the CP Rules.

The reason why the Executors, on the advice of KBL, took that pro-active role was explained in the evidence of Mr Forrester, Mr Marriott and Mr Liptrott. All gave evidence that tax planning is an important factor in the preservation of landed estates for the benefit of successive generations, and that it was part of the retainer of KBL to consider ways in which the HLF could be passed to Mr Butterfield, or others contingently entitled in remainder to the HLF, as economically as possible and with the minimum taxation. Mr Marriott’s evidence was that there was no reason to believe that anyone, other than the Executors, could fund the necessary steps to implement the tax saving scheme.

Negligence

Underlying the whole of the Claimant’s case in the DOV Action, even though not expressly alleged in the amended Particulars of Claim, is the criticism that the conduct of the Executors in taking the central role in promoting the DOV and the Application was entirely inappropriate.

I agree with the Claimant that the role adopted by the Executors, on the advice of KBL, in formulating and promoting the DOV, and prosecuting the Application, was inappropriate and improper.

The role adopted by the Executors inevitably placed them in an impossible position of conflict of duties. As Executors, and as Trustees, they owed fiduciary duties to all those beneficially interested in the HLF. The tax planning arrangements, of which the DOV formed the central plank, involved a variation of the trusts of the HLF under the Will by elimination of the life interest in possession of Lady Hulton and an acceleration of the interest of Mr Butterfield. That variation was itself dependent upon the payment of a capital sum to Lady Hulton out of the HLF. In assuming the pivotal role in promoting the DOV, putting forward a specific capital sum to be paid to Lady Hulton as a pre-condition of the elimination of her life interest, and in seeking to persuade the CP to make an order for the execution of the DOV, the Executors placed themselves in a position in which it was quite impossible to satisfy their fiduciary obligations to both Lady Hulton and to Mr Butterfield.

The Executors, and KBL, were undoubtedly acting in good faith and were motivated by the desire to implement what they believed were the wishes of Sir Geoffrey in relation to the disposition of the HLF, namely that the immediate overriding consideration of the Executors/Trustees should be to ensure that Lady Hulton was properly provided for, and, subject to that, to ensure that the HLF passed to Mr Butterfield as soon and as economically as possible. Nevertheless, in seeking to balance the interests of Lady Hulton and Mr Butterfield, the Executors, and KBL who advised them, appear to have been entirely unaware that they could not do so, consistently with their fiduciary obligations to both beneficiaries. The inevitable result was that, in some respects, they acted against the interests of Lady Hulton and, in other respects, they acted against the interests of Mr Butterfield.

As Mr Ham observed pithily at one point in the hearing, the duty of the Executors and the Trustees was to uphold and to enforce the trusts of the Will and not to drive forward proposals for their change.

It is possible that, consistently with their fiduciary obligations to all the beneficiaries, the Executors/Trustees could have adopted a facilitative role in relation to negotiations between persons acting for Lady Hulton, on the one hand, and Mr. Butterfield, on the other hand.

Mr. Marriott, as I have said, suggested in his evidence that no one, other than the Executors, could have funded the negotiation of the DOV and the making of the Application. There is, in fact, no evidence to support that conclusion. The point was never put to Mr. Butterfield in cross-examination. The Trustees had power to advance capital to Lady Hulton to meet any expenses she might incur. Further, all parties could reasonably have expected that the CP would order their costs of any successful Application to be paid out of the Estate, in accordance with the usual practice. Moreover, there is no contemporaneous evidence that Executors actually considered whether or not they should take a neutral or facilitative role rather than the pro-active role they actually adopted, and that they opted for the latter because of funding difficulties on the part of Mr. Butterfield or Lady Hulton.

Adoption of a neutral or facilitative role by the Executors would have been consistent with the normal way in which variations under the Variation of Trusts Act 1958 ("the VTA") and family arrangements are conducted. The Executors’ approach, driving forward the tax saving plan on their own initiative, giving the appearance of negotiating on behalf of Mr. Butterfield, and then prosecuting the Application, was unorthodox and, in my judgment, manifestly inappropriate.

Nor was that erroneous position of the Executors rectified when the Official Solicitor was appointed, after the commencement of the Application, to act for Lady Hulton. As I shall elaborate in due course, the opportunity had been lost, by that stage, of an agreement negotiated with Lady Hulton’s receiver and, therefore, of the Application proceeding as unopposed. Further, even after the commencement of the Application, the attitude of the Executors was influenced by what they understood to be the wishes of Sir Geoffrey, as mentioned above, and this affected both the amount of the capital sum they considered appropriate to be given to Lady Hulton as a pre-condition of her release of her life interest and their response to requests by Major Reynolds for information and other matters related to the Application. The consequence was that the Application remained opposed until an agreement was reached with Major Reynolds and Mrs. Cooke, on appeal from the Master.

The approach of the Executors/Trustees was inconsistent with advice given by Mr Venables and Mr Grierson. In an Opinion of 22 August 1994, they advised that, whether an application was made to the CP or to the High Court for a variation under the VTA, it would not be appropriate for the Executors to institute the proceedings.

In notes on procedure prepared by Mr Grierson, and given to KBL on or after 24 November 1994, Mr Grierson stated clearly that, in the CP, the applicants would be nieces and nephews of Sir Geoffrey.

The hasty addition of Mr Butterfield as an appellant from the decision of the Master (presumably after advice by counsel who drafted the notice of appeal), without his knowledge or consent, appears to have been a late recognition of the anomalous role of the Executors as the applicants.

The responsibility for the misguided approach of the Executors to the DOV and the Application must lie with KBL, who advised the Executors in relation to the tax planning arrangements and acted, on their behalf, in the Application.

Against this background, I turn to consider the specific allegations of negligence in the amended Particulars of Claim.

The Claimant’s case is that, had those instances of negligence not taken place, there would have been a real or substantial chance that Lady Hulton’s receivers, initially Major Reynolds alone, and subsequently Major Reynolds and his sister Mrs Cooke jointly, would have agreed a much lower figure than £750,000 as the capital payment to be paid to Lady Hulton specified in the DOV; and so the Application would have come before the Master as an unopposed application, or alternatively, even if opposed, the Master would nonetheless have made an order for execution of the DOV on behalf of Lady Hulton.

In essence, the Claimant’s case is that, had the Executors, in compliance with their fiduciary duties to both Lady Hulton and Mr Butterfield, been entirely open and not sought to favour one beneficiary over the other in any respect, the Executors would have obtained up to date valuations, as requested by Major Reynolds, and an actuary’s report, and would have responded positively to all reasonable requests for information by Major Reynolds, and explained to the Reynolds’ family from the outset precisely the thinking behind the DOV and the Application, and taken steps to ensure the active engagement of Major Reynolds and Mr Butterfield in negotiations over the DOV and the capital sum intended to be paid to Lady Hulton.

The Claimant claims that, had that approach been taken, and had the Executors generally acted in a manner likely to secure the cooperation and support of Major Reynolds and the Reynolds’ family, it is likely that it would have been possible to obtain full and up to date medical evidence of the condition of Lady Hulton and, in particular, her life expectancy, and full and proper details of Lady Hulton’s assets. The Claimant says that, if all that had been done, there would have been a substantial prospect of a negotiated agreement at an early stage between Major Reynolds and the Reynolds’ family, on the one hand, and Mr Butterfield, on the other hand, which would not have involved so large a capital sum for Lady Hulton as £750,000, and that the Application would have proceeded before the Master on an unopposed basis. All the costs that were, in fact, incurred on the appeal from the Master would, therefore, have been avoided.

The Claimant further claims that the Application should have been brought more promptly; there should have been full and clear affidavits, of the kind that were ultimately placed before Mr Justice Ferris; and also information as to Lady Hulton’s assets, as well as the assets and liabilities of the Estate; a skeleton argument ought to have been placed before the Master; counsel should have been instructed on the hearing before the Master; and the case should have been presented to the Master in a clear and cogent manner, so that the Court could understand the implications of the proposed DOV on both the Estate and Lady Hulton. The Claimant claims that, if the Executors had adopted a proper attitude, and all those steps had been taken, then, notwithstanding the opposition of Major Reynolds and members of the Reynolds' family, the Master or, on appeal, a judge of this Division sitting as a Nominated Judge of the CP, would have been persuaded to order the execution of the DOV on terms that involved a much smaller payment to Lady Hulton than £750,000.

In my judgment, at least some of those criticisms are justified and constituted negligence on the part of KBL.

KBL should have advised the Executors, for the reasons I have given, not to take the central, pro-active role which they did take in relation to the DOV and the Application. The Executors having taken that role, however, KBL ought to have advised the Executors, and taken steps on behalf of the Executors, to ensure that Lady Hulton and Mr. Butterfield were treated equally and openly in relation to all relevant information and other matters, and to have ensured that the Application was conducted in all respects in a proper manner.

The impression which the Executors gave to Major Reynolds and the Reynolds’ family was that the Executors were, in effect, acting in the interests of Mr Butterfield. Indeed, in some respects, that was precisely what they were doing. Whereas Mr Butterfield was at all times kept informed of the advice of Mr Venables and Mr Grierson, Major Reynolds and his sisters were not. The tax planning arrangements were discussed with Mr Butterfield by the Executors, acting on the advice of KBL. They were not discussed with Major Reynolds or his sisters.

Prior to the Application, KBL, on behalf of the Executors, never explained to Major Reynolds, or those acting on his behalf, precisely what was the object and intended tax consequences of the proposed arrangements and the likely amount of the tax saving.

Further, it appears from the oral evidence that the original strategy of the Executors, on the advice of KBL, was to initiate negotiations with Major Reynolds from a starting position that no capital sum or only a low capital sum should be offered to Lady Hulton as a pre-condition of her release of her life interest.

It is not surprising that, as early as March 1994, Major Reynolds was complaining that the Executors were failing to deal in an even-handed way with both Lady Hulton and Mr Butterfield, towards both of whom the Executors owed fiduciary duties: see letter 7 March 1994 from Major Reynolds to his solicitor Mark Fitzgerald-Hart.

Nor did the Executors seek to engage Major Reynolds in active negotiations as to the terms of the DOV, including, in particular, the capital payment to be made to Lady Hulton. There were repeated indications, in correspondence between Major Reynolds and KBL and also in discussions between Major Reynolds and Mr Marriott, that Major Reynolds and his sisters were keen to discuss any proposed variation to the Will.

Further, it is clear from the contemporaneous written documentation that, although Major Reynolds’ sisters had strong moral objections to the variation of the Will in a manner which cut down Lady Hulton’s life interest, Major Reynolds himself was willing to negotiate. Indeed, the fact that Major Reynolds and Mrs Cooke did ultimately agree to the execution of the DOV, on terms which included the pre-condition of a £750,000 payment to Lady Hulton, shows that they were willing to negotiate and compromise. There is no evidence, however, of any serious attempts by the Executors, or KBL on their behalf, to enter into any genuine negotiations around a sensible and proper capital sum for Lady Hulton prior to the hearing before the Master.

Bearing in mind the Executors’ misguided approach to their role, and the objective they were intending to pursue, namely the transfer of the HLF to Mr Butterfield as economically as possible, none of this is surprising. The Executors were proceeding, on the advice of KBL, on the basis that all that should be paid to Lady Hulton was a capital sum sufficient to compensate her for the loss of income from the HLF, without regard to the tax advantage it was hoped to achieve and which would benefit Mr Butterfield, and without regard to the acceleration of Mr Butterfield’s interest and, generally, without regard to all the factors that would normally be taken into account on the partition of a capital fund between those having different interests in it.

Mr Fenwick did not seek to challenge, at least in any forceful way, the allegations that KBL failed to act in a manner likely to secure the co-operation and support of Major Reynolds and the Reynolds' family, to respond to reasonable requests for information from Major Reynolds, to explain the basis for the Application to the Reynolds' family, or to negotiate the terms of the proposed DOV with Major Reynolds. I find that there was negligence in all those respects.

The position with regard to the other allegations of negligence in the amended Particulars of Claim is less straightforward.

It is convenient, at this point, to state the approach of the Court in applications such as that made by the Executors to the CP. The relevant principles were summarised as follows by Sir Robert Megarry VC in Re D (J) [1982] 1Ch 237 (a case concerning a statutory will of a patient), at pp.242ff:

"… Though the statutory guidance is exiguous, it seems possible to state five principles or factors which should guide the court…

The first of the principles or factors which I think it is possible to discern is that it is to be assumed that the patient is having a brief lucid interval at the time when the will is made. The second is that during the lucid interval the patient has a full knowledge of the past, and a full realisation that as soon as the will is executed he or she will lapse into the actual mental state that previously existed, with the prognosis as it actually is. …

The third proposition is that it is the actual patient who has to be considered and not a hypothetical patient. One is not concerned with the patient on the Clapham omnibus. …

… But subject to all due allowances, I think that the court must seek to make the will which the actual patient, acting reasonably, would have made if notionally restored to full mental capacity, memory and foresight. If I may adapt Dr. Johnson’s words, used for another purpose, the court is to do for the patient what the patient would fairly do for himself, if he could.

Fourth, I think that during the hypothetical lucid interval the patient is to be envisaged as being advised by competent solicitors. The court will in fact be making the will, of course, and the court should not make a will on the assumption that the terms of the will are to be framed by someone who, for instance, knows nothing about lapse and ademption. Furthermore, as the court will be surveying the past and the future, the hypothetically lucid patient should be assumed to have a skilled solicitor to draw his or her attention to matters which a testator should bear in mind…

Fifth, in all normal cases the patient is to be envisaged as taking a broad brush to the claims on his bounty, rather than an accountant’s pen. There will be nothing like a balance sheet or profit and loss account…

Now I certainly do not say that these principles or factors are either exhaustive or very precise, nor am I altogether convinced that the notional lucid interval is the best way of expressing what the court has to do. …

…However, it has found its way into this branch of the law; in most ordinary cases I think it will suffice, and so I have adapted and, perhaps, expanded it. …"

There were numerous requests by Major Reynolds for an up to date valuation of the assets in the HLF. These were always refused by the Executors, and by KBL, acting on the Executors’ behalf. Further, when valuers were appointed by Major Reynolds, they were refused access to the Hulton Land. KBL never advised the Executors that an up to date valuation should be provided, and that the Executors should co-operate with any valuers appointed by Major Reynolds.

In the usual case in which a settled fund is to be divided between the life tenant and the person or persons entitled in remainder, an up to date valuation will be essential. Bearing in mind the principles in Re D (J), Major Reynolds was perfectly justified in seeking such a valuation.

In part, the refusal of the Executors to provide, or co-operate in the provision of, an up to date valuation of the HLF stemmed from a misunderstanding by the Executors, acting on the advice of KBL, to the exercise that would be carried out by the CP in considering whether or not to order the execution of the DOV on Lady Hulton’s behalf.

The approach of the Executors was, as I have said, that the capital sum to be paid to Lady Hulton, as a condition precedent to the release of her life interest, should be sufficient, but no more than was necessary, to compensate her for the loss of the anticipated income from the HLF. Further, in reaching their conclusion as to the amount of income that would be lost to Lady Hulton, the Executors acted on the basis that they would continue Sir Geoffrey’s policy of paying for capital improvements out of rental income.

The Executors’ misguided approach was the product both of a mistaken understanding of the legal principles that would guide the CP, but also of the conflict of duty in which the Executors were placed by taking the pivotal role in the promotion and implementation of the tax saving scheme. The extent of the misconception of the Executors, and of KBL, is highlighted by their view that, in deciding what would be an adequate capital sum to compensate Lady Hulton for the loss of income, it was appropriate to take into account (in deflating the sum that might otherwise be appropriate) the income which she received, and her capital assets, apart from her interest in the HLF.

In addition to the generally mistaken approach of the Executors and KBL, there were special reasons of prudent management which influenced the decision of the Executors not to obtain, or co-operate in obtaining, an up to date valuation of the HLF.

The contemporaneous documentation, as well as the oral evidence of Mr Forrester, Mr Marriott and Mr Liptrott, highlight the concern of the Executors, at the time that, an independent valuation would be likely to produce higher values than the values placed by the Executors on the Estate for probate. As I shall explain later, in the context of the CGT Action, at the time in question, that is to say before the DOV had been executed and before the Certificate of Discharge was obtained, there were sound reasons why the Executors wanted to maintain low probate values. The Executors were concerned that, if there was brought into existence an independent valuation with higher values than probate values, this would be unhelpful in subsequent negotiations with the District Valuer as to proper probate values.

Mr Ham pointed out to KBL’s witnesses that the hearing of the Application would be in private. That, however, would have provided no comfort to the Executors if a valuation had been produced prior to the Application for the purpose of negotiations with Major Reynolds. Further, as Mr Liptrott forcefully observed, even after the Application the fact that the hearing was in private would provide no absolute safeguard against the valuation achieving wider publicity, and, indeed, its very existence might have placed KBL and the Executors in a serious professional and ethical dilemma in subsequent discussions with the District Valuer, if its existence was not disclosed to the District Valuer.

Furthermore, and critically, in a letter to KBL dated 15 September 1995 the Assistant Official Solicitor, Mr W H McBryde, stated that the question of whether a further valuation of the Hulton Land should be given was one for the Official Solicitor and not Lady Hulton’s receiver, and he confirmed that he was quite prepared to deal with the matter on the existing valuation evidence. In due course, Mr McBryde made clear that the Official Solicitor supported the Application for the execution of the DOV on terms of a capital payment to Lady Hulton of £435,000, without the need for any further valuation.

In those unusual and exceptional circumstances, notwithstanding the usual requirement for an up to date valuation in the case of a VTA application or a family arrangement, I do not consider that it was negligent of KBL to fail to advise the Executors that they should obtain, or co-operate in obtaining, up to date valuations of the assets in the HLF.

Further, I conclude that, even if KBL had so advised the Executors, it is probable that the Executors would not have obtained, or co-operated in obtaining, an up to date valuation of the assets in the HLF, but would have sought to avoid the need for a valuation by negotiating with Major Reynolds and making the Application with a concession that there was a legitimate range of possible values of the HLF.

As regards the absence of an actuary’s report, it is the Claimant’s case that, not only was such a report appropriate before the Application, but also that, without the report, it was not possible for the Court properly to quantify the value of Lady Hulton’s life interest in the HLF: paragraph 5.2 of the amended Particulars of Claim.

The Claimant relies upon the evidence of Mr Pollock and his report dated 12 August 2002. In that report 4.9% of the HLF was apportioned to Lady Hulton’s interest. The probate value of the HLF was £5.6 million, 4.9% of which is just under £275,000.

In written Replies to a Request by KBL for further information made on 10 March 2002, the Claimant stated that "the appropriate lump sum" which "should properly have been paid to Lady Hulton" "as revealed by the actuarial evidence obtained after the Application" was £275,000.

In my judgment, KBL ought to have advised the Executors to obtain an actuary’s report.

Although not decisive, such a report is a standard and, usually, an essential tool, in the negotiations leading to a VTA application or a family arrangement, for determining a proper division of a fund between those interested in income and those interested in capital. Mr Liptrott himself, in cross-examination, accepted, with hindsight, that an actuary’s report could have been a useful negotiating tool.

Although there is no direct evidence on the point, it seems likely that the reason why no advice was given by KBL for the production of an actuary’s report for the purpose of negotiating the DOV and making the Application was because, for the reasons I have already mentioned, KBL and the Executors were concentrating their attention on Lady Hulton’s income needs and the loss of the income stream from her life interest in the HLF. An actuary’s report would not have taken into account at all Lady Hulton’s income needs, let alone the income which she could expect to derive from her own free assets or the amount she might receive in consequence of the exercise of the Executors’ power under the Will to advance capital to her.

In my judgment, KBL should have advised the Executors to obtain an actuary’s report, notwithstanding the difficulties of obtaining an up to date medical report on the condition of Lady Hulton. I consider that, if there had been full, frank and open discussions between the Executors, Mr Butterfield and Major Reynolds, as there ought to have been, the Executors would probably have obtained at a reasonably early stage the same medical evidence as was in due course placed before the CP. Although not as full and specific as Mr Pollock would have liked, that evidence would have been sufficient for the production of an actuary’s report, which could have served as a starting-point for negotiations and would have been useful evidence on the Application.

As I have already said, by 24 October 1995 the Official Solicitor was prepared, on the then state of the evidence, to support the DOV and the Application on the basis of a payment to Lady Hulton of £435,000. Notwithstanding the Official Solicitor’s support, I consider that KBL were negligent in failing to advise the Executors, at a much earlier stage, to obtain an actuary’s report. Such a report should have been obtained before an Application was commenced, for the purpose of attempting to identify an appropriate capital payment to Lady Hulton, and to assist the negotiations with Major Reynolds and the Reynolds' family, so that any application to the CP could be on an unopposed basis.

The Claimant complains that KBL failed to make the Application promptly and failed to obtain appropriate Estate accounts at an early stage. Those two aspects are connected.

The evidence of Mr Marriott and Mr Liptrott was that the Application was delayed until July 1995 principally on account of three matters: awaiting completion of the sale of the Jones Land, which took place in August 1994; awaiting the opinion of Mr Venables and Mr Grierson, which was produced in November 1994; and awaiting the first year’s accounts for the Estate from the accountants, Kevans, which were produced in June 1995.

No criticism can properly be made of KBL, or the Executors, in waiting for completion of the Jones Land and the Opinion of Mr Venables and Mr Grierson prior to commencement of the Application. The former was necessary to provide the funds for any capital payment to Lady Hulton, and the latter was necessary for any informed decision as to the appropriate tax planning.

In his cross-examination of Mr Marriott and Mr Liptrott, Mr Ham appeared to be suggesting that KBL should have considered instructing new counsel in view of delay in the production of the Opinion of Mr Venables and Mr Grierson. The matters on which Mr Venables and Mr Grierson were advising were difficult and complex, as is apparent from the very long and detailed Opinion which they produced. It is wholly unrealistic, in my judgment, to suggest that KBL and the Executors should have dis-instructed Mr Venables and Mr Grierson at some point prior to November 1994 and instructed fresh counsel. That suggestion was not, in fact, pursued in Mr Ham’s closing submissions.

On the other hand, I do not consider that the delay in the production of accounts by Kevans provides a proper or reasonable explanation for the delay in the commencement of the Application. KBL were fully aware of the two year time limit under IHTA s.142. Further, at all times after receiving a letter from the Public Trust Office dated 11 November 1994, KBL knew that cases were being listed for hearing in the CP up to 3 months from the time of receipt of an application. If, as is KBL’s case, it would have been premature and inapposite to institute the Application prior to the production of first year accounts for the Estate, then steps should have been taken promptly to instruct Kevans in connection with the production of those accounts.

In fact, notwithstanding that the Opinion of Mr Venables and Mr Grierson was produced in November 1994, Kevans were, apparently, not instructed to begin work on the accounts until March 1995. Even then, Kevans were not provided with all relevant material, and the correspondence shows a distinct lack of pressure by KBL on Kevans to carry out their work with the greatest speed in view of the two year time limit. No adequate explanation was given by Mr Marriott or Mr Liptrott for that delay and the absence of such pressure.

As I have said earlier in this judgment, the Claimant makes numerous complaints about the manner in which KBL conducted the Application. The Claimant complains, in particular, of the failure of KBL to prepare affidavits that were clear, complete and consistent; to present all relevant material to the Court, and to do so in a clear and cogent manner, in particular with regard to Lady Hulton’s estate and assets and the implications of the proposed DOV for both the Estate and Lady Hulton; to obtain full and up to date medical evidence of the condition of Lady Hulton, and, in particular, her life expectancy; to provide a skeleton argument or summary to assist the Court; and to arrange for the Executors to be represented by counsel at the hearing before the Master on 24 October 1995.

In my judgment the Claimant has failed to make out a case of negligence against KBL in respect of these matters, either singly or together.

It is clear, from what took place before Mr Justice Lightman on 9 November 1995, and from the third affidavits of Mr Liptrott and Mr Forrester which were produced thereafter, that it would have been desirable for fuller affidavits to have been prepared, on behalf of the Executors, at the outset. The context in which the Application came before the Master on 24 October 1995, however, was that Mr McBryde, on behalf of the Official Solicitor, had written to KBL stating that it was for the Official Solicitor, as the representative of Lady Hulton, to decide on matters of principle, and to advise the CP whether or not Lady Hulton could reasonably agree to join in the proposed DOV, and that the Official Solicitor supported the Application on the evidence and on the terms that were placed before the Master on 24 October 1995.

In those circumstances, even though Mr Marriott accepted that he was aware that the CP would listen to Lady Hulton’s receiver, it was not negligent of KBL to expand the evidence before the Court.

In relation to the state of the medical evidence as to Lady Hulton’s physical condition and life expectancy, I would add that the Executors were in agreement with Major Reynolds and the Reynolds' family that it would be highly undesirable for Lady Hulton to be medically examined by someone who was unfamiliar to her. There were available to the Master on 24 October 1995 three reports on her medical condition, namely the medical report which accompanied the application for the appointment of her receiver, and two more recent reports. Those more recent reports were a report dated 14 August 1995 by Doctor A C Young, a consultant neurologist, and a report dated 24 August 1995 by Doctor J P Nagle, Lady Hulton’s General Medical Practitioner. It was not unreasonable for the Executors and KBL to take the view that, in all the circumstances, such evidence would have to be sufficient.

In relation to evidence of Lady Hulton’s estate and assets, I would add that this was information which was not in the possession of the Executors. They requested the information from Major Reynolds, but he did not supply it. Further, the CP itself already had access to such information in Form CP5, which would have been supplied on the application for the appointment of her receiver.

It was not negligent to fail to require counsel to present the case on behalf of the Executors, bearing in mind that the Official Solicitor supported the Application and no other party was represented by counsel on 24 October 1995. If the decision to dispense with counsel was an error at all, it was, at the worst, an error of judgment.

The decision whether or not to provide the Court, on 24 October 1995, with a skeleton argument or summary was also pre-eminently a matter for professional judgment, on which different advocates might have a different view. It was within a competent professional judgment to decide not to provide such a skeleton argument or summary.

The remaining pleaded criticisms of the Claimant are that KBL failed to supply sufficient relevant information, in sufficient time, to enable Mr Butterfield to consider the implications of the proposed DOV or any alternatives, and failed to inform him as the progress of the Application, and its reasons for failing in the first instance, and failed to consider the possible impact that the extent of Lady Hulton’s own assets and estate might have had in relation to the Application. None of those allegations of negligence are made out on the facts or in law.

The evidence shows, to my mind, that Mr Butterfield was kept informed of all important developments at all stages. The one matter, of which he was not informed at the time, was that the appeal from the Master was made in his name. This, however, is not the subject of a specific allegation of negligence, presumably because it manifestly did not result in any loss of any kind.

I am unable to understand the allegation that KBL failed to consider the possible impact that the extent of Lady Hulton’s own assets and estate might have in relation to the Application. Both on the facts, and as a matter of law, the nature and extent of Lady Hulton’s own assets and estate were of negligible, if any, relevance to the proper amount of the capital sum that should be paid to her as a pre-condition of any release of her life interest. What were critical were the value of the HLF and the proper valuation of her interest in it, on a partition between herself and Mr Butterfield. In the event, Mr Ham addressed no submissions to me on this allegation of negligence.

Finally, there remains the allegation that KBL "Failed to identify the lump sum to be paid in respect of the life interest [of Lady Hulton] and caused confusion in the minds of the executors, the advisers to Lady Hulton and Mr. Butterfield by putting forward several different figures": para. 5.16 of the amended Particulars of Claim. I have already dealt with the allegation insofar as it relates to the wider issue of a failure to negotiate openly and reasonably with Major Reynolds and a failure to disclose to him all relevant matters. Subject to that aspect, the allegation is perplexing, not least because Mr. Ham made no submissions, or no clear submissions, on this particular head of alleged negligence, and I am not aware of any evidence supporting the allegation of confusion in the minds of the Executors, Lady Hulton’s advisers and Mr. Butterfield, or any evidence in support of any loss said to flow from such confusion. Accordingly, in respect of those matters, I find there was no negligence or no loss.

Loss

Notwithstanding my conclusion that KBL ought to have advised the Executors to obtain, and the Executors should have obtained, an actuary’s report prior to the Application, I find that the Claimant did not suffer any loss in consequence.

As I have said, the evidence of Mr Pollock, accepted by Mr Ham, was that the actuary’s report would not have been decisive, but would have been one element in the negotiations. Furthermore, there are several important and obvious respects in which Mr Pollock’s report, and the valuation of the respective interests of Lady Hulton and Mr Butterfield which follow from it, would have been adjusted in any negotiations and in its deployment before the CP.

Mr Pollock’s report was based upon a valuation of the HLF at £5.3 million. The clear evidence is that value was not only a very conservative one, for probate purposes, but would have increased in the light of actual sales following Sir Geoffrey’s death, and would have been increased on any independent valuation. If, as I have concluded, the Executors would have preferred, rather than obtaining a valuation which might prejudice their future negotiations with the District Valuer, to negotiate on the basis that there was room for legitimate debate as to the true value of the assets in the HLF, then it is likely that Major Reynolds, the Reynolds' family and the CP would have made a generous allowance for under-valuation of the HLF.

Further, Mr Pollock based his calculations on a 5 year life expectancy of Lady Hulton. On the basis of the medical reports that were placed before the Master on 24 October 1995, the Official Solicitor recommended attributing to Lady Hulton a 5-7 year life expectancy. It is likely that, in negotiations and in any hearing before the CP, Major Reynolds and the Court would have taken a generous view of Lady Hulton’s life expectancy, bearing in mind, particularly, that there was inevitably a degree of uncertainty about it and she would be giving up the right to an income stream for life in return for a one-off capital payment, and bearing in mind also that Mr Butterfield was not a blood relative of hers or a person for whom she could be expected to feel any, or any overriding, moral obligation to provide.

Further, Mr Pollock assumed, for the purpose of his calculations, a yield of 1% from the Hulton Land. It is probable that, in negotiations, and on any contested application before the CP, Major Reynolds would have argued forcefully for a higher return, criticising the decision of the Executors to continue Sir Geoffrey’s policy of paying for capital improvements out of rental income. He would doubtless also have emphasised the ability of the Executors to invest the proceeds of the Jones Land in a diversified portfolio, which would properly balance the interests of the life tenant and those interested in remainder.

Further, Mr Pollock’s apportionment of 4.9% of the HLF to Lady Hulton takes no account of the intended tax savings that would be achieved by the DOV. Mr Pollock apportioned 38% of the value of the HLF to IHT. There is a strong probability that, in any negotiations and on a contested application before the CP, Major Reynolds would have argued successfully that the IHT element should be apportioned pro rata between Lady Hulton and Mr Butterfield.

In the light of those adjustments to Mr Pollock’s analysis I have mentioned, it is clear that the resultant figure attributable to the interest of Lady Hulton in the HLF would far have exceeded the sum of £275,000 specified in the Claimant’s Replies to the Request by KBL for further information. There is no actuarial evidence before me indicating that the resultant figure would have been less than the £750,000 ultimately agreed with Major Reynolds and Mrs Cooke.

Notwithstanding my finding that there is no proper or reasonable excuse for the delay of KBL in obtaining the first year Estate accounts and in making the Application, on the Executors’ behalf, I conclude that no loss was suffered by the Claimant in consequence. The Application was, in fact, heard before the end of the two year period specified in IHTA s.142. Further, for the reasons in the following paragraphs, earlier commencement of the Application would not have resulted in an order of the Court for execution of the DOV on terms of a payment to Lady Hulton of less than £750,000, and nor would it have resulted in any avoidance of the costs of the appeal from the Master.

Whether or not (contrary to some of my earlier conclusions) all, or any, of the criticisms of the Claimant in its amended Particulars of Claim constituted negligence on the part of KBL, the Claimant has failed to satisfy me that it has suffered any loss in consequence.

As I have said, the Claimant alleges it has suffered loss under two heads. Firstly, it is said that, as a consequence of KBL’s negligence, the Executors and Mr Butterfield were forced to offer, at the hearing of the appeal before Mr Justice Ferris, the sum of £750,000 as the amount to be inserted in the DOV, which was a sum substantially in excess of the appropriate amount.

Secondly, it is said that, if there had been no negligence on the part of KBL, the Application would have succeeded before the Master, and the cost of the appeal would have been avoided.

These alleged heads of loss reflect and perpetuate, in my judgment, the misconceived view which the Executors and Mr Butterfield held about the Application throughout.

The Application was highly unusual.

In the first place, it was an opposed application. That, in itself, was very unusual. Mr Marriott’s notes of the judgment of the Master record the following as part of her reasoning for dismissing the Application:

"The variation is unusual in that in any other Variation which involves an element of tax saving is normally agreed by all parties as being for everyone’s benefit. Here this is not the case."

Mr McBryde’s note of the hearing before the Master records as follows:

"The Master in her judgment said that she could not recall a case where a Deed of Variation was being proposed by personal representatives and opposed by the Receiver. She felt that the Receiver’s views must have very great weight especially as he was the person entrusted by the Court with the management of the Patient’s affairs. She had therefore concluded that an application for a Deed of Variation depriving the Patient of a substantial interest which was opposed by the Receiver could not go forward. She therefore proposed to dismiss the application"

It is worthy of note that in their November 1994 Opinion, Mr Venables and Mr Grierson advised that, since Lady Hulton’s relatives would be likely to oppose any application being made to the CP for resettlement of her life interest, it was not possible to predict with any certainty that the application would be successful.

The Application was being made by the Executors. That was, as I have said, and for the reasons I have given, not only unusual but also unorthodox and, in principle, save in the most unusual circumstances, inappropriate.

The fact that the Application was opposed, and that the Executors were the applicants, would have been sufficient, of themselves, to cause the Court to view the Application with caution and misgivings.

The opposition of Major Reynolds and Mrs Cooke, as joint receivers of Lady Hulton, to the Application was reflected in the absence of agreement on virtually every important aspect relevant to a valuation of Lady Hulton’s interest in the HLF on what was, in substance, a proposed partition between herself and Mr Butterfield. There was no agreement on the capital value of the HLF, on the income which the HLF might be anticipated to produce (if there was a fair balance maintained between the interests of Lady Hulton, on the one hand, and those interested in remainder, on the other hand), on the life-expectancy of Lady Hulton, and on the efficacy and likely outcome of the tax planning arrangements.

The Application was also unusual in that the purpose of the DOV was not, in any meaningful sense, to raise money to meet the needs or desires of Lady Hulton. The purpose of the transaction was to create a tax saving, for the benefit of Mr Butterfield, as the person next in line to inherit the HLF after Lady Hulton’s death.

Lady Hulton was entitled, by virtue of her life interest, to the income produced by the HLF, and her needs were restricted to income. She had no need of capital. If there was any shortfall on the available income to meet her needs, that could and would have been met by the exercise by the Trustees of their powers of advancement under the Will.

The capital payment to her specified in the DOV was not for the purpose of giving her money that she needed, but merely as an inducement for the release of her life interest, for the benefit of Mr Butterfield. Yet, he was not a blood relative and was not a person who, at first sight, she could be expected to have any, or significant, moral obligation to provide.

In those circumstances, it was always highly improbable, in my judgment, that the Application, so long as it was opposed, would be granted. I am not in the least surprised by the hostile reaction to it by the Master, Mr Justice Lightman and Mr Justice Ferris.

Even if the Executors’ evidence had, from the outset, been amplified in the manner indicated in the amended Particulars of Claim, there was no realistic prospect whatever that the Master would, in the face of such wide-ranging disagreement by the joint receivers of Lady Hulton, have granted the Application on the relatively short appointment on 24 October 1995. If the Master did not dismiss it out of hand, she would have referred the case to one of the Nominated Judges of the High Court. There is no real or substantial prospect that she would have done otherwise.

In short, KBL, the Executors, and, for that matter, the Official Solicitor, appear to have approached the Application with a wholly misconceived optimism.

Mr Liptrott gave evidence that, at some point, Mr Venables expressed some kind of approval to the Application, but it is common ground that, if and when he did so, Mr Venables was entirely unaware of the strong opposition by Lady Hulton’s receivers and the Reynolds' family.

Mr Ham, in the course of his submissions, appeared to acknowledge the reality that, unless the Application came before the Master as an unopposed Application on 24 October 1995, there was no real or substantial prospect that the Application would have been successful on that day, even if the evidence had been improved, a skeleton argument had been employed, and counsel had appeared for the Executors.

The critical question, therefore, on causation and loss is whether, if KBL had conducted themselves in a competent manner, there was a real or substantial prospect that, prior to the hearing on 24 October 1995, there would have been an agreement between the Executors and Lady Hulton’s receivers, Major Reynolds and Mrs Cooke, for the payment to Lady Hulton of a sum less than £750,000 as a pre-condition of the extinguishment of Lady Hulton’s life interest in the HLF. In my judgment, the Claimant has not made out a sustainable case to that effect.

In considering that issue, the first step is to consider what sum the Executors would have been prepared to offer, in negotiations with Major Reynolds, prior to 24 October 1995. In paragraph 6.1 of the amended Particulars of Claim, by way of particularisation of the Executors’ loss, it is alleged that £750,000 "was substantially in excess of the amount that should properly have been paid, had actuarial evidence had been obtained." That allegation is plainly tied to the statement in the Claimant’s Replies to the Request of KBL for further information of 10 March 2003, to which I have referred earlier in this judgment, that the amount which should properly have been paid to Lady Hulton was £275,000 "which would have been based on a proper actuarial report."

Mr Butterfield says in his witness statement:

"78.

….If the case had been prepared properly I would have only had to pay £250,000 as per Mr. Pollock’s report dated 12 August 2002. In any negotiations about this figure, particularly now I know that Major Reynolds was willing to "Horse Trade", there could have been the possibility of a slight increase in this figure of up to "£275,000 but I can see no basis for this figure being any higher than this if the case had been properly prepared.

88.

…. I consider that it would have been possible to achieve a satisfactory solution before the Master in the Court of Protection, which required payment of a sum of around £250,000. Alternatively, had the proper medical and actuarial evidence been available, it seems to me that even on the Appeal a figure in the order of "250,000 would have been the result."

Bearing in mind that Mr Pollock’s evidence was that his actuarial calculations would have been no more than a tool, albeit an important one, in negotiations, and bearing in mind Mr Pollock took no account, for example, of the fact that Lady Hulton had no need for a capital payment and her real interest was in a continuing stream of income for the uncertain period of the rest of her life, and that £275,000 does not reflect any apportionment in favour of Lady Hulton of the benefit of any IHT saving, it is clear that Major Reynolds would never have accepted £275,000, let alone £250,000 as suggested by Mr Butterfield, as the appropriate capital payment. Nor would the Court have approved a DOV in which payment of that amount was a condition precedent to the extinguishment of Lady Hulton’s life interest.

Mr Ham recognised this difficulty, and, in his closing submissions, emphasised that the Court should proceed on the basis that the Executors would have been prepared to offer, in negotiations with Major Reynolds, any sum up to the £750,000 which they ultimately offered during the hearing before Mr Justice Ferris, and that there was a real or substantial prospect that Major Reynolds and Mrs Cooke would have accepted a much lower figure than that.

The difficulty with this approach is that, once there is a departure from Mr Pollock’s report and the figure of £275,000, there is no evidence before me as to the figure, short of £750,000, that the Executors would have been prepared to offer, above the sum of £435,000 which they did in fact offer by the time of the hearing before the Master, and which was rejected both by Lady Hulton’s receivers and by the Master.

In my judgment, there was no real or substantial prospect that, if KBL had not been negligent in the respects alleged in the amended Particulars of Claim, Major Reynolds would have accepted the £435,000 put forward by the Executors at the hearing on 24 October 1995, and, indeed, that Major Reynolds and Mrs Cooke would have accepted anything less than £750,000. In arriving at that conclusion, I have taken particular account of the following matters.

The motivation for the DOV was not to benefit Lady Hulton. The motivation was solely the reduction of IHT prospectively payable by the Trustees on Lady Hulton’s death, and the acceleration of the interest of Mr Butterfield. The payment of a capital sum to Lady Hulton would not be likely to improve, in any significant respect, her quality or standard of living. She was entitled to the income of the HLF for life and, to the extent that such income was insufficient to meet her expenses, she could rely upon the Executors or Trustees to advance capital to her pursuant to their powers under the Will.

Mr Butterfield was not a blood relative of Lady Hulton, and was not a person for whom she or any other members of the Reynolds' family was morally obliged to provide.

Further, Major Reynolds was, rightly, dubious about the values placed upon the assets in the HLF by the Executors. Any up to date valuation would, almost certainly, have increased those values, possibly substantially.

Major Reynolds was also, rightly, dubious as to the projections of the Executors as to the future income that would be payable out of the HLF.

He was also entitled to take into account the anticipated tax benefits that the DOV was intended to achieve, and to claim a portion of those benefits for Lady Hulton.

Although Major Reynolds was willing to negotiate, Lady Hulton’s sisters had fundamental objections on moral grounds to the alteration of the Will by eliminating Lady Hulton’s right to receive the income for life. They took the view that this would be an interference with the intention of Sir Geoffrey, as expressed in the Will. Further, they and Major Reynolds were concerned, rightly, that there were risks for Lady Hulton in giving up a right to income in return for a one-off capital payment which, should it prove in the event to be inadequate for her needs, would leave Lady Hulton relying upon the decision of the Executors whether or not to exercise a discretionary power to advance capital.

Further, Major Reynolds and Mrs Cooke, as receivers of Lady Hulton, would not be personally exposed to any adverse order for costs should the Court, notwithstanding their opposition to the Application in good faith, decide to grant the Application. As Mr Ham accepted in his submissions, unless they acted improperly or for their own personal benefit, they would not be penalised in costs, and the usual order for costs in such cases would apply, namely that the costs be paid out of the Estate.

Mr. Ham, in his closing submissions, placed weight on the fact that, in his first affidavit in the Application, Major Reynolds mentioned a figure of £725,000 in connection with the income that Lady Hulton might lose over a 6 year period. Mr. Ham submitted that Major Reynolds "would have been prepared to settle for rather less, because somebody who is talking about horse-trading does not generally open the discussions with his final figure". I reject that submission. It is pure speculation, without any evidential basis. It rests on a figure purely in respect of lost income for a 6 year period, even though the Official Solicitor himself thought that a longer period was appropriate, and was on the basis of the limited information that had been provided by the Executors in breach of their duties to Lady Hulton. It takes no account of all the other relevant factors, including the apportionment of any prospective tax saving which would be achieved by the DOV.

I conclude that, in the light of all those matters, it is purely speculative whether, even if there had been no such negligence as alleged in the amended Particulars of Claim, including the failure to obtain an actuarial valuation, Major Reynolds and Mrs Cooke would have accepted, or the Court would have approved, a DOV with a condition precedent of a payment to Lady Hulton of less than £750,000.

For all these reasons, the DOV action must be dismissed.

Further matters

In his closing submissions, Mr Fenwick contended that, quite apart from my findings of fact, the DOV Action is bound to fail since any loss suffered as a result of the payment of the £750,000 to Lady Hulton will have been suffered only by Mr Butterfield, and not by the Executors/Trustees: cf. White v Jones [1995] 2AC 207. This is because, Mr Fenwick submitted, the Trustees, in paying the £750,000 to Lady Hulton, were merely exercising their discretionary powers of advancement under clause 7(A)(ii) of the Will.

For the sake of completeness, I do not accept that analysis. On the hypothesis (contrary to my actual findings) that KBL were negligent and their negligence caused a larger sum than was appropriate to be paid to Lady Hulton by the Executors/Trustees, the value of the fund in the hands of the Executors/Trustees was less than it would have been but for KBL’s negligence. That is sufficient to distinguish the position of the Executors/Trustees in the present case from the position of the personal representatives in a case such as White v Jones.

I should add, in support of that analysis, that it has always been the case of KBL that KBL owed no duty of care to Mr Butterfield. The submissions of Mr Fenwick, on this aspect, therefore, amount to an argument that, even if there was negligence causing loss, there is no one who can recover damages in respect of it.

Nor do I accept the further submission of Mr Fenwick that there will have been no loss since, even if the £750,000 payment was excessive, it enabled a saving of some £2 million IHT to be achieved. The short answer is that, if the Executors/Trustees could have achieved the same tax savings, at a lower cost, but for the negligence of KBL, a recoverable loss will have been sustained by them.

The CGT Action

Grounds of complaint

The Claimant has five broad grounds of complaint against KBL in relation to CGT. They may be summarised as follows:

i.

As a result of KBL’s negligent advice, or negligent failure to advise, incorrect tax returns were submitted by the Executors/Trustees;

ii.

KBL negligently advised Mr Forrester, on behalf of the Executors, to place low values on most of the Hulton Land for the purpose of obtaining probate of the Will, thereby potentially increasing the chargeable gains for CGT on subsequent disposals of such land;

iii.

KBL negligently failed to advise the Executors to assent to the vesting of the assets comprised in Sir Geoffrey’s residuary estate in themselves as Trustees before the death of Lady Hulton; alternatively, KBL negligently failed to advise the Executors to assent to the vesting in themselves as Trustees of (a) all the assets comprised in Sir Geoffrey’s residuary estate, or, alternatively, (b) such of the assets as it was intended to dispose of, between the death of Lady Hulton and the disposal of such assets;

iv.

KBL negligently failed to advise the Executors to substitute, for probate values, the actual sale values of three assets comprised within the HLF sold during the 3 years after Sir Geoffrey’s death; namely, a reversion sold to Lomax Football Club, certain ground rents, and the Jones Land ("the Three Properties");

v.

KBL negligently failed to advise the Executors against vesting the HLF in themselves as Trustees before the death of Lady Hulton.

Incorrect returns

It is alleged by the Claimant that, as a result of the submission of incorrect tax returns, the Executors/Trustees are exposed to claims for interest and penalties.

KBL claim that it was the responsibility of a firm of accountants, Warings, to ensure the accuracy of the relevant returns, and not the responsibility of KBL. Further, KBL claim that, in certain cases, the errors were made after KBL ceased to advise the Executors and the Trustees in about August 2000.

Prior to the commencement of the hearing before me, KBL, without admission of liability and subject to their right of contribution from Warings, made an offer to the Executors that KBL would pay any costs, interest and penalties associated with the submission of corrected tax returns to the Revenue in connection with CGT.

That offer was accepted by the Executors prior to the trial.

The result of the acceptance of KBL’s offer was that there remains outstanding no issue as to loss in respect of this head of alleged negligence. The only outstanding issue is who should bear the litigation costs associated with this head of claim.

The parties agreed that, rather than investigate further the substantive merits of the dispute purely for the purpose of deciding the costs issue, the costs of pursuing and defending this head of claim should be dealt with by me, at the end of the trial, in a manner which reflects the broad measure of success or failure of the parties on the other issues.

Low probate values

Save in relation to the Three Properties, this head of complaint was not developed to any significant degree in the written and oral submissions made on behalf of the Claimant.

The substance of the complaint is that Mr Forrester, for probate purposes, deliberately attributed low values to the Hulton Land, except in respect of the Jones Land. The low probate values had significant CGT implications in the case of the sale of the Three Properties, and also had an impact on the deemed disposal of the HLF, for CGT purposes, on the death of Lady Hulton.

The Claimant’s complaint is that it was unnecessary and inappropriate to apply deliberately low values, for probate purposes, in view of the fact that it was plainly foreseeable that this would potentially increase the chargeable gains for CGT on subsequent disposals, and bearing in mind that, in view of the surviving spouse exemption, there was no charge to IHT on the HLF on Sir Geoffrey’s death.

In his oral evidence, Mr Forrester accepted that, when giving probate values in the context of an exempt transfer, it might be thought beneficial to go to the higher end of acceptable values. He was advised by KBL, however, to proceed on a different basis in the case of the HLF.

In my judgment, the claim in negligence against KBL in respect of the policy of low probate values fails.

There were sound reasons for adopting a policy of low probate values. The evidence is clear that, at the time of the application for probate, there was already under consideration the possibility of a deed of variation in order to create a chargeable transfer in respect of the HLF, on the death of Sir Geoffrey, and to attempt to take advantage of the opportunity of invoking business property relief, which would arguably be available on Sir Geoffrey’s death, but not on Lady Hulton’s death. There was doubt as to whether, in the event of the conversion of the exempt transfer of the HLF into a chargeable transfer, any liability to IHT could be completely eliminated by business property relief and agricultural relief.

Indeed, at a consultation on 9 February 1994, Mr Venables specifically advised that, so far as the HLF was concerned, values should be kept as low as possible.

Furthermore, if there was no variation of the provisions of the Will, IHT would be paid, in respect of the HLF, on the death of Lady Hulton, and accordingly low probate values on Sir Geoffrey’s death would assist potentially in reducing that prospective charge to IHT.

Mr Fenwick also pointed out that IHT would be charged at 40% of the entire value of all assets, as opposed to the rate of 23% for CGT on the uplift value of assets which were sold. There were unlikely to be many sales since it was the established policy to seek to keep the landed estate together, if possible.

Against all that background, the policy of the Executors in relation to the valuation of the assets in the HLF for probate, and the advice of KBL in relation to that policy, were entirely reasonable.

No assent of residue

The Claimant’s complaint in relation to residue falls into two parts. Firstly, it is alleged that KBL were negligent in failing to advise the Executors to assent to the vesting of the assets comprised in Sir Geoffrey’s residue in themselves as Trustees before the death of Lady Hulton, since, had they done so, there would have been a tax-free uplift in base values, by virtue of the Taxation of Chargeable Gains Act 1992 ("TCGA") s.73(1), on the death of Lady Hulton. The base cost for any subsequent disposals would have been the probate value at her death. Any gains accruing after the death of Lady Hulton would have been treated as accruing to the Executors/Trustees, as bare Trustees for Mr Butterfield, a non-resident, and so outside the charge to CGT.

It is alleged, in the alternative, that KBL negligently failed to advise the Executors to assent to the vesting in themselves as Trustees of all the assets comprised in Sir Geoffrey’s residuary estate, or alternatively such assets in the residuary estate as it was intended to dispose of, between the death of Lady Hulton and the disposing of such assets. If such advice had been given, and the Executors had followed the advice, the disposal of such assets would, in view of Mr Butterfield’s status as a non-resident, have been treated as made by persons who were neither resident nor ordinarily resident in the UK, and so outside the charge to CGT.

There is no dispute as to the alleged tax advantages, if the Executors had assented to the vesting in themselves, as Trustees, of assets comprised in Sir Geoffrey’s residuary estate before the death of Lady Hulton or between that death and the disposal of any such assets. The defence is that the retention of the residuary estate by the Executors was at all times normal, prudent and reasonable.

Notwithstanding Mr Ham’s attractive and eloquent presentation, this claim in negligence is, in my judgment, quite hopeless.

The financial statements for the year ended 20 November 1994 show the value of residue as at 20 November 1993 as £2.424m.

The evidence is that the Estate remains in administration, and, according to the latest draft accounts, the residue has been exhausted. Indeed, on the basis of the draft accounts, it appears that there will have to be an abatement of specific gifts. Further, the evidence is that it was always likely that, if tax had to be paid, there would be nothing left in residue.

Both Mr Marriott and Mr Liptrott emphasised the practical difficulties that would have been encountered by the Executors if, on or after the death of Lady Hulton, the residue was vested in themselves as Trustees. The residue would have been held on bare trust for Mr Butterfield, and there would or might have been difficulties in obtaining the assets in order to meet liabilities.

In my judgment, those concerns were fully justified. Mr Ham put to Mr Marriott and Mr Liptrott, in cross-examination, that the Executors would have been protected by a lien or could have taken other security. As Mr Marriott and Mr Liptrott rightly indicated, however, the realisation of such security would not necessarily have been straightforward and might have taken time. The suggested arrangement would have given scope for disagreement between the Executors and Mr Butterfield as to whether it was right, necessary or desirable for assets to be applied in payment of particular liabilities.

In my judgment, it was not only reasonable for the Executors, in the circumstances, to retain the residue in order to meet potential liabilities, but it would have been unusual, surprising and imprudent of them to vest the residue in themselves as Trustees in the manner for which the Claimant contends. In this context, it is also important to note that the Executors owed duties to the beneficiaries, as a whole, to place themselves in a position in which they were able, at the least cost and with the greatest ease and speed, to pay debts and liabilities.

Sale values of the Three Properties

IHTA s.191(1) provides as follows:

"Where –

a.

an interest in land is comprised in a person’s estate immediately before his death and is sold by the appropriate person within the period of three years immediately following the date of the death, and

b.

the appropriate person makes a claim under this Chapter stating the capacity in which he makes it,

the value for the purposes of this Act of that interest and of any other interest in land comprised in that estate and sold within that period by the person making the claim acting in the same capacity shall, subject to the following provisions of this Chapter, be its sale value."

By virtue of TCGA s.274, for the purposes of CGT the IHT value is to be treated as the market value of an asset as at the date of death.

In a letter dated 10 October 1994 to Mr Liptrott, Mr Forrester enquired whether it was possible, in respect of any assets sold by the Estate during the two year period from 20 November 1993, for the actual sale values to be substituted for probate values, for IHT or CGT purposes. Mr Liptrott responded, by letter dated 11 October 1994, confirming that, in respect of land and buildings sold within three years of Sir Geoffrey’s death, the Executors had the right to substitute the sale values for the probate values for both IHT and CGT purposes.

The possibility of substituting sale prices for (lower) probate values was raised at a consultation with Mr Venables and Mr Grierson, attended by Mr Liptrott, on 18 October 1994. KBL’s note of the consultation records that: "Mr Venables said that section 191(1) IHT was intended as a relief to substitute a reduced price but saw no reason why that section could not be used to substitute an increased price."

The Three Properties were sold by the Executors within three years of Sir Geoffrey’s death at values in excess of the probate values.

In January 2000 Miss Chambers, of Warings, wrote to Mr Marriott and to Mr Forrester to obtain instructions from the Executors as to whether, for the purpose of revised tax returns for 1994/95 to 1997/98, the Executors should seek to substitute the actual sale values of the Three Properties for their probate values.

On 4 February 2000 Mr Forrester spoke to Mr Marriott over the telephone on this issue. Mr Forrester’s contemporaneous attendance note recorded the following:

"Stephen Marriott is of the opinion that the values as submitted, whilst not being agreed, should remain as the Inland Revenue had seen and thinks that if any attempt were to be made to negotiate these upwards, it would cause the Inland Revenue to look at the whole position again and it might [cause] repercussions on the inheritance tax position that had been achieved."

As a result of Mr Marriott’s advice, no attempt was made, for CGT purposes, to substitute the sale values of the Three Properties for the probate values.

In due course, the Executors reached an agreement with the Inspector of Taxes, under which the Executors were treated as making no gains and incurring no losses in respect of the transactions relating to the Three Properties and the sale of the Jones Land. The practical consequence of that agreement was that the Executors were not liable for CGT in relation to the gains on the sales of the Three Properties, but, on the other hand, they were unable to carry forward, for setting against future gains, a loss of £137,000 in respect of the Jones Land. The agreement was made between the Executors and the Inspector of Taxes on about 12 December 2000, and related to disposals of Hulton Land in the tax years 1994/5 and 1995/6.

The Claimant alleges that the failure of KBL to advise the Executors to substitute actual sale values of the Three Properties for their probate values was negligent, and that the Executors have suffered damage as a result of their inability, for CGT purposes, to set off the £137,000 loss on the Jones Land against future gains.

In my judgment, KBL were negligent in failing to consider, and to draw to the attention of the Executors, the possibility of utilising the provisions of IHTA s.191 in respect of the sales of the Three Properties.

It is apparent from Mr Marriott’s oral evidence that he did not consider s.191 at the time of the enquires by Miss Chambers and Mr Forrester in January 2000. He accepted, in cross-examination, that it is arguable that he should have given advice about s.191. He accepted the accuracy of Mr Forrester’s note, and that it was his advice not to raise with the Revenue the substitution of sales values for probate values, for CGT purposes.

Mr Fenwick submitted that, as a matter of law, relief under s.191 would not have been available in the circumstances of this case, as no IHT was payable on the estates of either Sir Geoffrey or Lady Hulton. In brief, he submitted that, by virtue of the definition of "the appropriate person" in IHTA s.190(1), the appropriate person in s.191(1) must be "liable for inheritance tax", so that, for the relief under s.191 to apply, IHT must be payable.

Mr Fenwick further submitted that such a statutory interpretation has been adopted by the Revenue for some time. In this connection, he referred to the following passage at paragraph D3.11 in Foster’s Inheritance Tax:

"Where the sale price is higher than the value at the date of death, the usual reason for wanting to make a claim to substitute the sale price for the value on death is to increase the personal representatives’ or beneficiary’s acquisition value of the interest in land for CGT purposes, in circumstances where there will either be no additional IHT payable by reason of the substitution of the higher value, or less additional IHT than the amount of CGT saved. However, the Revenue have for some time maintained, and the Special Commissioners have now held, that such a claim cannot be made where there is no IHT payable on the interest in land on the deceased’s death, eg because of exemption, 100 per cent business or agricultural relief, or the entire estate being below the IHT threshold. The point here is that there must be an "appropriate person" in relation to an interest in land if a claim for the relief is to be made in respect of that interest in land and there is no "appropriate person" in relation to an interest in land if no IHT in respect of the deceased’s death is payable on it."

The decision of the Special Commissioners, to which reference is made in that passage, is a reference to Stonor v Inland Revenue Commissioners [2001] STC 191 (Dr Nuala Brice).

Mr Ham submitted that the decision in Stonor was incorrect, and the relief in s.191 would have been available to the Executors in respect of the Three Properties.

It is not necessary for me to resolve that issue of law.

The question, which I am currently addressing, is whether a reasonably competent solicitor, with the knowledge of KBL as to the advice which had been given to Mr Forrester in 1994 and the advice of Mr Venables in 1994, would, on the specific enquiries by Miss Chambers and Mr Forrester in 2000, have, at the very least, considered, and if necessary taken counsel’s advice about, and discussed with the Executors, the possibility of substituting the actual sale prices of the Three Properties for the probate values pursuant to s.191.

In my judgment, a reasonably competent solicitor would have done so.

In that connection, it is to be noted that, prior to the Stonor case, there was no authority determining the correct statutory interpretation of s.191. Further, Mr Marriott’s own oral evidence, in cross-examination, was that, at no time between the advice given to Mr Forrester in 1994 and the advice given by Mr Marriott to Mr Forrester in early 2000, did Mr Marriott consciously change his views about the applicability of s.191 in the case of sales in the three year period following the death of Sir Geoffrey.

The fact that KBL ceased to act in August 2000, some four months before the compromise agreement reached between the Executors and the Inspector, does not affect my finding of negligence. That finding relates to the conduct of KBL, and the steps they should have taken, long before August 2000.

The question which next arises is whether such negligence caused any loss. This is a difficult question, on which the evidence is not altogether complete or satisfactory. I have come to the conclusion that the Claimant has failed to show that any loss was caused by the negligence.

The factual setting for Mr Marriott’s advice, and the negotiations and agreement between the Executors and the Inspector of Taxes in 2000, was that on 28 September 1999 the Revenue had confirmed that, notwithstanding it had made an error in granting the Certificate of Discharge, the Revenue would not seek to go behind that Certificate. This gave rise to a windfall, and wholly unexpected, saving of some £2 million in tax.

The loss, for CGT purposes, on the Jones Land was £137,595. At a CGT rate of 23%, that loss gave rise to a potential saving of CGT, if the loss was set off against future gains, of about £31,646.

Although Mr Prosser, in particular, had given very firm advice that the Revenue could not go behind the Certificate of Discharge, Mr Marriott was, as appears from the note of his telephone advice to Mr Forrester on 4 February 2000, concerned to do absolutely nothing that would imperil the £2 million tax saving that had been achieved by the combination of the Certificate of Discharge and the assurance of the Revenue that it would not seek to go behind the Certificate, even though the Revenue had made a mistake in issuing it in the first place.

In my judgment, notwithstanding the earlier advice of Mr Venables (which, it is to be noted, was given before the Certificate of Discharge), Mr Marriott’s concern that there should be no opportunity whatever for the Revenue to revisit the question of tax on the deaths of Sir Geoffrey and Lady Hulton was perfectly reasonable, bearing in mind, particularly, that the total tax saving to be achieved by substitution of sale values under s.191 was the relatively small amount of £31,646.

In my judgment, it is probable that, if Mr Marriott had brought to mind and considered and discussed and, if appropriate, taken further advice on, the s.191 point, he and the Executors would have concluded that, even if there was a statutory right to substitute the sale figures without the need for any further negotiation or discussion with the District Valuer, it was not worth taking any risk whatever of imperilling the £2 million tax saving that had been achieved.

Accordingly, I consider it improbable, even if there had been no negligence as alleged, that there would have been submitted to the Revenue revised returns for the relevant years showing the actual sale values of the Three Properties as their base values.

Even if I am wrong on that, I consider that there was no real or substantial prospect that the Revenue would have accepted those substituted values and that, despite any such refusal by the Revenue, the Executors would have persisted in the revised returns. That seems to me to fly in the face of all probabilities.

I consider that the overwhelming probability is that the Revenue would have challenged the right of the Executors to rely on s.191. Although there was no decided case on the point at that time, both the passage in Foster’s, which I have mentioned, and realism strongly point to the likelihood that the Revenue would have questioned the use of s.191 in such a way as to enable the loss on the sale of the Jones Land to be carried forward for the purpose of CGT, in circumstances where no IHT was payable on the death of Sir Geoffrey.

I consider that this is the overwhelming probability, notwithstanding the evidence, which is somewhat exiguous, that the Inspector was anxious to "close his files" (in Mr Sharp’s language) for the relevant tax years, particularly in view of past delays by the Revenue due to the file having been mislaid and other reasons.

If the Revenue had shown the slightest resistance to the s.191 substitution, there can be no doubt, in my mind, that the Executors would have agreed to abandon the s.191 point. As Mr Sharp himself accepted, the compromise with the Revenue in December 2000 was a good one. In particular, it involved the Revenue abandoning any challenge to the longstanding policy of Sir Geoffrey and the Executors deducting capital improvements from rental income. The compromise not only avoided any further tax that would have arisen from the Revenue’s rejection of that policy, but also penalties and interest.

Mr Ham observed, at one point in his submissions, that the tax implications of that policy concerned Lady Hulton rather than the Executors. Whether or not that is technically correct, I have to form a view about the likely conduct of the Executors and the Revenue, in the light of what they actually negotiated and they thought they were achieving by the agreement between them.

For all these reasons, I conclude that there was never more than a speculative prospect that, if KBL had, in early 2000, advised that consideration should be given as to whether to substitute sale values of the Three Properties for their probate values, the Executors would in fact have pursued a course which would have secured the tax benefit of carrying forward the loss from the Jones Land sale.

Assent of the HLF

The Claimant alleges that KBL were negligent in failing to advise the Executors/Trustees against vesting the HLF in themselves as Trustees before the death of Lady Hulton.

The result of the 1997 Assent was that, on Lady Hulton’s death, there was a deemed disposal of the HLF, for CGT purposes, when Mr Butterfield became absolutely entitled as against the Trustees.

There is no doubt that, if the HLF had not been vested in the Trustees prior to Lady Hulton’s death, there would have been no such deemed disposal, and so no charge to CGT on Lady Hulton’s death.

Further, as I have already stated, the Estate is still in the course of administration, and the latest draft accounts apparently show that the residue is not sufficient to pay all the debts and liabilities of the Estate.

In those circumstances, the early vesting of the HLF in the Trustees by the 1997 Assent appears unusual and unexpected.

KBL’s case, supported by the evidence of Mr Forrester, Mr Marriott and Mr Liptrott is that the 1997 Assent was executed pursuant to the express advice of Mr Venables, and was, in accordance with that advice, an essential step in the proposed strategy to enable the Trustees to contend that, notwithstanding the Certificate of Discharge, the effect of the DOV and IHTA s.142 was that there was a chargeable transfer in respect of the HLF on Sir Geoffrey’s death. The strategy, which in the end was successful, was thus to preserve the benefit of the Certificate of Discharge as conclusive that no IHT was outstanding in respect of the HLF on the death of Sir Geoffrey, but to leave the Trustees free to argue that, by virtue of s.142 and the DOV, there was no PET by Lady Hulton in respect of the HLF, and nor was she entitled to a life interest in the HLF immediately before her death.

It is KBL’s case, and was the evidence of Mr Forrester, Mr Marriott and Mr Liptrott, that, in order to achieve success in that strategy, the Executors vested the HLF in the Trustees, immediately the Certificate of Discharge was granted, so as to enable the Trustees to argue the s.142 point. The critical feature, according to KBL’s case and that evidence, was the need to transfer the HLF away from the Executors, who would otherwise have been liable for IHT in respect of the PET on Lady Hulton’s death, and to place the HLF and the potential liability to IHT in respect of the PET on Lady Hulton’s death in the Trustees, since it was the Executors, and not the Trustees, who had applied for the Certificate of Discharge on the basis of acceptance of the CTO’s analysis that s.142 did not apply and that the effect of the DOV was to give rise to a PET by Lady Hulton.

Mr Liptrott’s oral evidence was, in particular, clear and forceful. His evidence, in cross-examination, was that he particularly recalled Mr Venables’ advice on this aspect, since he was concerned that the proposed tax planning exercise was "rather too near the bone", but he eventually "decided that I would go down that route because Mr Venables was recommending it".

Notwithstanding the oral evidence, it appears to me quite clear, in the light of the contemporaneous written material, that no such advice was given by Mr Venables.

The evidence of KBL’s witnesses, and KBL’s case, is that the relevant advice was given by Mr Venables at a consultation on 19 November 1996. A note of that consultation was prepared by Mr Marriott and was subsequently amended by Mr Venables, and approved, as amended, by Mr Venables and Mr Grierson. Particular reliance is placed by KBL and their witnesses on the following passages in that note:

"If one accepts that there is a P.E.T. and Lady Hulton dies within 7 years is it possible for the C.T.O. to go back on its statement that the transaction is a P.E.T.?

One should initially establish who is liable for the tax. Guidance can be obtained from Section 199 onwards – ‘liabilities’ of IHTA.

…

Whilst RV indicated that while the position is not absolutely clear it was his view that the Trustees will be primarily and ultimately liable for the payment of the tax, and doubted whether anyone else would be able to come to a contrary view on the facts.

… RV indicated that it was essential that we distinguish between Executors and Trustees although in this instance they would be the same individuals. After the administration of the estate had been completed the Executors would become Trustees. The distinction was important as any agreement made by the Executors would not bind them as Trustees.

RV therefore proposed the following course of action be adopted:

(i)

that K.B.L. on behalf of the Executors write a letter to the C.T.O. to be drafted by RV noting the C.T.O.’s view that the transfer was a P.E.T. as a result of which the Executors are not liable to tax.

…

(iv)

If a Certificate of Discharge is obtained then one should examine the position based upon Lady Hulton’s life. If she survives for 7 years then there will be no tax to pay in any event. If she fails to survive for 7 years then tax will be payable. The amount of tax will be dependent upon how many years she will have survived the transfer.

(v)

If a "small" amount of tax is payable then the Trustees may decide to pay the same. If a more substantial sum is due then the Trustees may argue that the transfer was not a P.E.T. but a chargeable transfer on Sir Geoffrey’s death and it may be that it would be necessary to refer this point to the Courts to determine whether business relief were available. If however the C.T.O. were bound by the Certificate of Discharge, no tax would be payable.

(vi)

It is also the case that if the C.T.O. seek to pursue the tax in the future their action would be very likely to be against the Trustees. It is therefore important to seek and obtain from the Revenue a Certificate of Discharge."

The oral evidence of Mr Marriott and Mr Liptrott was that, according to the note of the consultation, Mr Venables was clearly describing the course of action to be taken, making a distinction between the "Executors" in paragraph (i) and the "Trustees" in paragraphs (v) and (vi), and that it is implicit in the note that he advised that, prior to step (v), the HLF was to be vested in the Trustees.

Mr Fenwick submitted that, throughout Mr Venables’ advice, as recorded in the note of the consultation on 19 November 1996, Mr Venables was using the expression "Trustees" in the sense of those to whom the land had been assented.

As I have said, it is KBL’s case and an essential part of Mr Fenwick’s analysis that, prior to any vesting of the HLF in the Trustees, the Executors would have been liable for the tax in respect of the failed PET, and Mr Venables so advised.

Those interpretations of the note of the consultation are, in my judgment, plainly misconceived.

At the outset, it is to be observed that the note of the consultation went through several drafts. It was prepared by Mr Marriott after careful consideration and revision. The third draft was amended, and approved, as amended, by both Mr Venables and Mr Grierson. Neither Mr Liptrott nor Mr Forrester apparently took exception to the concluded note, as approved by counsel.

Nowhere in the note is there any record of any express advice by Mr Venables or Mr Grierson that, immediately after a Certificate of Discharge was obtained, the Executors should execute an assent of the HLF in favour of the Trustees. It is against all probabilities that a step, described by Mr Marriott and Mr Liptrott as central to counsel’s advice and an essential feature of the tax planning scheme, should be omitted from a note produced so carefully and approved by counsel with amendments.

Further, and critically, KBL’s case, in relation to Mr Venables’s advice, rests on the hypothesis that, in the absence of an assent in favour of the Trustees, it would be the Executors who would be liable to pay IHT in respect of the failed PET. The 1997 Assent was necessary, according to KBL, because the Executors, so long as they held the HLF, would be liable to pay the IHT on the failed PET, but there was a strong argument that they would be precluded from raising the s.142 point since they had themselves applied for the Certificate of Discharge on the basis that the Revenue was correct in concluding that the DOV gave rise to a PET and that s.142 therefore did not apply.

Nowhere in the note, however, is there any record of advice by Mr Venables that, prior to an assent, the Executors would be liable for the tax on a failed PET by Lady Hulton.

Further, in my judgment, it is perfectly clear that Mr Venables gave no such advice. This is apparent from the sections of the IHTA, which the note records he mentioned in the course of his analysis.

Mr Venables is recorded as referring to the PET as a deemed transfer under IHTA s.52. That section is in Part III of the IHTA, which deals with settled property. He concluded that IHTA s.201 was the relevant section for identifying who was liable to pay tax in relation to the PET. Section 201(1) provides as follows:

"The persons liable for the tax on the value transferred by a chargeable transfer made under Part III of this Act are –

(a)

the trustees of the settlement;

(b)

any person entitled (whether beneficially or not) to an interest in possession in the settled property;

(c)

any person for whose benefit any of the settled property or income from it is applied at or after the time of the transfer;

(d)

Where the transfer is made during the life of the settlor and the trustees are not for the time being resident in the United Kingdom, the settlor."

It is to be noted that none of the categories in s.201(1) embraces the Executors while the Estate is still in the course of administration.

Having referred to s.201(1), Mr Venables is recorded as advising that, while the position was not absolutely clear, his view was that the Trustees (ie the persons in s.201(1)(a)) would be primarily and ultimately liable for payment of the tax on the failed PET.

Accordingly, the entire analytical basis for the case of KBL, in relation to this head of negligence, falls away.

Mr Fenwick submitted that Mr Venables could not have been referring to the Trustees of the HLF, rather than the Executors, in respect of any period prior to an assent of the HLF in favour of the Trustees since, he said, it was impossible to have trustees, properly so called, of the HLF until the HLF had been vested in them.

I do not accept that analysis. The Trustees, as such, acquired an immediate equitable interest in the HLF, on the death of Sir Geoffrey. In IRC v Hawley [1928] 1KB 578, 583 (a case concerning dividend income from shares) Rowlatt J said:

"The shares were left to the respondent as a specific legacy, and from the date of death and before assent they were his property, subject to the right of the Executors to keep control of them for the purpose, if necessary, of paying the testators’ debts, and for this purpose they had the legal title."

It is to be noted that, for the purposes of IHT, the same principle has been expressly extended, by IHTA s.92, to a person who would have been entitled to an interest in possession in the whole or part of the residue of the estate of a deceased person had the administration of that estate been completed.

KBL do not rely upon any advice of Mr Venables, in connection with this head of negligence, other than the advice which he gave in consultation on 19 November 1996.

Reference was made during the course of the hearing to a note, apparently made by Mr Forrester, following a consultation with Mr Prosser on 23 September 1997. The note contained the following paragraph:

"JF also gathered that Kevin Prosser thought that Mr Venables scheme for the trustees to vest after receipt of the Clearance Certificate and then should an assessment be raised at a later date if Lady Hulton did not survive 7 years, that any defence that the tax was not payable would not be likely to be successful in view of the fact that the Clearance Certificate had been accepted. (Again this disagrees with RV’s view). "

Mr Forrester’s recollection was, in general, very poor outside the express contents of his witness statement. He appears to have no clear recollection of making the note, and what lay behind it.

Further, Mr Prosser prepared, and sent to KBL, a written note dated 2 March 1998, in which he recorded the advice which he gave in consultation on 23 September 1997. There is nothing whatever in Mr Prosser’s note to support KBL’s case that Mr Venables had advised the Executors/Trustees that the HLF should be vested in the Trustees as soon as possible after the Certificate of Discharge was obtained.

In the circumstances, and bearing in mind the long passage of time since Mr Venables’ advice in 1996, I consider that the safest guide to what Mr Venables advised, in this complex matter, lies in the carefully prepared contemporaneous note of the relevant consultation, which Mr Venables amended, and approved as amended.

I also observe that neither Mr Venables nor Mr Grierson were called as witnesses on behalf of KBL. Mr Fenwick submitted that, since Mr Venables and Mr Grierson were not called by the Claimant, the fact that they were not called by KBL to give evidence was entirely neutral in relation to any conclusion as to what they advised on 19 November 1996. Although in no sense essential to my conclusions, I observe that, in the light of the absence of any clear or express reference in the approved note of the consultation on 19 November 1996 as to the critical advice which KBL say was given by Mr Venables and Mr Grierson on the relevant point, it is surprising that KBL did not call either Mr Venables or Mr Grierson in support of KBL’s case on this issue.

Mr Fenwick submitted that, even if Mr Venables did not advise that it was an essential or necessary part of the tax planning scheme that the HLF should be vested in the Trustees as soon as possible after a Certificate of Discharge was obtained, nevertheless the Executors acted prudently and reasonably in so doing by the 1997 Assent, and KBL acted reasonably in advising the Executors to do so. He submitted that the CGT payable on the deemed disposal of the HLF on Lady Hulton’s death was only about £12,500, and the Executors/Trustees were acting reasonably and prudently in exposing the HLF to such a modest charge in order to avoid the potential IHT charge on a failed PET.

That submission cannot succeed. The advice of counsel, particularly of Mr Prosser, was that the Certificate of Discharge, once granted, would be conclusive and binding on the Revenue as regards all who might otherwise be liable to bear the relevant tax. Mr Fenwick appeared to accept that proposition of law. Further, in the light of the advice of Mr Venables, and the clear terms of IHTA s.201, there was no question of the Executors being liable to meet any IHT in respect of a failed PET of the HLF by Lady Hulton. On the other hand, the 1997 Assent would inevitably give rise to a deemed disposal of the HLF, on Lady Hulton’s death, for CGT. There is no agreement between the parties, and no determination by the Revenue, of the amount of the liability to CGT on the deemed disposal of the HLF on Lady Hulton’s death. It is difficult to see, in all these circumstances, why it was reasonable for the Executors to take steps which ensured an inevitable charge to CGT, when there was no need to do so in order to avoid a liability to IHT in respect of the HLF. Further, neither the Executors nor KBL ever appear, in fact, to have carried out any analysis in which the various tax consequences were properly weighed before deciding to proceed with the 1997 Assent.

Accordingly, I find that there was negligence on the part of KBL in failing to advise the Executors/Trustees properly in relation to the desirability, and CGT implications, of the 1997 Assent.

It is agreed that, in those circumstances, I should refer to an enquiry the issue whether any loss, and if so what loss, has been suffered by the Executors/Trustees in consequence.

Conclusions and order

For the reasons set out in this Judgment, I dismiss the DOV Action.

In relation to the CGT Action, I dismiss all the claims for negligence, other than the claim in paragraph 3.2B of the amended Particulars of Claim in that Action. I uphold the allegation of negligence in that paragraph, and direct that there should be an enquiry as to whether any loss, and if so what loss, has been suffered by the Executors/Trustees in consequence.

Postscript

On the first day of the hearing, Mr. Ham stated that, the overall costs in relation to the two Actions were, on the Claimant’s side, about £425,000, and, on KBL’s side, about £660,000.

The trial lasted 13 days, and doubtless resulted in a very substantial increase in those costs.

The matters in issue, as attested by this Judgment, were complex and numerous.

From everything I have been told, those costs, and the time and resources taken up by the two Actions, including court resources, would appear always to have been disproportionate to the actual damages likely to follow from any findings of negligence.

If that is correct, then it is a matter of regret that good sense, good advice, the spirit of proportionality that underlies the CPR and the merits of a just compromise by both sides have not played an effective role in avoiding this litigation.