Giles v The Royal National Institute for the Blind & Ors

This is a claim brought under Part 8 of the CPR for rectification of a deed of variation dated 24 November 2007 (“the Deed of Variation”) which purported to alter the provisions of the will of Hilda Elsie Bolton with a view to reducing the incidence of inheritance tax, pursuant to section 142 of the Inheritance Tax Act 1984 (“the 1984 Act”).

The claim for rectification is not opposed by any of the Defendants (“the Four Charities”) or by Her Majesty’s Revenue and Customs (“HMRC”). A claim for refund of inheritance tax has been made and will trigger a repayment insofar as the application for rectification is successful. I have been shown correspondence from HMRC indicating that they did not wish to be joined as a party and do not oppose the application.

Neither the Four Charities nor HMRC were represented at the hearing. The Claimant was represented by Mr David Yates, to whom I am grateful for his helpful analysis of the relevant principles and case-law. In addition to his skeleton argument, he also supplied a short supplemental note after the hearing.

The Claimant, Melinda Giles, brings the claim in her capacity as the administratrix of the estate of Hilda Elsie Bolton and as executrix of the estate of Hilda’s sister, Ellen Mary Bolton. The background is set out in the Claimant’s witness statement dated 31 October 2013 (“the Witness Statement”).

Hilda was born on 21 October 1908 and died on 6 February 2006. Ellen was born on 5 November 1914 and died on 11 September 2007. There was a third sister, Anne, who died on 11 October 2006. However, the present matter arises out of the interaction of the wills of Hilda and Ellen.

On 4 April 2005 Hilda made a will (“Hilda’s Will”). Ellen was the beneficiary of Hilda’s Will in two respects:

As a residuary beneficiary under clause 5.

Clause 7 of Hilda’s Will provided that “the Inheritance Tax payable on my death in respect thereof shall be payable out of my Residuary Estate in exoneration of the specific legacies given by this my Will.”

As I have said, Hilda died on 6 February 2006 whilst Ellen lived until 11 September 2007. Consequently, Ellen benefited under Hilda’s Will, both by clause 2(a) in respect of the Property and as the residuary legatee. The inheritance tax due on Hilda’s estate was calculated, on an initial basis as at March 2007, in the sum of £254,595, taking account of the then nil rate band of £275,000. This would have left very little by way of residue prior to other expenses of the estate.

Ellen, too, had made a will dated 4 April 2005, the structure of which was very similar to that of Hilda (“Ellen’s Will”). Leaving aside the details of specific legacies, and of gifts which lapsed as a result of both Hilda and Anne predeceasing her (none of which is material for present purposes), by clause 6 of her will Ellen left the residue of her estate to the Four Charities equally.

Although gifts to charities are and were exempt from charge to inheritance tax by virtue of section 23 of the 1984 Act, the combined effect of the two wills was that the Property and Hilda’s residue passed first to Ellen on Hilda’s death, and only on Ellen’s death did these pass to the Four Charities. Thus, the gifts which ultimately benefited the Four Charities attracted inheritance tax, albeit indirectly.

In the Witness Statement the Claimant, who is a solicitor, says that in 2007 she was aware of the possibility of taking advantage of section 142 (Footnote: ¹) of 1984 Act by effecting a deed of variation within two years of the date of death in order to redirect gifts passing under a will. Under section 142 such a variation would take effect for inheritance tax purposes as at the date of death. In this regard the Claimant was apparently aware that if such a deed of variation were used to redirect all of Ellen’s entitlement under Hilda’s Will to the Four Charities, there would be no inheritance tax at all to pay on Hilda’s estate, since the total of chargeable transfers arising from Hilda’s death would be less than Hilda’s then available nil rate band of £275,000, and the redirected gifts of the Property and the residue would enjoy relief under section 23 of the 1984 Act. In other words, the sums otherwise due by way of inheritance tax would accrue to the Four Charities under Hilda’s Will (as deemed to be amended by the deed of variation).

Accordingly, following Ellen’s death on 11 September 2007 the Claimant, in the name of the firm of solicitors in which she is a partner, wrote to each of the Four Charities proposing a deed of variation. Exhibited to the Witness Statement is a copy of the letter dated 5 November 2007 which was sent to the RSPCA (the letters to the others being in identical terms). That letter contained the following:

“However, a bigger picture occurs to us. If as Personal Representative of the late Ellen Mary Bolton our Melinda Giles were to enter into a Deed of Variation in respect of the late Ellen Mary Bolton’s entitlement to the estate of the late Hilda Bolton, this could save a considerable amount of Inheritance Tax. We are therefore drafting a Deed of Variation to the effect that Ellen Mary Bolton give up her entitlement to the estate of her late sister in favour of the same charitable beneficiaries who are entitled to the estate of herself, i.e. Ellen Bolton. This should make the first estate, i.e. the estate of Hilda Bolton, totally exempt for Inheritance Tax…”

There are two significant features of that passage: first, the proposed deed of variation is intended to have the effect of Ellen “[giving] up herentitlement to the estate of [Hilda]”; second, it is anticipated that the deed of variation will render Hilda’s estate “totally exempt” from liability to inheritance tax. (My emphasis.)

Of the Four Charities, three replied to the Claimant indicating their broad agreement to the proposal. There was no response from RNIB.

On 24 November 2007 the Deed of Variation was executed by the Claimant. This document had been drafted by the Claimant herself.

On 5 December 2007 the Claimant, as administratrix of Hilda’s estate, signed four Memoranda of Appropriation (“the Memoranda”) purporting to appropriate the Property to the Four Charities in part satisfaction of what was described in the Memoranda as their respective quarter shares in the residue of Hilda’s estate. The Memoranda expressly refer to Hilda’s Will as “varied by the Deed of Variation”.

The Claimant’s firm wrote to HMRC on 11 December 2007 enclosing the Deed of Variation. The letter states:

“Re: Hilda Elsie Bolton, deceased

43 Crosby Road, Westcliff on Sea

Further to this matter we attach Deed of Variation in duplicate for noting and return and it will be noted that this will have an effect on the Inheritance Tax being charged for this property and we therefore look forward to receiving amended calculations and refund.”

Two features of this letter should be noted: first, the writer is clearly under the impression that the Deed of Variation has an effect on the inheritance tax chargeable in respect of the Property; second, the writer believes that the effect in question will result in a refund of inheritance tax by HMRC.

The Property was sold soon afterwards, in December 2007. The Claimant states in the Witness Statement that she believed she was selling the property as a bare trustee for the Four Charities, having exercised a power of appropriation.

Contrary to the apparent intention set out in the letter to the Four Charities, the Deed of Variation did not redirect to them Ellen’s entitlement to Hilda’s estate. On its wording the Deed of Variation redirected to the Four Charities only the gift of the residue of Hilda’s estate. Therefore in other respects the terms of Hilda’s Will, and in particular the specific devise of the Property to Ellen, were unchanged for the purposes of section 142. Contrary to what was stated in the letter to HMRC, the Deed of Variation had no effect at all on the inheritance tax chargeable on the Property; it did not purport to affect the Property in any way. Since the refund of tax anticipated by the Claimant in her letter to HMRC was wholly linked to the redirection of the Property, the Deed of Variation did not result in any entitlement to a refund. It achieved no saving of inheritance tax at all.

In addition, the Deed of Variation contains two obvious errors of a clerical nature. First, paragraph 3 of the recitals refers to “clause 4” of Hilda’s Will when it should refer to “clause 5”. Second, there is a reference, in substantive clause 4, to “the Inheritance Tax Act 1979”. No such Act exists. The reference should be to the 1984 Act. The Court is also asked to rectify these clerical errors.

The Claimant submits that the wording of the Deed of Variation did not properly record her intention, or indeed the intention and/or understanding of the Four Charities to whom the Claimant circulated the draft Deed under cover of the letter dated 5 November 2007. Because only the residue was redirected, rather than all of Ellen’s entitlement under Hilda’s Will, the Property (subsequently agreed with HMRC to be worth £415,000 at the date of Hilda’s death) remained within the charge to inheritance tax, thereby defeating the object of the exercise undertaken by the Claimant.

In these circumstances it is submitted by the Claimant that the Deed of Variation can and should be rectified by the court in the proper exercise of its discretion.

When considering rectification of a unilateral document (such as the Deed of Variation) a leading authority and source of guidance appears to be the decision of the Court of Appeal in Racal Group Services Ltd v Ashmore [1995] STC 1151. It is no doubt for this reason that, although not opposing the claim for rectification, HMRC expressly asked that this authority, together with one other, be brought to the Court’s attention.

An analysis of the Judgment of Peter Gibson LJ (with whom the other two members of the Court of Appeal agreed) reveals the following, closely related, criteria for grant of the discretionary remedy of rectification:

It is necessary to consider these criteria in the context of the facts in this case, none of which is actually disputed.

Quite apart from her evidence in the Witness Statement, the intention of the Claimant in executing the Deed of Variation is established beyond doubt in the light of the contemporaneous documents, and in particular her letters to the Four Charities of 5 November 2007 (see paragraphs 12 and 13 above), her letter of 11 December 2007 to HMRC (see paragraphs 17 and 18 above) and the Memoranda (see paragraph 16 above).

These documents establish that the Deed of Variation was at all times intended to achieve the following: the whole of Ellen’s entitlement to Hilda’s estate, however arising, (and not just the residue) should be surrendered and redirected to the Four Charities; Hilda’s estate would thereby be rendered “totally exempt” from liability to inheritance tax, producing an entitlement to a refund from HMRC; this would be achieved, wholly or mainly, by the effect of the Deed of Variation on the inheritance tax chargeable in respect of the Property.

It is also clear that the Claimant, in her capacity as Hilda’s administratrix, could not have believed herself in a position to appropriate the Property to the Four Charities in part satisfaction of their respective quarter shares in the residue of Hilda’s estate, unless she believed that the Property formed part of that residue, as opposed to being subject to the original specific devise. This further evidences the Claimant’s belief that by the Deed of Variation she had redirected the Property to the Four Charities, so that it formed part of the residue of Hilda’s estate.

There is therefore in my view no doubt as to what the Claimant intended to achieve by the Deed of Variation or as to what she believed at the time it had achieved. There is no evidence of a contrary intention on anyone’s part. In particular, three of the Four Charities expressed their agreement with the Claimant’s aim and proposed course of action in response to her letter of 5 November 2007.

I therefore consider that the requirement of “convincing proof of error” is satisfied.

The distinction drawn in the second criterion is between a mistake as to the effect of an instrument, and a misapprehension of what the fiscal or other consequences are of a document which does not in fact misimplement the parties’ or donor’s intention. A good illustration of this distinction is to be seen in a decision of the Court of Appeal which is the second of the two authorities HMRC wished to be drawn to the Court’s attention in this case.

In Allnutt v Wilding [2007] EWCA Civ 412 the Court of Appeal held that there had been no mistake as to the effect of creating a discretionary trust. Rather there was a misapprehension that creation of discretionary trust meant that the transfers of assets into such a trust were a potentially exempt transfer, as opposed to being subject to an immediate lifetime charge to inheritance tax. It was therefore not possible to rectify the settlement deed so as to create an interest in possession trust instead. Rimer J put the matter as follows at first instance ([2006] EWHC 1905 (Ch)):

“23.

The case is therefore one in which I find that Mr Strain intended to execute a settlement in exactly the form that Mr Wilding drafted. In so far as he was labouring under any sort of mistake when he did so, his mistake was not as to the language, terms, meaning or effect of the settlement. His only mistake was that a payment of the £550,000 to it would be a potentially exempt transfer.

24.

In my judgment a mistake of that nature is not one which the court has any jurisdiction to rectify. Since, for reasons given, Mr Strain must be assumed to have understood the meaning and effect of the substantive trusts and powers of the settlement he executed, and to have intended to execute a settlement in that form and having the legal effect it did, there is no error in the drafting of the settlement (or in his understanding of it) that calls for correction. Mr Strain's only mistake was in relying on Mr Wilding's implicit advice that the payment of money to that settlement would be a potentially exempt transfer. That was wrong, and apparently negligent, advice. But in the circumstances of the case the remedy of rectification is not available to cure the damage it has caused.”

The present case does not in my judgment fall foul of this obstacle. Here the effect of the Deed of Variation did not reflect the clear intention of the Claimant (and beneficiaries), namely to redirect the entirety of Ellen’s entitlement under Hilda’s Will to the Four Charities, rather than just her entitlement in respect of the residue. In these circumstances it is no bar to rectification that in executing the Deed of Variation it was undoubtedly an objective of the Claimant to relieve the Four Charities of the indirect burden of inheritance tax.

In relation to this issue, provided the intended effect is clearly proved, the courts appear to have taken a relatively relaxed approach to the precise terms in which that effect was to be achieved in the instrument. In Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA 560 (a case concerning rectification for common mistake in a bilateral document) Peter Gibson LJ observed at paragraph 34:

“Whilst it must be shown what was the common intention, the exact form of words in which the common intention is to be expressed is immaterial if in substance and in detail the common intention can be ascertained: Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 at page 54, per Dillon LJ, with whom Kerr and Eveleigh LJJ agreed.”

See also Wills v Gibbs [2008] STC 808, per Rimer J (as he then was) at paragraph 25, Ashcroft v Barnsdale [2010] STC 2544, and Vallings v Gibbon [2013] EWHC 2862 (Ch).

I have already found that in the present case the Claimant has established what was actually intended to be the effect of the Deed of Variation, namely to redirect the entirety of Ellen’s entitlement under Hilda’s Will to the Four Charities, rather than just her entitlement in respect of the residue. In my view that intention has been proved with the requisite precision, even though, as the Claimant indicates in the Witness Statement, there may be more than one route to achieving this within the Deed of Variation.

The Claimant submits that if rectification of the Deed of Variation is granted, it should be implemented by providing for the deletion of clause 2(a) of the Hilda’s Will, which made the specific devise of the Property to Ellen. It is clear that this, when combined with the Deed of Variation’s existing redirection of the residue of Hilda’s estate to the Four Charities, would achieve the Claimant’s original intention. I also accept that this is the route which is most consistent with the premise upon which the Memoranda were made.

As I have already indicated, there is no need for an actual dispute to exist, and it is irrelevant that rectification of the instrument in question is sought or consented to by all interested parties.

In the present case the only party adversely affected by the proposed rectification is HMRC and, as stated earlier, they have indicated that they do not wish to be joined and do not object to the claim. None of the Four Charities nor HMRC has appeared or been represented before me.

I note that on 7 November 2013 the Claimant and the Four Charities signed a draft consent order providing for rectification of the Deed of Variation. Mr Yates told me that this was done without taking account of the fact that rectification is a discretionary remedy. He submits, and I agree, that the signing of this draft order is not effective in the absence of the Court’s approval, and that it does not affect one way or another the existence of an issue capable of dispute.

Mr Yates submits that here the following issues are capable of being contested:

In expanding upon these points, Mr Yates argues in relation to point 1, that had the Claimant not also been the executrix of Ellen’s Will (under which the Four Charities benefited) there would have been an issue whether, quite apart from the deeming provision of section 142, the Deed of Variation gifted the Property to the Four Charities.

As to point 2, Mr Yates submits that again this depends upon the effect of the Deed of Variation, which is in turn dependent on this claim for rectification. The Deed of Variation (if rectified) would have reduced the amount of IHT payable by Hilda’s estate because, for IHT purposes, the Four Charities would have been treated as entitled to the Property under Hilda’s Will (as well as to any other residue). However, Ellen was up to and at the time of her death on 11 September 2007 the relevant beneficiary of Hilda’s Will, both under clause 2(a) and clause 5. The Deed of Variation was only made in late November 2007. Whatever the actual effect of the Deed of Variation (i.e. whether it gave rise to a “real world” entitlement in favour of the Four Charities, independently of Ellen’s Will), if the document is rectified it will mean that the Four Charities will either receive Ellen’s entitlement to Hilda’s estate free of IHT under the Deed of Variation, or by virtue of Ellen’s Will, or a combination of the two. Currently, the Claimant has accounted for IHT to HMRC in relation to Hilda’s estate. This reduces the value of Ellen’s entitlement to the residue of Hilda. Unless and until rectification is granted, the Claimant will have no right to a refund from HMRC (in respect of Hilda’s estate), the estate of Ellen will remain diminished, and the Four Charities will not be able to receive monies which have been paid to HMRC.

Mr Yates further submits that point (3) is a genuine and substantive dispute which can be seen as both a freestanding issue for present purposes, and/or as evidencing the reality of the potential issues under points (1) and/or (2). Any such negligence action will only arise to the extent that the Deed of Variation remains unrectified.

In my view Mr Yates is correct in submitting that there exist here potential issues which affect the rights of those concerned. This is not a case where, to borrow the words of Vinelott J in Racal (above) “their rights will be unaffected and …the only effect of the order [of rectification] will be to secure a fiscal benefit.”

It follows that this criterion, too, is satisfied in the present case.

In the light of the matters discussed above I consider that the criteria for rectifying the Deed of Variation so that it reflects the clear intention of the Claimant at the time it was made, are satisfied, and that in all the circumstances it is right to grant the relief. Although the Claimant acknowledges in the Witness Statement that there has been some lapse of time from the date the error was discovered (October 2008) to when steps were first taken to approach HMRC (November 2012), I am satisfied that the delay has not caused prejudice of any significant kind, and certainly not such as to lead me to decline the relief sought.

Accordingly I propose to order rectification of the Deed of Variation in the terms of the draft Order at Annex 2 to this Judgment, which was discussed during the hearing. The rectification so ordered includes consequential amendments to the recitals of the Deed of Variation to reflect the content of its schedule, as well as correction of the clerical errors referred to at paragraph 21 above.

Where within the period of two years after a person's death—

any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied….

Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.

The Deed of Variation dated 24 November 2007 made by the Claimant in her capacity as executrix of the estate of Ellen Mary Bolton be rectified by the alterations reflected in the text of the Deed of Variation appended to this order, namely:

The First to Fourth Defendants’ costs of and incidental to this claim, to be assessed on the standard basis if not agreed, are to be paid by the Claimant.

There shall be no further order as to costs.