fbpx

Trusts – Court Relieves Family of Severe Tax Consequences of Drafting Error

18th June 2021 By

Trusts are delicate and often complex legal instruments and any flaws in the wording of documents relating to them can have grave tax and other consequences. As a High Court case showed, however, inadvertent drafting errors can be corrected.

The case concerned two trusts of which a widow and her son, her only child, were trustees and beneficiaries. They contained assets worth over £700,000, including a half share in the widow’s home. By deeds of appointment, the son was granted life interests in both trust funds. The effect was that the funds were held on trust for him during his lifetime, with anything left over on his death passing to his children.

The fact that the son was unmarried and had no offspring gave cause for concern in that, if he died before his mother without leaving a widow or children, the trust funds would revert to his mother. If that happened, Inheritance Tax (IHT) would be payable on the funds when the son died and again when the mother died.

In order to avoid that risk, further deeds of appointment were drafted with a view to adding default beneficiaries of the trusts, including the son’s five cousins. Due to a drafting error, however, the deeds had the inadvertent effect of terminating the son’s existing life interests in possession and appointing new ones in their place.

The tax consequences of the error were extremely serious: amongst other things, it gave rise to an immediate potential charge to IHT of more than £80,000, with further IHT liabilities arising every 10 years. The son would also be treated as having made a gift with reservation of the underlying property in the funds so that, for so long as he remained interested in them, they would fall into his estate for IHT purposes in the event of his death. In those circumstances, the son launched proceedings with a view to putting right the error.

Ruling on the matter, the Court noted that the mother and the cousins all supported the son’s claim on the basis that the funds would otherwise be severely depleted by tax liabilities. HM Revenue and Customs alone would be prejudiced by the grant of the relief sought but had chosen to play no active part in the proceedings.

The Court found that the drafting of the deeds of appointment was clearly flawed. The termination and reappointing of the son’s life interests had a legal effect that was neither intended, wanted nor needed. The intention had not been to affect the son’s interests in any way but merely to appoint default beneficiaries. The Court made an order rectifying the deeds in order to give effect to that intention.

Source: Concious

Latest News

Award That Requires Borrowing Made Into Court Order

17th May, 2024 By

Disagreements between separating couples all too often result in litigation that substantially reduces the assets available to them, as was illustrated by a case that recently reached the High Court. At issue was whether awards made by arbitrators in financial remedy proceedings can be made into court orders even if that would require one of the parties to borrow money. The couple had previously had a relationship lasting a few years before resuming their relationship in 2015. They had two children before separating again in 2019. Following their separation, the...

Inheritance Disputes – Costs Risks Can Be Reduced

15th May, 2024 By

Arguments about what someone promised before their death can lead to significant legal costs. However, if faced with a claim against the estate, there may be steps the beneficiaries or executors can take to reduce the risks, as a recent High Court case illustrated. A man had left a farmhouse and agricultural land in Cornwall to his wife, with whom he had also jointly owned a neighbouring area of land. After his death, one of the couple's daughters and her husband claimed that he had told them he wanted them...

Share Rounding Error Does Not Prevent CGT Relief

13th May, 2024 By

There are often very specific rules that must be complied with in order to claim tax reliefs, but if a small mistake arises, the courts may be able to provide assistance. In a recent case, the First-tier Tribunal (FTT) found that an investor was entitled to Entrepreneurs' Relief on the disposal of his shares in a company, despite owning one share fewer than he needed to qualify for it. The investor had agreed to purchase 5 per cent of the shares in the company for £500,000. He wished to own...

Wife Entitled to Maintenance Until Sale of Family Home

10th May, 2024 By

When divorcing couples disagree on how assets should be divided, the courts will seek to arrive at a fair outcome for both parties. In deciding how the proceeds of sale of a former couple's home should be apportioned, the Family Court agreed with the wife that she should receive maintenance payments until the sale took place. The couple had married in 2006. Following a brief separation, they had reconciled for two years before finally separating in 2022. The husband and wife both contended that they should be entitled to about...