Deed of Variation – Rectification – Ashcroft v Barnsdale [2010] EWHC 1948

 In Wills

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

The function of rectification is to put right a mistake in the way the parties recorded their agreement. The problem often is that it is hard to distinguish the misapprehension about the tax consequences of executing a particular document from the parties’ specific intention as to how the fiscal objective was to be achieved in the terms of the agreement. Simple misunderstanding of the tax consequences does not justify an order for rectification as the case of Ashcroft v Barnsdale [2010] EWHC 1948 shows:

The facts

Charlotte Ashcroft (the deceased) died on 14 April 2006leaving a Will under which she appointed her husband, David, and her brother, Andrew Barnsdale, as her executors and trustees.

By clause 3 of her Will she left David “free of all duty and taxes payable at my death (a) the sum of £10,000 and (b) all my freehold property situated in Surrey or Hampshire and occupied or farmed by me or me and my husband.”

Free LawSkills Newsletter

If you like our articles, why not subscribe to our free monthly newsletter with regular Private Client news, views and advice from leading legal minds. It's quick, easy and you can unsubscribe at any time if you no longer want to receive it.

Sign Up Now

By clauses 4 & 5 the deceased gave the residue of her estate on trust for her two children (Helen & Richard) absolutely. Clause 6 contained an extended power of investment.

Charlotte’s estate was worth approximately £1.7 million and the principal assets were farmland in Surrey worth about £585,000; shares and other investments worth about £995,000 and a share in a farming business worth about £80,000.

The Will was not efficient for tax purposes as the agricultural property was passing to the surviving spouse and the chargeable assets were falling into residue for the chargeable beneficiaries thus wasting Agricultural Property Relief at 100%.

The estate’s accountants suggested that a Deed of Variation be prepared in which David exchanged the farmland for part of the share portfolio. A Deed of Variation was prepared by the estate’s solicitors on 24 August 2006 which provided that clauses 3,4 & 6 of the Will be deleted and the following clause be inserted:

“2.1(a) I GIVE the sun of £410,000 to such of my children as shall be living at the date of my death and if more than one in equal shares.

2.1(b) I GIVE to my children as shall be living at the date of my death my agricultural farmland known as Great Holt Farm Dockenfield Farnham Surrey and if more than one in equal shares.

3 I GIVE DEVISE and BEQUEATH all my estate both realty and personalty whatsoever and wheresoever not otherwise disposed of by this my said Will to my husband David Arnold Ashcroft.”

There was no clause 3 in the Deed but by clause 4, which was headed “Executor’s Undertaking”, the executors undertook to administer the estate in accordance with the variation made by the Deed. Clause 5 of the Deed included the notices to HMRC under ss. 142 IHTA 1984 and 62 TCGA 1992.

The Deed of Variation was mistaken in a number of ways:

  1. there was no clause 3 – the draftsman having confused the new clause 3 of the Will with clause 3 of the Deed;
  2. the deletion of clauses 3, 4 & 6 was wrong because the residuary gift to the children was actually contained in clause 5 of the original Will
  3. the Deed left a sum of £410,000 to the children although the letter from the estate’s accountant had suggested the sum should be £410,772
  4. on submission of the IHT 200 to HMRC it became apparent that the gift to the children had to be treated as ‘free of tax’ since there was no indication to the contrary and therefore had to be grossed up causing a further £33,000 of IHT to be due, which reduced the residuary estate.

Initially, the parties sought to correct the mistake by executing a Deed of Rectification dated 20 September 2007 which was submitted to HMRC under cover of a letter dated the same date. In the letter the estate’s solicitors asked HMRC to revise the IHT position which they refused to do saying that the parties would need to apply to Court for rectification. HMRC said they would not seek to be joined as a party to the application and would be bound by the court’s decision but asked the court to take into account the cases of Racal Group Services Ltd v Ashmore [1995] STC 1151 and Allnutt v Wilding [2007] EWCA Civ 412.

The law

The Court of Appeal in Racal Group Services Ltd v Ashmore dismissed a claim for a covenant to be upheld when it failed to establish the required standards for tax relief. Peter Gibson LJ said:

“In my judgement, the principle…is that the court will make an order for rectification of a document if satisfied that it does not give effect to the true agreement or arrangement between the parties, or to the true intention of a grantor or covenantor and if satisfied that there is an issue, capable of being contested, between the parties or between the covenantor or a grantor and the person he intended to benefit, it being irrelevant first that rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences. On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.”

Counsel for David submitted that in this case that although the relief sought would reduce the estate’s IHT liability it also would change the burden of IHT between the parties benefitting David at the expense of the children.

In Allnutt v Wilding [2007] EWCA Civ 412 the trustees of a discretionary settlement sought to rectify it after the death of the Settlor on the grounds that the solicitor had made an error in drafting the settlement because he had not appreciated the need to confer interests in possession on the beneficiaries with the consequence that the settlement had not given effect to the settlor’s underlying intention of making a PET and thereby avoid paying IHT. The Court of Appeal upheld the first instance decision rejecting the application since the remedy was to enable the parties to correct mistakes in the way their transaction had been recorded and not to enable them to change the substance of the transaction entered into.

Counsel for David argued that the distinction between “effects” and “consequences” only applies to the rectification of a voluntary transaction whereas here the Deed of Variation was the product of an agreement between the parties; also in Allnutt the terms of the settlement were in accordance with the intention of the settlor whereas here the Deed had failed to give effect to the true intention of the parties.

The result

Judge Hodge QC rejected Counsel’s first point in Allnutt saying it would be wrong to confine to cases involving voluntary transactions the distinction between a mistake as to the meaning or effect of a document and one as to its consequences. This distinction is inherent in the nature of the equitable remedy of rectification itself.

In this case the mistake resulted from the inadvertent omission of a word or phrase (i.e. ‘subject to tax’) from a document and it is sought to introduce these additional words to cure the mistake. It is easier to prove the intention was to include rather than exclude words since the parties will not always appreciate the legal effect of the omission of particular words.

He was satisfied that a mistake as to the meaning and effect of the Deed had occurred on the evidence of David in his witness statement and of Helen & Richard (as a result of the recitals in the Deed of Rectification and the fact that they did not seek to contest the claim) as to what they understood to be the effect of the Deed of Variation and of the letters from the accountants as to the reason for the making of the Deed.

Practice points:

  1. Always draw up an attendance of any meeting at which decisions are made – contemporaneous notes were not made in this case at the meeting at which the terms of the Deed of Variation were agreed.
  2. Always make sure that the effect of what has been drafted is explained to all parties and their advisers and consider why omissions were made – lawyers understand the significance of ‘subject to tax’ clients and other advisers may not appreciate the default position in the absence of those words.
  3. Always ask someone else to read what you have drafted before sending it out as this can hopefully catch silly mistakes like the reference to the wrong clauses in the Will.

© Gill Steel, LawSkills Ltd

Free LawSkills Newsletter

If you like our articles, why not subscribe to our free monthly newsletter with regular Private Client news, views and advice from leading legal minds. It's quick, easy and you can unsubscribe at any time if you no longer want to receive it.

Sign Up Now
Recent Posts