Construction – RSPCA v Sharp & Mason [2010] EWCA Civ 1474;[2010] EWHC 268

 In Tax, Wills

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The awkward case of RSPCA v Sharp reached the Court of Appeal on 21 December 2010. It was an appeal by the RSPCA against the judgment of Peter Smith upon the interpretation of a testator’s Will. The interpretation of the Will had been challenged by the RSPCA as residuary beneficiary and caused much debate. He found against the charity and was most critical of their approach to the matter. The Court of Appeal unanimously disagreed with the trial judge and concluded the RSPCA should succeed.

The facts

George Mason made a Will on 19 January 2005. He appointed his lifelong friends, Mr and Mrs Sharp, as his executors and then made the following gifts:

“3. I GIVE the amount which at my death equals the maximum which I can give to them by this my Will without Inheritance Tax becoming payable in respect of this gift:

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(a) as to 78% to the said Norman James Sharp and Patricia Daphne Sharp as shall survive me and if more than one in equal shares absolutely

(b) as to 22% to John Edward Mason of 4 Jervis Avenue Freezywater EN3 6LT absolutely

4. I GIVE my property situate and known as 39 Malvern Road Gosport in Hampshire PO12 3LH to the said Norman James Sharp and Patricia Daphne Sharp as shall survive me and if more than one jointly and equally absolutely and I direct that the Inheritance Tax (if any) payable on my death in respect of the property and all costs of the registration of the said Norman James Sharp and Patricia Daphne Sharp as proprietors thereof shall be payable out of my residuary estate.

5. SUBJECT TO the payment of my just debts funeral and testamentary expenses and the legacies given by this my Will or any Codicil hereto I GIVE DEVISE AND BEQUEATH the residue of my estate of whatsoever nature and wheresoever situate (which said estate and property and the property for the time being representing the same and herein referred to as “my residuary estate”) unto my trustees upon trust to sell the same or any part thereof or to retain the same or any part thereof in its actual state of investment or condition at the time of my death.

6. MY TRUSTEES shall possessed of my residuary estate upon trust for the Royal Society for the Prevention of Cruelty to Animals of Causeway Horsham West Sussex RH12 1HG for its general purposes and I direct that the receipt of the secretary treasurer or other proper officer shall be a sufficient discharge to my trustees.”

The deceased’s estate on death comprised £771,178 in Bank and Building Society accounts; £12,832 in cash; and the property at 39 Malvern Road valued at £169,000.

The nil rate band at the time of Mr Mason’s death was £300,000 and the executors administered the estate on the basis that the full value of the NRB was to be divided as per clause 3 between themselves and the deceased’s brother. The house was then to be given free of tax to the Sharps which would mean that the residue had to bear IHT of £112,667 on the gift of the house. As a result the RSPCA would receive £370,153.

The arguments

The RSPCA argued that the way the Sharps construed the Will was incorrect. It argued that the way to determine how much of the NRB was available for distribution under clause 3 was to calculate the value of the house passing under clause 4 and deduct this from the NRB which meant only £131,000 was left for division under the terms of clause 3. The effect of which was that the residue did not bear any IHT at all and the cash gifts in clause 3 were significantly reduced. This is how IHT works –

  • s.1 IHTA 1984 provides that IHT shall be charged on the value transferred by a chargeable transfer.
  • S.2 IHTA 1984 defines a chargeable transfer as a transfer of value – i.e. a disposition as a result of which the value of the transferor’s estate immediately after the disposition is less than it would be but for the disposition
  • S.3(1) says the amount by which it is less is the value transferred
  • S.4(1) provides that on the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death

It is common form to include pecuniary and specific legacies in Wills before any further clause soaking up the NRB. In this case the order of the clauses in the Will was differently organised. The RSPCA’s claim was that the way in which they would interpret the Will was more tax efficient and that was surely what the deceased had intended:

RSPCA’s view Executor’s view
Clause 3 for Sharp’s £102,180 £234,000
Clause 3 for Brother £28,820 £66,000
Clause 4 – house £169,000 £169,000
HMRC NIL £112,667
Charity £651,820 £370,153

It was argued that the maximum amount which the deceased could give at his death “by this my Will” is the sum which could be paid under clause 3 without IHT being payable and that required taking into account the other clauses in the Will.

Counsel for the executors argues that the RSPCA’s construction did not properly reflect what the Wills says or what was likely to have been the intention of the Testator. Whilst he agreed that the ‘maximum that can be given without IHT becoming payable’ must be read as referring to the nil rate band under Schedule 1 IHTA 1984; the gifts in clauses 3 & 4 were separate gifts which the draftsman thought would produce their own fiscal outcomes. He argued that the Will should be construed on a sequential, gift-by-gift basis.

Counsel for the executors contended that it would be wrong to attribute knowledge of tax avoidance to ordinary people or to legal executives in small high street firms of solicitors but Lord Justice Patten regarded that comment as rather patronising and anyway not relevant as the wording of the Will did disclose some knowledge and understanding of the way IHT worked.

The decision

Lord Justice Patten made the point that in the absence of extrinsic evidence (i.e. the contents of the Will file), which the parties had agreed was not admissible, the court must construe the language of the Will so as to find the meaning which the testator intended; not what he meant to do when he made his Will but what the written words he used mean.

Both Patten LJ and the Master of the Rolls, Lord Neuberger, agreed that it was necessary to examine the wording of the Will as a whole and not to consider the clauses sequentially.

The difference between the parties was whether of not the Testator intended to make a Will which was IHT free unless the property exceeded the value of the NRB in value.

The Court of Appeal identified case law confirming that all bequests stand on an equal footing and therefore the order in which they appear in the Will does not by itself determine that the testator intended that the bequests should not stand on an equal footing. If this was the Testator’s intention there must be clear and sufficient words to indicate that one clause is subordinate to another simply because it is later in the Will.

Even though the Judge at first instance said that if the value of the house on death had exceeded the NRB then the Sharps and the deceased’s brother would receive no cash and

“I cannot believe that that is what the deceased intended. It is so unlikely as to be incredible. Further it is not logical and gives undue violence to the simple and straightforward wording of clauses 3 & 4.”

The Court of Appeal pointed out that in fact the value of the property was scarcely half the NRB on death and the testator may well have thought that the bequests would have still meant a sizeable legacy under clause 3. As Lord Neuberger observed, the notion that clause 3 might have no effect is no more surprising than the notion that clause 6 might have no effect; the value of the estate could have fallen, or the amount of the NRB could have risen to such an extent between the date of the Will and the date of death such that there would have been no residue.

The Court was therefore unanimous (Lord Black concurring) in its overturn of the judgement at first instance and the confirmation of the RSPCA’s interpretation of the Will.

Practice points

  1. How do you word your Wills when you include specific and pecuniary legacies as well as a ‘maximum sum’ gift under the NRB?
  2. If the value of the NRB on death is to be given as one type of legacy and an additional chargeable gift is to be made as well (i.e. not a tax saving Will), the wording of the NRB gift should not follow the standard form of the ‘maximum sum I can give by this my Will’ but rather would have to be a gift of such sum equal to the nil rate band as it appears in Schedule 1 IHTA 1984 with specifically no linkage to the other clauses in the Will.

© Gill Steel LawSkills Ltd

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