In the late 1960s I came across a lady who was domiciled in one of the communist controlled Eastern European countries, but who had been living and working in London since shortly after WW2. Every summer this lady went back to Eastern Europe to visit the village where she was born: and every year before she went away she handed a sealed envelope to her friend and employer, asking him to look after it for her and indicating that if anything happened to her she wanted her friend to have the contents of the envelope. When the lady returned from holiday the envelope was returned to her unopened.
One summer whilst she was away on this annual holiday the lady died. A death certificate came from Eastern Europe, but there was no will in existence and no close relatives known. The friend opened the envelope, which contained a building society passbook in the lady’s name showing a significant credit balance. A statutory declaration was prepared covering the circumstances of the gift, sworn by the friend and sent to the building society’s head office with the original death certificate. The building society accepted there had been a valid gift and sent the lady’s friend a cheque in his favour for the balance in the account.
Gifts of this nature are rare, but when they do arise are often missed for what they really are – a gift on the occasion of death, often called a gift in contemplation of death and more correctly known by its Latin name, donatio mortis causa (DMC). The three essential components are –
- The donor must have had a contemplation of death at the time of the gift, but not necessarily an expectation of death
- The gift must be conditional on the donor’s death and not take effect if the donor does not die
- There must be a delivery of the subject matter of the gift or the essential indicia of title thereto which amounts to a parting with dominion and not merely physical possession over the subject matter of the gift (from Sen v Headley- see below)
These simple rules are complicated by various cases on the DMC doctrine. For a long time it was considered that land could not be the subject matter of a DMC – until the 1991 case of Sen v Headley.
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Sen v Headley
Mrs Sen and Mr Hewett had lived together as man and wife for ten years. After they stopped doing so they remained friends. Mrs Sen visited Mr Hewett every day when Mr Hewett was terminally ill in hospital and knew he did not have long to live. As the judgment records –
“On 4th December, three days before his death and when they were alone together Mrs Sen asked Mr Hewett what she should do about the house if anything should happen to him. Mr Hewett replied “The house is yours, Margaret. You have the keys. They are in your bag. The deeds are in the steel box. When she asked about the contents of the house he said: “Do what you like. It’s all yours.” Nothing more was said between them about the subject of the house or its contents.“
The judgment goes on to record that after Mr Hewett’s death, Mrs Sen found a bunch of keys in her handbag and believed Mr Hewett must have slipped them into the handbag without her noticing. The keys were to the house and to a cupboard in the house and also to a locked steel box in that cupboard which held the deeds to the unregistered title of the house. Mr Hewett died without a will and his nephew (Mr Headley) and two nieces were entitled on his intestacy. The Court of Appeal confirmed a valid DMC of the house, but not the contents, to Mrs Sen. As an aside, whether the decision would be the same with a dematerialised land registry title is still unresolved: what are the essential indicia of title? (see footnote below)
What else defeats a will?
A DMC is one example of where the provisions of the donor’s will or the intestacy rules are overridden. Other instances that could trigger this to happen are –
- the statutory rights given to dependants and children by the Inheritance (Provision for Family and Dependants) Act 1975
- a claim that a mutual will exists, usually made on the death of a survivor of a couple with similar wills ( Explained in Money Management March 2008 “ Mutually exclusive”)
- a claim that a lifetime promise should be honoured because of the intended recipient both reasonably relying on that promise and suffering detriment as a result of that reliance, giving rise to the doctrine of constructive trusts
- a defective or defectively drafted will, including the application of the rule that marriage or entering into a civil partnership will revoke an existing will, unless that will is expressed to be in contemplation of that marriage/civil partnership.
The significance of whether a gift is effective and, if so, what type of gift is involved is obviously relevant for the intended recipient but can also have an impact on the donor’s inheritance tax position. A DMC is an incomplete gift for legal and IHT purposes so the property gifted remains in the donor’s estate. The intended recipient of a DMC has a right to make the donor’s personal representatives complete (or perfect) the gift – so a DMC can be regarded as a legacy notionally written into the will/intestacy provisions with the liability for any IHT nearly always falling onto the residue of the donor’s estate.
Gifts by cheque
A DMC is an exception to the general rule that a gift must be perfected to be valid. This is particularly relevant in the case of cheques written by a donor to use the annual capital or any lifetime IHT exemption. The rule is that a gift by cheque is completed (or perfected) when the cheque has been cleared into the recipient’s bank account, not when the cheque is written out or handed to the recipient.
It is this date of clearance that is the date of the gift for IHT purposes, which needs to be remembered when using the annual IHT capital allowance of £3,000 if it is being done at the end of the fiscal year. If a cheque is intended to use the IHT marriage exemption keep in mind the rules set out in the estate duty case of Rennell v IRC and IHTM p14201 –
“Gifts or settlements made after marriage or civil partnership do not qualify for the exemption unless made in the fulfilment of a binding promise before marriage or civil partnership.”
Some case law suggests that a cheque not cleared before death could be a valid DMC depending on the circumstances, but the position is uncertain. HMRC’s view contained in the IHT manual at paragraph 14882 states – “a gift by cheque is not complete until the cheque itself is cashed” or “cleared.”
Gifts of land
More significant is HMRC’s approach to gifts of land. A valid lifetime gift will be a disposal for capital gains tax purposes often, if to a member of the donor’s family, with the more restrictive connected persons CGT provisions applying. There may be immediate IHT exemptions to apply to reduce the agreed value for IHT (but not CGT) purposes. The value of the gift will be at the time the gift is made – but what does this mean? HMRC’s IHTM at paragraph 14883 states –
“An outright gift of an interest in land is completed on the execution of the formal transfer, conveyance or assignment of the property or of a declaration of trust evidenced by writing (Law of Property Act 1925 s. 53(1)(b)). Any preliminary agreement to make the gift which lacks the necessary formality would be ineffective.”
This statement overlooks cases like Sen v Headley which records “section 53(2) of the Law of Property Act 1925 excluded constructive trusts from the formalities for the transfer of land imposed by section 53(1)…”
The date for valuation can be important if there is a delay in putting in place a formal transfer document at a time when values are rising quickly; or the donor could have died before the transfer is executed; or the “formal transfer” may just be within seven years of the donor’s death. If between the donor verbally proposing to make the gift and the execution of the transfer document, the intended recipient in reliance on the promised gift starts expending his or her own money eg instructing an architect to draw up modernisation plans or starting renovation of the property, then there is a good case to argue on constructive trust principles that the valuation date is the earlier date when the commitment to that expenditure was made by the intended recipient and the gift was enforceable from that time.
Forgiving a debt
This is another issue that can often trap advisers. In many families there can be an informal loan from a parent to an adult child, often to help the child to purchase a home. Sometimes there is no documentation. After a year or so the parent decides the loan is forgiven and tells the child there is no need to repay it. To complete the waiver the parent should execute a deed of release. The IHTM at paragraph 19110 headed “Legal background: waiver of loans by deed” gives a full explanation and contains the statement –
“If any loan has been waived by the lender so that the estate of the lender is reduced for inheritance tax purposes by the amount of the loan released, the waiver must be effected by deed….So a unilateral release of a debt not founded on, nor accompanied by consideration, is void at law and in equity if it is not made by deed.”
Financial advisers should be aware of these issues, not necessarily to advise on the detail, but just to have a fuller understanding of what may occur. No professional adviser is infallible. Sometimes just asking about a seemingly failed gift – “Could this be a DMC or constructive trust case?” – might cause a meaningful reappraisal of the position.
The principles in Sen v Headley were followed (but that case does not appear to have been cited) in the recent case of King v Dubrey 2014 EWHC 2083 (Ch) where it was decided that an aunt had made a valid DMC of her family home four to six months before her death.
Acknowledgement: With thanks to Money Management, an FT publication, where this article was first published.
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