Rectification – Will – Deed of variation – Deed intended to reduce sum of inheritance tax chargeable without changing liability of deceased’s children to pay it – Deed erroneously placing liability for inheritance tax on father – Whether rectification of deed possible – Whether deed failing to reflect parties’ true intentions – Application allowed
The claimant was one of two executors and trustees of his late wife’s will; the other was the first defendant. The deceased left the sum of £10,000 plus her farmland to the claimant, free of all duty and taxes payable on her death, with the residue of the estate to be held on trust for their two children, the second and third defendants. The legacy was inefficient because it failed to make use of the inheritance tax exemption for surviving spouses; the exemption was not required for the farmland, which attracted 100% agricultural property relief. The parties agreed that the claimant should exchange the farmland for equivalent monetary value and become the residuary beneficiary. The aim was that the surviving spouse exemption would apply to the entire estate, save for the gift to the children, which would, as to the farmland, benefit from the agricultural property relief.
To that end, the parties executed a deed of variation, which provided for a pecuniary gift of £410,000 plus the farmland to the children with the residue of the estate going to the claimant. However, the deed contained a major defect in that, under section 211 of the Inheritance Tax Act 1984, the pecuniary gift was to be treated as being free from tax and therefore had to be grossed up under section 38, such that the claimant, as the residual beneficiary, bore the incidence of the inheritance tax.
The parties wanted to correct that mistake so that the children would continue to bear the inheritance tax liability. HM Revenue & Customs (HMRC) indicated that they would have to apply to the court before it would accept the rectification for inheritance tax purposes. The claimant made an application seeking to insert the words “subject to inheritance tax” into the clause dealing with the pecuniary gift to the children. He submitted that the distinction drawn in Allnutt v Wilding [2007] EWCA Civ 412; [2007] BTC 8003 between mistakes as to the effects and the consequences of a transaction, with rectification permissible to remedy the former but not the latter, applied only to voluntary transactions, whereas the deed of variation was the product of an agreement between the parties.
Held: The application was allowed.
(1) The distinction between a mistake as to the meaning or effect of a document and one as to the consequences of, or the advantages to be gained from, that transaction was not confined to voluntary transactions. The relevance of the distinction did not depend on the nature of the document but was inherent in the equitable remedy of rectification. The function of rectification was to correct a mistake in the way in which the parties had recorded their transaction; it did not empower the court to change the substance of or to correct an error in that transaction: Allnutt applied.
(2) So long as a mistake related to the meaning or effect of a document, relief might be available even though the parties had deliberately adopted the actual words used in the document. The fact that they had employed a particular form of words in the mistaken belief that it was achieving their common intention did not prevent the court from giving effect to that intention. Where the mistake resulted from the inadvertent omission, rather than inclusion, of certain words, it might in practice prove easier to establish a mistake since parties would not always appreciate the legal effect of omitting particular words. However, the requirement of an outward expression of accord might require some modification in its application to omission cases; it might be more difficult for parties outwardly to express an intention to include certain words when they did not appreciate the need for them: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 considered.
(3) The court could not rectify a document merely because it failed to achieve the parties’ fiscal objectives. The parties had to show their specific intention as to how their fiscal objective was to be achieved. The court would order rectification only if there were cogent evidence that: (i) the document did not give effect to the true agreement or arrangement between the parties; and (ii) there was an issue, capable of being contested, between the parties, it being irrelevant for that purpose that rectification was sought or consented to by all the parties or that it was sought because of its beneficial fiscal consequences. Conversely, the court would not order rectification if the parties’ rights would be unaffected and the only effect of the order would be to secure a fiscal benefit: Racal Group Services Ltd v Ashmore [1995] STC 1151 applied.
(4) Rectification was available to the claimant because the deed of variation failed to give effect to the true agreement of the parties. Under the terms of the will as executed, the assets left to the claimant were to pass to him free from any liability for inheritance tax, the burden of which was to fall on the children. In executing the deed of variation, the parties had not intended to change the basic position regarding inheritance tax but had wanted to reduce the sum payable. If there had been an intention to change the basic position, it would have been addressed in the contemporaneous documentation and would have been translated into a consequential change in the amount that was to pass to the children by way of pecuniary legacy under the deed of variation. The omission of any reference to such matters amounted to an outward expression of the parties’ true accord. Further, their mistake was not solely as to the fiscal consequences of the deed. The claimant had established a specific intention as to how the parties’ fiscal objectives were to be achieved and that, owing to a mistake in the way in which the intention was expressed in the deed, that intention had not been put into effect. The parties had failed to appreciate that, in order to give effect to their true objective, the words “subject to inheritance tax” had to be inserted into the clause that dealt with the pecuniary legacy to the children. An order for such rectification would address an issue that could be contested by the parties, given the indication by HMRC that an order of the court was required before they would accept the rectification for inheritance tax purposes.
Thomas Entwistle (instructed by Butler & Co, of Oxsted) appeared for the claimant; the defendants did not contest the claim and were not represented.
Sally Dobson, barrister
