The England & Wales High Court has granted an application to alter a deed of variation to a will on the ground that it created unintended and detrimental tax consequences.
Traditionally the Court’s view was that a rectification was only available if the author of the Variation had made a mistake regarding the legal effect of the document. This was first expressed in Gibbon v Mitchell in 1990 but appears to be changed by this more recent case.
In Ashcroft £10,000 plus some farmland comprised in the £1.7 million estate was to pass to the deceased’s husband and the rest was to pass to the children. The husband’s accountant suggested that a variation be carried out to make the Will more tax efficient. A variation of any sort can be carried out within two years of death with the original beneficiaries consent. Often variations are used to achieve a more tax efficient result for the estate. The variation in this case was defective and the unwelcome result was an extra IHT charge of £33,000 on Mr Ashcroft’s share of the estate, created by the grossing-up provisions of s.38 of the Inheritance Tax Act 1984. If the deed had been drafted properly he would not have had to pay any IHT at all.
To avoid this extra IHT charge and to reverse the detrimental effect Mr Ashcroft executed a deed of rectification. It was not contested by any of the beneficiaries but HM Revenue & Customs refused to accept it without a court order which led to proceedings being issued.
The Court decided that the mistake amounted to a different legal consequence of the deed in its entirety and not just a different tax consequence.
The judge compared the position in this case to a voluntary settlement where “it is clear that there is jurisdiction to order rectification if there is cogent proof of a relevant mistake on the part of the settlor notwithstanding the absence of proof of any mistake on the part of any of the trustees”.
He upheld the claim for rectification distinguishing between a mistake as to the fiscal effect of the Variation and the document not giving effect to the agreement between the parties. The Court would not order rectification if the only effect was to secure a fiscal benefit to one or both of them if their rights were unaffected. However, where the mistake was regarding the meaning or effect of a document a rectification will be allowed.
Of course, with proper lifetime planning and correct advice a variation would not have been necessary. Where it is necessary to carry out a variation on a Will then professional advice should always be sought.
