Many couples have Wills which give a legacy of the nil rate band amount (usually to a trust) in order to reduce inheritance tax when the second one of them dies.
Prior to 2007 this was the only way of ensuring that the nil rate band of the first to die of a couple (married or in a civil partnership) could be used to maximise inheritance tax relief without inconveniencing the survivor. Post 2007 any unused nil rate band of the first half of the couple to die can be claimed by the executors of the second one to die. Many Wills still contain a nil rate band legacy to a discretionary trust, either because those Wills have not been reviewed and updated, or because the trust provides benefits other than just the use of the nil rate band.
In most cases there was insufficient sole name savings and so the legacy could only be funded using the couple’s home. However, for, say, the husband’s half of the house to be available on his death to fund a nil rate band legacy to a trust for his wife and children, it is generally necessary for the joint ownership of the house to be “severed”. Severance changes the joint ownership from a beneficial joint tenancy (which would mean the husband’s half of the house passes automatically to the wife and not under the Will) to a tenancy in common (in which the share of the first to die passes under the terms of his or her Will).
The Severance is usually completed by a single sheet of paper. We all know how easy it is to lose paper. It is good practice for that Severance to be recorded at the Land Registry or physically marked upon the title deeds of the house. A recent case has examined what is needed to achieve severance.
In December 2014 the tax tribunal heard about the Tobin family, whose firm of accountants had attempted to use this tax planning strategy when writing the Wills. The husband died in 2003. The accountants were involved in administering the estate and put, as they thought, the tax planning scheme into operation.
Mrs Tobin died in July 2007. The executors tried to claim the full transferable nil rate band (the new tax planning available after 2007), but had not realised they could not do so – not least because Mrs Tobin had died before the new law became available (9 October 2007)! HMRC made this point and the executors and their accountants then tried to rely upon the nil rate band trust legacy. At which point HMRC asked for proof that the legacy had been funded by way of a severance. Unfortunately, the Notice of Severance could not be found.
The family then had to take the case to court, to the tax tribunal, to try to prove, in the absence of definitive evidence, that a severance had been made. Without the severance, there would be no funds for the trust and so no use of the nil rate band to save Inheritance Tax. The case turned upon what evidence could be given in the court.
Unfortunately the accountants had mislaid the original severance, had not stored a copy of it with the title deeds, had not kept a copy on the file, had not sent one to the family and had not made records of meetings sufficiently detailed to record whether a severance had been signed. Everyone, except HMRC, hoped the severance could be proved in some other way. Not only would its absence lead to a large tax bill for the family, but it would cause considerable difficulty for the severely handicapped daughter who was intended to benefit from the trust.
Although the Judge found that the accountant in question had some erroneous recollection, he accepted the accountant’s recollection that he took the severance to the Tobins to be signed, the family’s recollection that a single sheet of paper was signed, and an email internally within the firm referring to the signed severance, as being sufficient combined proof that the severance had taken place, by the couple seeing the Notice.
As an example of how close the severance was to being rejected by the tribunal, it should be noted that great importance was placed upon the use of the word “the”, instead of the word “a”, in that internal email!
The Judge held that on the balance of probabilities the severance had been achieved. However, the Judge stressed that intention to sever alone is insufficient and there must be some form of action demonstrating that such intention was being carried into effect.
Anyone with similar difficulties in the future might wish to note the Judge accepted there was no need for the notice to have been signed; it was sufficient for it to be displayed by one party to the other. As a result, the Judge did not need proof that the notice had been signed, but only that it had been taken to the couple and shown to each of them and, on the balance of probabilities, the Judge decided that, at least, had happened.
Although it was not part of the formal decision, the Judge mentioned that merely signing Nil Rate Band Wills could not be taken to indicate that the couple intended to sever the joint tenancy. He felt the additional discussions and financial circumstances of that particular case might indeed indicate a mutual unwritten (but binding) agreement to do so. Fortunately, the Judge had already held that the Notice of Severance had existed and so the family did not need to try to prove “mutual agreement” or “mutual course of conduct”.
It is possible for HMRC to appeal against this decision until mid February 2015. There is no indication that HMRC intends to do so because the tax planning intention in this case was saved only by a very specific set of circumstances and recollections.
This case eventually had a happy ending for the tax payer family and their disabled daughter. However, the Judge did comment that appropriate conveyancing steps did not appear to have been taken. With hindsight, the accountancy firm no doubt wishes that many legal, and indeed administrative, steps had been taken, so that the family could have avoided the worry of a court case. It is not known who paid the cost. The severance of a joint tenancy is often seen as a “simple” one page document. This case serves as a lesson that it still merits a not insubstantial amount of time and effort to get it right, in order to avoid considerably more time, expense and effort at a later stage.
What Should You Do?
If you used nil rate band legacies in your Wills, or if a gift in your Will, irrespective of tax planning purposes, required the joint ownership of a property to be severed in order for the gift to take effect, then you may wish to check that you have a copy of the notice of severance and that where appropriate it as recorded on the title deeds and that the original is, ideally, stored by your solicitors with your Will. If you have any reason to be concerned that there should have been such a severance, but that your accountant, unqualified Will writer or previous firm of solicitors, may not have achieved the desired result, then of course you could contact Hewitsons for advice on your situation.
For more information please contact Carolyn Bagley on 01908 247015 or click here to email Carolyn.
For more information on why it is a good idea to consider a will please click here.