Royal Society for the Prevention of Cruelty To Animals v Sharp & Ors

When construing a will, a tax-saving interpretation is not preferred if it conflicts with the will’s ordinary meaning and the apparent distribution intended by the testator. A legacy expressed as the maximum amount capable of being given without inheritance tax may refer to the nil-rate band at death, without requiring other gifts under the will to be brought into account first. A testator may allocate the economic burden of inheritance tax between gifts, even though tax is assessed on the estate as a whole. The court must consider the will as a whole, including directions that tax or expenses are payable from residue.

The claimant, the residuary legatee under George Mason’s will, sought construction of clauses 3 and 4. Clause 3 gave the maximum amount that could be given without inheritance tax becoming payable in respect of the gift, divided between the defendants. Clause 4 devised a property to the first and second defendants and directed that any inheritance tax on it be paid from residue.

The defendants construed clause 3 as giving the full nil-rate band at the date of death, with inheritance tax on the property payable from residue. The claimant argued that the property had to consume the nil-rate band first, reducing or eliminating the clause 3 legacy. The issue was the proper construction of the will and the intended allocation of inheritance tax.

1. Application dismissed. The will was construed in accordance with the defendants’ case.
2. Clause 3 was intended to provide a legacy equal to the nil-rate band applicable at the testator’s death, so far as possible without inheritance tax being payable on that legacy. The wording was designed to accommodate an increase in the nil-rate band between execution of the will and death.
3. Clause 4 was intended to pass the property to the first and second defendants free of tax as between the beneficiaries, with any inheritance tax arising on that devise payable from the residuary estate. The clause did not require the nil-rate band to be applied to the property before calculating the clause 3 legacy.
4. The claimant’s construction would produce the unlikely consequence that an increase in the property’s value could reduce the gifts to the testator’s friends and brother to zero, while substantially increasing the residuary gift. That result gave undue violence to the straightforward wording and distribution scheme of the will.
5. Section 4(1) of the IHT Act 1984 made inheritance tax chargeable by reference to the estate as a whole, but did not prevent a testator from allocating the incidence of tax between the constituent gifts in the will. That allocation did not bind HMRC. The general provision in clause 5 also supported the conclusion that the gifts in clauses 3 and 4 were intended to be tax-free to the beneficiaries.
6. The court noted that section 34(3) of the Administration of Estates Act 1925 could apply if the incidence of debts was affected by the size of the estate.

not stated in the judgment.