Sharas Alexander Changizi v Pamela Kathleen Changizi & Anor

Where an estate has exempt and non-exempt residuary beneficiaries, Inheritance Tax Act 1984, section 41 prevents inheritance tax attributable to the residue from being borne by the exempt share. Unless the will contains clear contrary wording, the tax falls on the non-exempt share.

A court may stay disclosure proceedings until substantial unpaid costs orders are paid where the claimant has chosen not to pay, has not shown that payment would stifle the claim, and it would be unjust to require the defendants to incur further costs. A previous decision applying a different approach to the incidence of inheritance tax does not establish a general principle where the reasoning does not support one.

The appellant challenged an order of Master Marsh dated 8 January 2024 staying his Part 8 claim for disclosure against the executors of his late father’s will until he paid nearly £116,000 in costs from earlier proceedings.

The estate accounts treated the appellant as liable for inheritance tax on a failed potentially exempt transfer and for inheritance tax attributable to the estate. The appellant argued that the estate, rather than his share, should bear the latter liability and that the costs had effectively been paid by deduction from his share.

The appeal concerned whether the judge had been entitled to proceed on the respondents’ calculations, including the treatment of the appellant’s mother’s five-sixths residuary share as exempt, and whether the stay was within the judge’s discretion.

1. Appeal dismissed. The stay of the appellant’s Part 8 disclosure claim was within the judge’s discretion.
2. The appellant was liable to the estate for all inheritance tax paid, including tax attributable to the estate and tax arising from the failed potentially exempt transfer. His mother’s residuary share was exempt from inheritance tax.
3. Section 41 of the Inheritance Tax Act 1984 provides that tax attributable to residue cannot fall on an exempt share of residue. The will directed payment of inheritance tax before dividing the residue into equal shares, but contained no provision requiring the non-exempt share to be grossed up so as to equalise the beneficiaries’ net receipts.
4. The court followed Re Ratcliffe, Homles v McMullen [1999] STC 262. That decision supported the gross division approach, under which inheritance tax attributable to the non-exempt share is borne by that share.
5. Re Benham’s Will Trusts, Lockhart v Harker, Read and the Royal National Lifeboat Institution [1995] STC 21 laid down no general principle requiring grossing up. It was not followed.
6. The judge was entitled to proceed on the basis of the respondents’ calculations. The appellant had not provided a complete account of his finances or demonstrated that payment of the costs would stifle the claim. The unpaid costs were substantial, and requiring the respondents to defend the disclosure claim without payment would be unjust.
7. The parties were directed to file an agreed draft order, with written submissions on consequential matters that could not be agreed, within 14 days of hand-down.

• Chancery Appeals, High Court: Appeal from Master Marsh’s order dated 8 January 2024. The appeal was dismissed.