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INHERITANCE (PROVISION FOR FAMILY AND DEPENDANTS) ACT

1975: A REVIEW OF THE LATEST CASE LAW

Miranda Allardice

1. INTRODUCTION

The purpose of this Seminar is to provide a review of recent relevant Inheritance Act decisions.

It is 40 years since the 1975 Act came into force. The momentous event on the horizon is the

hearing in December 2016 by the Supreme Court of the appeal in Ilott v Mitson.

There are a limited number of reported cases, and this is not surprising given LJ Briggs’ statistic

that 90% of all civil cases issued settle, Civil Courts Structure Review: Interim Report December

2015.

Despite this statistic as to settlement there are many bitter family disputes about inheritances, and

the specialist lawyer still has an important role to play in guiding the disputants to a resolution.

There is now a wide array of Alternative Dispute Resolution processes to be utilised.

For deaths occurring after the 1st October 2014, the amendments made by the Inheritance and

Trustees’ Powers Act 2014, will now apply. This includes an expansion of the claimant class, at

S1(1)(d) to include an individual in respect of whom the deceased stood in the role of a parent.

The notion of who constitutes a family has expanded in response to changes in society.

2. ILOTT V MITSON

2.1 The Supreme Court: Where are we now?

In February 2016, the Charities were granted permission to appeal the quantum decision of the

Court of Appeal, reported at [2015] EWCA Civ 797. There is now a hearing date of the 12th

December 2016.

2.2 The Ilott Quantum saga: first instance award

Mrs Ilott had sought the price of her housing association property, and capitalised periodical

payments, the combination of which amounted to more than the estate. DJ Million’s award was

a sum of £50,000. He arrived at this by adopting 50% of the tax credits in the sum of £4,000 pa.

The Duxbury figure she adopted for capitalisation was £69,000. This he rounded down on the

premise that Mrs Ilott had a small earning capacity. He emphasised that this was a rough and

ready approach owing to a dearth of information as to impact of the award on the family’s

housing benefit and tax credits. The crucial issue was the impact upon the means tested housing

and council tax benefit.

2.3 The Grounds for interference by the Court of Appeal

Mrs Justice Parker [2014] EWHC 542, had upheld the District Judge’s quantum award. Mrs

Ilott’s appealed her decision to the Court of Appeal.

In determining what amounted to reasonable financial provision, the District Judge was

exercising a judicial discretion. This is only reviewable on appeal where he is demonstrated to

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have made an error of law by, for example, applying the wrong test, or reaching a conclusion that

was perverse.

LJ Arden at Para 35 identified 2 errors of law that fatally undermined his decision:

(a) The District Judge concluded that Mrs Ilott’s lack of expectancy and her ability to live

within her means meant her award should be “limited”. He failed however to explain how

those reasons are translated into the reduced award made, and “... it is of the essence of a

judicial decision that adequate reasons are given on material matters”.

(b) The District Judge concluded that he should make reasonable financial provision for

her maintenance in the sum of £50,000. Having done so he failed to examine the net

effect of the award, expressing the concern that a large capital payment could disentitle

the family to their state benefits.

2.4 The award made by the Court of Appeal

The Court of Appeal awarded her the sum of £143,000 (to buy the housing association property

at a discount). A further £20,000 was provided for living costs. This last capital sum was

expressed as an option, so as to allow a draw down on the option without affecting the Ilott’s

means tested state benefits. It is not clear what the value of the property was. The utility of the

award was expressed as follows:

“having the property will enable her to raise capital (by equity release) when she needs further

income in the future”.

2.5 Reasonable financial provision and maintenance

The statutory considerations at section 3(1) do not include a definition of maintenance. In Re

Coventry [1980] Ch 461 Goff LJ gave the following guidance:

”I think that it is clear on the one hand that one must not put too limited a meaning on it; it does

not mean just enough to enable a person to get by; on the other hand, it does not mean anything

which may be regarded as reasonable desirable for his general benefit or welfare.”

In Re Dennis [1981] 2 AER 140 Browne-Wilkinson J indicated that maintenance:

“connotes only payments which directly, or indirectly, enable the applicant in the to discharge

the cost of his daily living at whatever standard is appropriate to him…. The provision can be

by way of a lump sum, for example, to buy a house in which the applicant can be housed, thereby

relieving him pro tanto of income expenditure.”

LJ Arden adopts a very narrow definition of maintenance, at Para 42 she concluded that to be

within the 1975 Act, the award had to be for the appellant’s future maintenance not for what she

described as “an immediate, major spending spree”. LJ Arden at Para 60 correctly concluded

that DJ Million’s order adversely impacted on the housing and council tax benefits, leading to

disqualification until diminished below the capital threshold. As a consequence of that cessation

she held that: “there is little or no financial provision for maintenance at all”.

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However it can be argued that this was a family who had been on a low income for many years,

and so had not been able to out of income renew household goods etc. It is suggested that

expenditure on such things as a car, computers, white goods, and decoration can all qualify as

maintenance.

2.6 Necessitous circumstances

At Para 58 Arden LJ concludes that; “given the restrictions that she has to impose on her own

expenditure and the lack of any provision to meet her future needs, for example when she grows

older or if she suffers any ill-health”, Mrs Ilott was a person in need. What level of contribution

is to be made by the Deceased’s Estate is governed by the interplay of all the Section 3 factors.

2.7 The satisfaction of needs and reduced obligation

Mrs Ilott, did not own a property, she had no pension provision, and was reliant on state benefits.

At first instance she advanced a claim to the whole of the estate, in satisfaction of her needs.

What was the relevant balance of the Section 3 factors that shaped the award held to amount to

reasonable financial provision?.

Adult independent child

LJ Arden did address the issue of obligation owed to an able bodied but poor adult child. It was

argued that the; “the ordinary family obligation”, weighed in the applicant’s favour. Therein

lies the central issue, what is this obligation? LJ Arden, at Para 49, identified the following

circumstances as relevant in limiting the level of provision:

“.. the appellant is an adult child living independently. That factor has to be taken into account.

At minimum that means that the court is not concerned to provide her with an income that would

fully support her needs”.

Where however an applicant has only a basic level of resources, their poverty will, “outweigh

the importance that would normally be attached to the fact that the appellant is an adult child

who had been living independently for so many years”, see Para 57.

It appears from the Judgment that provision should not be made for all the needs of an

independent adult child, however no further guidance is given as to precisely what impact the

fact of independence for all a child’s adult life should shapes the contribution to be made. The

award made was to provide housing for the applicant, however at no time had the deceased been

responsible for this married daughter’s housing.

2.8 Estrangement and S3(1)(g)

The question arises what impact if any, does the absence of any family relationship have upon

this ordinary family obligation. DJ Million concluded that the applicant’s lack of expectation

and estrangement did lessen the obligation. LJ Arden at Para 51 v), determined that on the facts

of this case the estrangement neither; deprived the applicant of an award or even substantially

diminished it.

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The central problem of apportioning blame in respect of family relationships was recognised.

Further there may even not be blame but rather inability to make lasting relationships. LJ Arden

appeared to place no weight on the 30 plus year estrangement.

Comment It is suggested that it may not be necessary to apportion blame, but rather to have

regard to the stark fact that there are not 40 years worth of a dutiful daughter activities to weigh

in the balance in favour of the applicant. It is an odd message to send society that estrangement

from your parents will not adversely impact upon your inheritance prospects!.

2.9 State Benefits

(i) One of the reasons for the introduction of the Inheritance Act was to relieve the state

from having to support family members, and thus access to state benefits is not a defence to a

1975 Act claim. Further the receipt of benefits does not act as a ceiling upon a party’s need for

maintenance. See LJ Ryder at Para 69:

“As a matter of public policy, the court is not constrained to treat a person’s reasonable

financial provision as being limited by their existing state benefits, nor is the court’s function

substituted for by any assessment of benefits undertaken by the state”.

Therefore the maintenance standard is not to be equated with subsistence level living as provided

for by benefits.

For assistance with what might constitute a reasonable level of income see Joseph Rowntree

Foundation Reports: Minimum Income Standards www.jrf.org.uk.

(ii) In Ilott the Court of Appeal expressed a clear desire to ensure that the family still retained

access to state benefits. At Para 67 LJ Arden held:

..”this is a case where the court can and should make reasonable financial provision out of the

deceased’s estate for the appellant’s maintenance so that her living expenses are relieved

without affecting the state benefits upon which she relies”.

LJ Arden appears to conclude that the interplay between the benefits and retention of tax credits

may have led her to make greater provision than otherwise might have been the case. See Para

60, where she likens the position to a person who has greater living costs because of their

disability:

“In my judgment, the same applies to the case where a person has extra financial needs because

she relies upon state benefits, which must be preserved. (my emphasis). ..the provision of

housing would enable her both to receive a capitalised sum and to keep her tax credits”.

Whilst she concluded that the claim has to be balanced against that of the charities she holds that;

“since they do not rely on any competing need they are not prejudiced by what may be a higher

award than the court would otherwise need to make.

In the event the state was relieved of the burden of paying housing benefit and council tax, but

left with applicant reliant upon non-means tested benefits. The applicant’s position was

improved by access to homeownership and thus a capital resource, which she may be able to

draw down upon in the future.

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2.10 The Benefit Regulations

The regime relating to Housing Benefit is found in Regulation 46 of the Housing Benefit

Regulations 2006 provide as follows:

“a claimant shall be treated as possessing capital of which he has deprived

himself for the purpose of securing entitlement to housing benefit or increasing

the amount of that benefit...”

This regulation is supplemented by the Housing Benefit and Council Tax Benefit Manual, which

provides guidance on identifying when deprivation has occurred. This states at BW.730 that

‘securing entitlement to benefit need not be a person‟s main motive but it must be a significant

one‟. Assessors are directed to „establish whether the claimant has exercised choice when

disposing of the resource.‟ It provides further that if ‘claimants do no more than satisfy their

need for one of the necessities of life, they have not exercised a real choice in the transaction‟

and hence deprivation will be absent.

In the current context, it is relevant that BW1.714, provides that substantial expenditure on a

non-essential item such an as an expensive holiday; money put into another form that would fall

to be disregarded, such as personal possessions; or capital having been used to provide a much

higher standard of living than the claimant usually maintained, are all indicia that deprivation

may have occurred.

While a court may make a clear finding that the claimant requires particular items for their

needs, and maintenance, there is some danger that there could be a finding that deprivation had

occurred in some cases where an award along the lines of DJ Million’s was made and the money

then quickly spent.

One way around this, would be provision by way of a simple discretionary trust for the benefit of

the claimant and her immediate family. Such funds do not engage the means testing provisions.

The settlement of property for the benefit of a claimant is also an action that the court can make

by way of reasonable provision under s. 2(1)(d) of the Inheritance Act. The use of such an award

to preserve means tested benefits was adopted in the case of Challinor v Challinor [2009]

EWHC 180 (Ch). Where a small award was intended to be spent in a reasonably short time on

essential needs, the running costs of such a trust would be moderate.

The interplay of reasonable financial provision and benefits gives rise to difficult issues. This is

highlighted by the fact that in structuring the award of the sum of £20,000 to Mrs Ilott as an

option to be paid the money on request, Arden LJ arguably failed to protect the money from

means-testing as she expressly meant to do: Reg. 49(2) of the HBR 2006 provides that any „any

capital which would become available to the claimant upon application being made, but which

has not been acquired by him, shall be treated as possessed by him‟. It would appear that the

£20,000 to which Mrs Ilott was entitled to call for would fall into this provision, and thus impact

upon her means tested benefits in any event.

2.11 The position of the Charities

There are two material statutory S3 considerations:

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(i) resources and needs of the Charities S3(1)(c)

(ii) obligations and responsibilities of the deceased S3(1)(d)

As is common practice the Charities did not advance any needs. The approach of the Court of

Appeal was that provision for the Charities was by way of a windfall and there was no obligation

owed to these mainstream charities. See Para 50 iv); “The only beneficiaries are the Charities,

who can have no expectation either”.

Black LJ (in the threshold appeal in Ilott v Mitson [2011] EWCA Civ 346 at Para 91) held:

“… if the presence of a needy beneficiary has the potential to weaken the applicant’s claim, (as

it must where the estate is limited), so must the absence of any beneficiary in the conventional

sort of need have the potential to assist the applicant”.

The dismissive treatment of a charity beneficiary is extremely alarming for the charity sector,

who derive a substantial amount of income from testamentary gifts. The approach is similarly

dismissive of a testator who wishes to be remembered for that last good deed of a gift to

charitable causes.

3. THE SUPREME COURT

3.1 Public Importance

The Charities were granted permission to appeal the Court of Appeal’s quantum decision in

February 2016. The Appeal will be heard on the 12th

December 2016. It is advanced on the

Charities’ behalf that the Appeal does raise a number of points of general public importance. It

is over 40 years since the introduction of the 1975 Act, and the legislation has never previously

been considered by the House of Lords/Supreme Court.

(i) The principle of testamentary freedom is restricted by the 1975 Act. For all applicants

other than spouses/civil partners, the standard of provision is limited to maintenance. It is

important there is clear guidance as to what constitutes maintenance;

(ii) There is a concern that if an adult child can demonstrate that they are impecunious, an

award under the 1975 Act will follow. Does this amount to forced heirship by the

backdoor?;

(iii) What should the interplay be between an award under the 1975 Act, and the state

benefit regime, should the court be engaged in trying to maintain state benefits;

(iv) The implications for charitable testamentary gifts, are severe. There has been the

recent reduction in the IHT payable for an estate where 10% is left to charity. Arden LJ

was somewhat dismissive of the charity qua beneficiary, who are therefore the more

vulnerable to claims by disgruntled adult children.

The date for the review

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LJ Arden determined that she should address the facts as at the date of appeal. The appeal

hearing was a review hearing not a re-hearing. It is argued by the Charities that the correct date

for reviewing the findings was the date of the original hearing. Further that if LJ Arden was

correct to exercise her discretion afresh at the date of the appeal there was insufficient reliable

evidence for her to do so.

3.2 How far will they go?

It was recognised by the Court of Appeal in Ilott on the threshold appeal [2011] EWCA Civ 346,

that however hard one looks at the Section 3 statutory criteria those by themselves do not give

the answer. There is involved a value judgment (exercised with due deference to the doctrine of

precedent). See Para 88 of Black LJ:

“A dispassionate study of each of the matters set out in section 3(1) will not provide the answer

to the question whether the will makes reasonable financial provision for the applicant, no

matter how thorough and careful it is. ..So between the dispassionate study and the answer to

the first question lies the value judgment to which the authorities have referred”.

Arden LJ at Para 67 states:

“I am not concerned that a judge should be called upon to make such [value] judgments. It is a

reality in the twenty-first century that judges are called upon to make judgments of this kind.

They must do so with such assistance as they can find in the decided cases. If as often happens

there are no decided cases, they must decide questions involving value judgments within four

corners of statutory framework and with the benefit of their own awareness and experience of

society and social issues, and their own considered view of how such matters ought fairly to be

decided in the society in which we live”.

This does leave the Supreme Court with a wide brief to determine how much of a revolution they

wish to cause!.

There may be a number of societal reasons for a creeping erosion of testamentary freedom.

There is a substantially increased life expectancy, for a long period when children of the

deceased are economically inactive. This may place a burden on the public purse at a time of

post Brexit austerity!.

At very least we would expect to secure some guidance on how one determines reasonable

financial provision, where the able bodied adult child has not been dependant upon their parents

for many years. How great a contribution (if any) should an estate make towards their

maintenance needs?.

4. STEPS TO REDUCE RISK OF ATTACK

When a controversial will is being contemplated the best advice currently remains that some

provision should be made for an adult child.

4.1 The Discretionary Trust

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One method of preserving benefits would be provision by way of a simple discretionary trust for

the benefit of the claimant and her immediate family. Such funds do not engage the means

testing provisions. The settlement of property for the benefit of a claimant is also an action that

the court can make by way of reasonable provision under s. 2(1)(d) of the Inheritance Act. The

use of such an award to preserve means tested benefits was adopted in the case of Challinor v

Challinor [2009] EWHC 180 (Ch). Where a small award was intended to be spent in a

reasonably short time on essential needs, the running costs of such a trust would be moderate.

The Letter of Wishes can make it clear that the aim is to provide for the provision of such things

as may improve quality of life e.g. a new car, new white goods, and minor decorative projects.

4.2 Statement of reasons

These can be a hostage to fortune. An example of how not to do it is to be found in the case of Re

Myers decd [2004] 1944 (Fam), the father had considered that an educated woman was a

dangerous beast, and his daughter’s failure to marry had vexed him.

However reasons for not including provision for an application can be relevant, see Goff LJ in Re

Coventry [1984] 1 Ch 461 The contents of such a statement, should be reasonable in tone and if

possible independently verifiable!.

For an example of a restrained letter of wishes see Williams v Seals [2014] EWHC 3708 (Ch).

The statement should also extend to reasons why a particular beneficiary has been chosen. If a

substantial portion of the estate is to pass to charity an explanation should be included as to why

the testator wants a particular charity to benefit.

5. THE RICH WIDOW

The recent case of Wooldridge v Wooldridge Central London County Court 12th

February 2016

(currently on Westlaw) concerns the dismissal of a widow’s claim by Her Honour Judge Karen

Walden-Smith.

5.1 Outline facts

The Deceased “D” was a successful man in business with his brother. He had a construction firm

and partnership in respect of Twelve Oaks, a 140 acre estate in Surrey, from where he ran a polo

business. He had been married to the Claimant “C” for 11 years and they had a 6 year old son,

“Rhett”. He had an adult son “Charlie” by a previous relationship.

D had died in a helicopter crash, and there had been a fatal accident claim in Northern Ireland. C

had received some £1.95m, and Rhett £200k.

5.2 The Will & the Estate

D left a homemade will in which he left C the family home (probate value £2.1m, but by trial

£4m +). Life insurance policies redeemed the mortgage and left a £800k surplus for C. D’s will

had purported to leave C an income of £75,000 pa paid from his company. Counsel had advised

this legacy was in way binding on an independent company!.

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The Estate (excluding the home was in the region of £7m), the chief asset of which was the

Surrey Estate. The other beneficiaries were Charlie & Rhett.

5.3 C’s position as widow and the deemed divorce test

An important consideration is contained at S3(2), whereby the court should have regard to the

provision which the claimant might reasonably have expected to receive if the marriage had been

terminated not by the death but rather by a decree of divorce.

Briggs J in Lilleyman v Lilleyman [2012] EWHC 1056 set out the approach to the deemed

divorce test;

“[the] cross check should be treated neither as a floor nor as a ceiling in relation to the relief

available under the Inheritance Act, nor as something which requires a meticulous quasi divorce

application to be analysed side by side with the application of the separation provisions in

section 3 of the Act”..

This approach is endorsed by the recent amendment in Schedule 2 Para 5(2) of the Inheritance

and Trustees’ Powers Act 2014 which provides that:

“nothing requires the court to treat such provision as setting an upper or lower limit on the

provision which may by an order under section 2”.

However some regard does have to be had to the matrimonial law and the Matrimonial Causes

Act 1973. The recent development of the principle of sharing assets following the breakdown of

the marriage is encapsulated by the Court of Appeal in the case of Charman v Charman (No4) 1

FLR 1246;

Para 64 “The yardstick of equality of division” first identified by Lord Nicholls in White at

p605G, filled the vacuum which resulted from the abandonment in that decision of the criterion

of “reasonable requirements”. The origin of the yardstick lay in s25.(2) of the Act.. The

yardstick reflected a modern, non-discriminatory conclusion that the proper evaluation under

s25(2)(f) of the parties’ different contributions to the welfare of the family should generally lead

to an equal division of their property unless there was good reason for the division be to

unequal”.

Para 68: “In Miller [2006] 2 AC 618] the House unanimously identified three main principles

which together inform the second stage of the enquiry, namely that of distribution; “need

(generously interpreted), compensation, and sharing”.. The three principles must be applied in

the light of the size and nature of all the computed resources, which are usually heavily

circumscribing factors”.

5.4 The widow’s financial resources

The Judge found that the C had assets to the value of £10.5m. If one deducted the value of the

fmh, she had £5.2m in other assets, which could be income producing or drawn down against.

C had already secured significantly more than half of the marital assets, and therefore presented

her case on the basis of needs, to be determined against the background of a high standard of

living during the marriage.

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5.5 The widow’s claimed income need

C claimed at Trial that her income need amounted to £372,000 pa, described by the Judge, at

Para 70] as reading more like a wish list than an actual assessment of her needs. The Schedule of

Needs had increased during the currency of the litigation, which did not lend it credence. Nor

was there any recognition that the death of D meant his needs were not part of the family budget.

Further Rhett had received some assets that were expressly designed for his maintenance and

could make provision for him during his minority.

There was a real problem as to the level of income the couple enjoyed during the currency of the

marriage. D’s drawings from his various enterprises as stated in his Tax Returns, his average net

in recent years of difficult trading had been £108,033 pa. One interpretation was that D must

have been drawing on capital in order to maintain a certain standard of living. A less charitable

interpretation was that his drawings were not all reported to HMRC. If this was the case then,

the Judge found that authority from the personal world eg Hunter v Butler [1996] RTR 396

indicated a claim based on funds “tainted by illegality then her claim under the 1975 Act would

be bound to fail”. In the event C resiled from this claim.

The Judge found that at most C had a maximum income need of £240,000 pa. By reference to

the Duxbury Tables in At A Glance C would be able to amortize her £5m of capital producing

£210,000 pa. Further the Judge concluded that C had an earning capacity, pursuant to the

consideration at S3(6) of the 1975 Act, which capacity would more than make up any shortfall.

5.6 The family business and beneficiaries

The bulk of the remaining assets were tied up in the building firm or the Surrey Estate, from

which Charlie derived his living. The Judge placed weight on D’s desire to ensure that his

business assets could be passed onto to his immediate descendants.

5.7 The threshold claim

The Judge concluded that the C had not satisfied the court that there had been a failure to make

reasonable financial provision for her as widow. Her claim was dismissed with an order for her

to pay the costs on an indemnity basis. The costs judgment, dated 25th

May 2016 (Westlaw) is a

rare example of judicial disapproval of the exaggerated claim resulting in assessment on the

indemnity basis.

6. THE MATRIMONIAL COURTS: NON-MATRIMONIAL PROPERTY

In Charman the Court of Appeal stated that while the principle of equal sharing does apply to all

the parties’ property, “but, to the extent that their property is non-matrimonial, there is likely to be

better reason for departure”.

6.1 In the “big money” matrimonial cases there have been developments relating to the

approach in respect of non-matrimonial and non-matrimonial property. Mostyn J in N v F [2011]

EWHC 586 (Fam) enthusiastically embraced the Court of Appeal’s approach in Jones v Jones

[2011] EWCA Civ 41. This approach involves a forensic exercise in identifying what constitutes

non-matrimonial property. Mostyn J adopts a 2 stage approach:

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i) whether the existence of pre-marital property should be reflected at all

ii) if it is to be reflected, then how much is to be excluded eg the actual historic sum

If non-matrimonial property is found, then court can exclude this in the first instance from the

calculations, and apply the equal sharing principle to the remaining marital assets. However if a

parties needs cannot be satisfied following this approach then the non-matrimonial assets cann be

invaded. These principles he applied recently in JL v SL [2015] EWHC 360 (Fam).

6.2 However, there remains an alternative approach referred to as the; “overall percentage

technique”, where the tribunal just adjusts the % proportions to account for non-matrimonial

property. This more intuitive route has been cogently criticised, by Mostyn J, as being opaque

and subjective. However the judiciary do not all adopt or endorse Mostyn J’s approach. In the

case of Evans v Evans [2013] EWHC 506 (Fam) Moylan J adjusted the % share on the premise

of the husband’s post separation endeavours, as to 55%/45%. He decided that he could not

unravel the matrimonial and non-matrimonial property.

In the case of Robertson v Robertson [2016] EWHC 613 Holman J discussed the two differing

approaches canvassed by the authorities:

(i) as to accountancy evidence of the value of the shares at the inception of the marriage,

with an uplift for passive growth, carved out as non-matrimonial property Jones v Jones

[2011] EWCA Civ 41 and not shared unless needs dictate;

OR

(ii) an overview recognising that the original capital assets were provided before the

marriage or from an external source.

Holman J concluded in that case that the accountancy evidence, as to the forensic value of pre-

marital property did not produce a sufficient adjustment in the husband’s favour and concluded that

the husband’s pre-marital efforts and capital deserved greater recognition.

6.3 In respect of the matrimonial home, the matrimonial courts have determined that in most

instances, whatever the origin of the funds this type of property should be treated as a matrimonial

asset. This will be a particularly important consideration where there is a second marriage, and one

party has sold their property to move into another spouse’s property.

6.4 The issue of pre-acquired property will be often by a feature in 1975 Act claims.

therefore it does feature in 1975 Act claims, see most recently Lilleyman v Lilleyman [2012]

EWHC 821 (Ch). The particularity of its relevance will depend upon the size of the estate. In

respect of a 1975 Act claim the clear warning has to be that the needs of the survivor will be a

central consideration, and if necessary, the non-matrimonial property will be invaded to make

provision for a surviving widow.

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7. MARRIAGE AND THE CLEAN BREAK

7.1 In the case of Chekov v Fryer [2015] EWHC 1642 (Ch), the central issue was whether an

order under S15(1) of the 1975 Act made against a spouse was effective where cohabitation had

resumed. In this case the parties had been previously married and divorced in 1982. There had

been an ancillary relief order made, by consent, which included a dismissal of the parties’ ability

to apply against the other’s estate. The Deceased had 2 children by another relationship, and

they were his beneficiaries.

At the time of the Deceased’s death the Claimant “C”, was living with him. She made an

application pursuant to S1(1A) of the Act on the premise that they were living together in the

same household as husband and wife.

7.2 S15(1) provides that where a court has jurisdiction under S23A or S24 of the Matrimonial

Causes Act 1973, then; “the court if it considers it just to so, may on the application of either

party to the marriage order that the other party to the marriage shall not on the death of the

applicant be entitled to apply for an Order under Section 2 of this Act”.

S15(3) provides:

“if at any time when an order is made under subsection (1) above with respect to any party to a

marriage has effect the other party to the marriage dies, the court shall not entertain any

application made by the surviving party, (my emphasis) to the marriage for an order under

section 2 of this Act”.

7.3 Strike out Application CPR 3.4

The Beneficiaries sought to argue that not only was the C disentitled to make any application

under S1(1)(a) and (b), but that she could not rely upon S1(1)(ba) of the Act, as a cohabitant.

S1(1)(ba) reads as follows:

“(ba) any person not being a person included in (a) or (b) above to whom sub-section (1A) or

(1B) below applies”.

The Beneficiaries submitted that:

once as an individual you are prevented from applying then you are prevented from so

doing in whatever capacity you subsequently have and

in any event C could not apply as a cohabitant as she still was a person included in S1(1)

(b) i.e. a former wife

The C’s main argument, before Deputy Master Matthews (as he then was) was to the effect that

S1(1)(ba) should be construed purposively. The word person should be construed to refer to the

capacity of a person, rather than to the identity of the person.

There was no authority on the point, and the Master reviews the statute and the history of the

introduction of the right of cohabitants to apply. The provisions allowing cohabitants to claim by

reason of their status as cohabitants did not arise until 1996. Therefore he held that the reference

in S15(1) as originally passed would only apply to an application by a former spouse under S1(1)

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(b). Therefore the words in S15(3) only referred to any application by a person under S1(1)(b) as

a former spouse and did not include claims by a cohabitant.

There is a hierarchy of categories of applicant, so that the applicant should make the application

under the highest category they are able to. This is apparent from the provision in respect of

S1(1)(e) also being a person not included in the higher category of applicant.

7.5 At Para 24 the Master concluded:

“… the key to the resolution of the problem is this. .. So when, in section 1(1)(ba) and section

1(1)(e), the Act uses the phrase “not being a person included in [earlier provisions”, it is

referring to a person who is able to apply to the court for an order under section 2”.

He went on to examine the effect of the descending order of qualification:

“However, where a former spouse has been excluded by virtue of section 15(3) from making

such an application because of an order under section 15(1), that person is not a person able to

apply to the court as a former spouse under section 1(1)(b). Accordingly, that person (if

cohabiting with the former spouse during the relevant period before the latter’s death) is capable

of being a person falling within section 1(1)(ba)”.

The application to strike out was dismissed, and the C died before her claim as a cohabitee was

the subject of a full determination.

7.6 The recent Northern Ireland case of Beckett v McMillan [2015] WTLR 1127, related to a

claim by a widow under their similar inheritance act jurisdiction. There a claim had been issued

against her estranged husband’s estate, however the litigation had meandered on for a decade.

There had been substantial negotiations then the beneficiary had reneged on the proposed

settlement, and sought to strike out the claim for want of prosecution. The Judge refused the

strike out.

8. A COHABITATION REVIEW

Section 1 (1A)...“during the whole of the period of two years ending immediately before the date

when the deceased died, [the claimant] was living (a) in the same household as the deceased and

(b) as the husband or wife of the deceased”.

8.1 Household and nature of the relationship

There is a helpful review of the case law relating to qualification as a cohabitant in the case of

Williams v Martin 12th

February 2016 Central London County Court before HHJ Gerald.

Facts The C had shared a house with the deceased for 18 years. They had in 2009 brought a

property 20 Coburg Rd, which they held as tenants in common. The C sought an award of the

deceased’s 50% share of that property. The deceased’s will was made in 1986 with a codicil in

1995, appointing his now estranged wife as executrix and sole beneficiary.

The financial terms of the separation between the deceased and his wife were very unusual. It

appeared that the deceased had elected not to rock the financial boat, and had taken no divorce

proceedings. His former matrimonial home passed by survivorship to his wife. He and his wife

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had made a lifetime gift, to their 2 children a valuable property in Winchester. The widow

continued to hold the family purse strings for many years post physical separation operating a

joint account.

8.2 The argument re qualification

The widow defendant “D” contended that the deceased had continued to maintain 2 separate

households. As such counsel argued if there were 2 separate quasi marital households, then C

could not bring herself within S1(1A). The Judge expressed the obiter view that he did not agree

with that as a proposition. However in this case he was able to make a clear finding that C and

the deceased were living in one household as husband and wife; “namely in an intimate,

committed and loving relationship in which they expected to spend the rest of their lives.”

The Judge rejected the argument (largely based on financial support for the wife) that the

deceased was maintaining two separate households. Whilst he may have been contributing

financially to that household he was not living together with his estranged wife.

8.3 Characteristics of the relationship

There are a number of other statutes in which the qualification of living together as husband and

wife is a prerequisite to some form of relief, e.g. The Fatal Accidents Act 1976, and the Housing

Act 1988. In the case of Amicus Horizon v Mabbott [2012] EWCA Civ 895 the Court of Appeal

reviewed the position of a couple, who shared a rented property. The tenancy was in the name of

the deceased female partner and her partner wished to succeed to the tenancy. Ward LJ reviewed

the authorities and concluded that there is both an objective and subjective element in the test of

whether the parties were living together as husband and wife. In that instance whilst they

presented their relationship to the outside world as “important and lasting”, the court concluded

that the deceased had cherished her financial independence and therefore had not made the

necessary level of commitment for them to qualify. It is worth noting that in the Amicus case the

parties had continued to claim benefits individually rather than as a couple. The survivor

retained his mother’s address for all correspondence etc.. .

8.4 Clues to qualification

There is some case law as to the degree to which a relationship has to be openly acknowledged

as being akin to a marriage, see Ghadian v Godin-Mendoza [2004] UKHL 30. Some of the Law

Lords required a clear public commitment to the openly acknowledged relationship. That case

related to a homosexual relationship, and Baroness Hale was sensitive to this aspect, concluding:

“what matters most is the essential quality of the relationship, its marriage-like intimacy,

stability and social and financial inter-independence.

See also Norris in Churchill v Roach [2002] EWHC 3230 for a synopsis of the criteria he regards

as necessary for qualification.

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9. THE STUDENT CHILD

The 1975 Act case of Taylor v Bell & others [2015] LTL 12/3/15 concerned the variation of an

order for periodical payments pursuant to S6 of the Act. Orders for periodical payments are now

rarely made, and this is a useful reminder of the need to ensure sufficient funds set aside to make

the payments.

9.1 The claim was by a young adult child, “C”, against the estate of his father, who left an

estate worth £2m. The claim had been compromised, with provision being made for the sum of

£210,000 to be set aside by the executors in order to ensure there were sufficient monies

available for C’s education. At the time of the award he had 2 years left at school, with a further

5 years in tertiary education to include a post graduate qualification. Under the order he received

an annual amount for his maintenance and fees, until 2014 when the payments should cease. In

the event C suffered an accident, which set the proposed time table awry for his completed

education, further he had some mild learning difficulties. He was a talented musician and

wished still to undertake some postgraduate classical singing course. At the time of the hearing

he had not yet secured a place.

As a result of the hiatus in his education, the amount paid out by the executors had been only

£112,000. However as the time frame in the order had come to an end they had distributed

£59,000 to beneficiaries leaving £38,479.

9.2 The executors resisted C’s application on the basis that the original order was a consent

order and could only be revisited in the event that there was a dramatic unforeseen development

in accordance with Barder v Calouri [1988] AC 20. HHJ Behrens had no difficulty in

determining that he had power to vary what was a periodical payments order, pursuant to S6(1)

of the Act. S6(1) provides that the court has power to vary or discharge an order made in respect

of periodical payments. At S6(6)(a), any order for variation may only affect:

“ any property the income of which is at the date of the death of the order applicable wholly or

in part for the making of the periodical payments to any person who has applied for an order”.

Further where an application is made after the termination of the payments, then only property

that was previously available is relevant property which can be the subject of an order.

The C sought the payment of the full £90,000 which should have remained of the £210,000 to

have financed his studies. The Judge was rather parsimonious in awarding the sum of only

£6,500 for this year and £7,500 pa for the next two years. The award itself was to be conditional

upon the C securing his place on a post graduate course of training. These figures were

markedly lower than the sums needed for fees and accommodation. However, the level of

Judge’s award meant he did not have to grapple with the thorny issue of the executor’s

distribution of the funds.

This case does provide an example of the need to accurately cost a student’s tertiary education,

and provide the necessary information for the court.

10. DISCLOSURE

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10.1 The case of Dellal v Dellal [2015] EWHC 907 (Fam) raised issues as to what evidence is

needed to sustain an application under S10 of the Act. Further whether absent compelling

evidence a defendant can succeed either on a strike out application under CPR 3.4(2) or a

summary judgment.

Background

The Deceased was a property tycoon, who in the Sunday Times Rich List 2012 had been

assessed as worth over £500m. The Claimant (his widow) “C” was the beneficiary of the whole

of his apparent estate valued at £15.4m.

She issued proceedings on the premise that there must have been more funds, which could have

been caught by S10. In order to persuade a court that there had been a disposition to defeat an

application for financial provision the C had to show:

that less than 6 years before death the deceased had made a disposition

with the intention (albeit not the sole intention) of defeating an application under

the Act

that full valuable consideration was not given by the donee for the disposition

that the exercise of the powers would facilitate the making of financial provision

If the above criteria are satisfied then an order may be made against the donee directly. S13

deals with the position where the funds are held by trustees.

10.2 The evidence & disclosure

The evidence of dispositions was thin on the ground, but there had been skirmishes in 2007, as to

the future of the marriage and some minimal exchange of information suggesting a far greater

wealth than recorded on the IHT form. There was further limited evidence as to trusts and

Panamanian companies.

Mostyn J concluded that on the evidence the C had a strong prima facie case that the Deceased

had access to considerable resources at his death, and it was reasonable to infer that the resources

were held in trusts.

The Judge made an order for specific disclosure pursuant to CPR 31.12 to the effect that the

Defendants (the Deceased’s children & his sister), should give specific disclosure of:

“all documents in the custody possession or power of each defendant which evidence any

individual transfer of money or any other thing (£10,000) to them from 2006 until Jack’s death

and which derived directly from him, or from any entity over which he had de jure or de factor

control”.

This approach followed that of Vos QC (as he then was) in Arsenal Football Club v British

Airways [2002] EWHC 3057, where provision was made for specific disclosure prior to

adjudicating on an application for summary judgment.

In relation to the procedure of pre-action disclosure at CPR 31.16 Mostyn J concluded that;

“Parliament has equipped Mr Micawber to go angling”.

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He adjourned the application for summary judgment to after the disclosure process.

10.3 Strike out CPR 3.4(2)(a)(b)

Mostyn J dismissed this application, the C had pleaded in her Part 8 Claim form a legally

recognisable claim under the Act.

10.4 Summary Judgment CPR 24.2

Summary judgment may be given if the claimant has no real prospect of succeeding on the

claim. The court must consider whether the claimant has a “realistic” as opposed to a “fanciful”

prospect of success, Swain v Hillman [2001] 1 AER 91. However in determining that issue it

clear that the court should have regard to whether there is a prospect that material will become

available in time for trial so as to afford the defendant a real prospect of success. This involves

something more than the blind optimism of Charles Dicken’s Mr Micawber to the effect that

something will turn up!. See Lewison J (as he then was) in Easy Air Limited v Opal Telecom Ltd

[2009] EWHC 339 (Ch) for a full review of the principles governing a summary judgment

application.

Mostyn concluded that disclosure of the documents (or the absence of the same) would allow

everyone to determine whether or not C has a real prospect of proving her S10 claim.

11. EARLY NEUTRAL EVALUATION

11.1 Seals v Williams [2015] EWHC 1829 (Ch) provides authority for the courts to embark

upon a without prejudice dispute resolution; “Early Neutral Evaluation” hearing in claims under

the 1975 Act.

The origin of the power

Norris J noted that ENE is endorsed in the Chancery Modernisation Review Para 5.23 – 5.30.

The CPR 3.1(m) authorises the court to:

“take any other step or make any other order for the purpose of managing the case and

furthering the overriding objective”.

He concluded that it was within the judge’s inherent jurisdiction to express provisional views,

with a view to assisting the parties, and to seek to reduce the areas of dispute.

11.2 The Chancery Guide 2016

Where proceedings have been issued and evidence filed there are now 2 distinct types of ADR,

involving the Chancery Division.

(i) Early Neutral Evaluation Para 18.7 & CPR rule 3.1(2)(m)

(ii) Chancery FDR Para 18.16

11.3 Early Neutral Evaluation

The Chancery Guide states in appropriate cases and with the agreement of all parties:

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“the court will provide a non-binding, early neutral evaluation ENE.. .The person undertaking

ENE provides an opinion based on the information provided by the parties”.

It is envisaged that in most cases there would be a hearing of up to half a day and the Judge

would deliver his opinion informally. In normal circumstances the same will be without

prejudice and non-binding.

11.4 Chancery FDR

This is described as follows:

“Ch FDR is a form of ADR in which the judge facilitates negotiations and may provide the

parties with an opinion about the claim or elements of it”.

The FDR had its origins in the Family Court in respect of ancillary relief claims. In that

jurisdiction there is a “First Appointment” prior to any FDR, and there will have been the filing

of evidence and disclosure prior to the FDR taking place. The Chancery Guide describes the Ch

FDR as being widely used in claims under TOLATA and the Inheritance Act.

These developments are useful additions to the armoury that can be deployed to allow the parties

to achieve a compromise without the costs consequences of a full blow trial. There is a

significant amount of “front loading” in terms of costs to get to the matter before the Court. In

the majority of cases the lawyers will continue to speak for the lay parties.

There will continue to be room for mediation, where the lay parties in particular can see their

input into the resulting compromise.

12. SECTION 4 AND RECALITRANT PRS

S4 as amended by the Inheritance and Trustees’ Powers Act 2014, allows for proceedings to be

issued prior to a grant or letters of administration being obtained. The new CPR 57.16 (3A)

provides directions as to the information that needs to be filed with Claim Form.

“(3A) Where no grant has been obtained, the claimant may make a claim without naming a

defendant and may apply for directions as to the representation of the estate.”

It is made clear that direction should be sought as to the representation of the estate. However it

is a valuable weapon in securing the compliance of otherwise recalcitrant executors.

13. TAXATION CONSIDERATIONS

13.1 The retrospective effect of an order

Where proceedings are on foot S19 of the 1975 Act applies so as provide that the terms of the

order are treated as if they had appeared in the will and so retrospective to the date of death.

“Where an order is made under section 2 of this Act then for all purposes, including the

purposes of the enactments relating to inheritance tax, the will or the law relating to intestacy, or

both the will and the law relating to intestacy, as the case may be, shall have effect and be

deemed to have had effect as from the deceased’s death subject to the provisions of the order”.

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This is reflected in S146 of the Inheritance Tax Act 1984:

“Where an order is made under section 2 of the Inheritance (Provision for Family and

Dependants) Act 1975 (“the 1975”Act) in relation to any property forming part of the net estate

of a deceased person, then, without prejudice to section 19(1) of that Act, the property shall for

the purposes of this Act be treated as if it had on his death devolved subject to the provisions of

the order”.

13.2 Use of the spouse exemption

If a widow/widower is to receive provision then the effect of the two sections above will be to

make the spouse exemption available in respect of any property that is given to the

widow/widower absolutely.

However the spouse exemption can also apply in respect of any property in which the widow has

an immediate post-death interest under S49A of the Inheritance Tax Act 1984. Therefore if the

widow is given a life interest for a term then S49A will apply. This is a valuable method of

saving inheritance tax and as such a spur to settlement of these cases. The structure is that the

surviving spouse has an interest in possession which is to be terminated and the property in

which the interest existed then vested absolutely in the remaindermen (for example the children

of the second marriage). The effect of this arrangement is that the transaction is treated as a PET

and provided that the widow survives for 7 years there is no tax payable. It is common place for

insurance to be obtained in order to make provision for a death within that time frame.

13.3 The length of the life interest

(a) Where there have been no proceedings. The life interest should last for longer than two

years from the date of death if a deed of variation is being relied upon under S142(4) of the

Inheritance Tax Act 1984, which provides that an interest in possession that lasts for less than

two years from the date of death is treated as if the same had not been made.

(b) Where there have been 1975 Act proceedings the HMRC at IHTM35202 states that:

“If the order creates a short-term life interest (not exceeding five years) interest in possession

for the benefit of the deceased’s spouse or civil partner.. you should refer the file to TG with a

summary of the deceased’s will or intestacy and of the order”.

However in practice periods of time, substantially less than the 5 years do appear to achieve the

desired result without any challenge by the HMRC. It is important to ensure that the spouse does

receive real benefit from the life interest. This can be demonstrated by the widow continuing to

reside in the matrimonial home for a substantial period of in excess of 2 years, before the

inevitable sale. Or where there are liquid assets the widow will need to receive the income

stream during the requisite period.

13.4 What type of order is required

The majority of cases are settled using the mechanism of a Tomlin order, which stays the

proceedings except for the purpose of carrying the agreed terms into effect. The terms are

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essentially a contract between the parties. The essential question is whether the Tomlin order is

an order made under S2 of the 1975 Act as referred to in S146(1).

However S146(8) comes into play to endorse the applicability of S2 to a Tomlin order as

follows:

“Where an order is made staying or dismissing proceedings under the 1975 Act on terms set out

in or schedule to the order, this section shall effect as if any of those terms which could have

been included in an order under section 10 or 10 of that Act were provisions of such an order”.

Therefore the provisions contained in a Tomlin order should be effective for inheritance tax

purposes as if they were dispositions made by the will.

13.5 Capital Gains Tax

This may be a concern if in the above example the matrimonial home has increased in value

from the date of death to the date of the award. In order to secure the application of S62(6) of

the Taxation of Chargeable Gains Act 1992, which provides that a variation does not constitute a

disposal for the purposes of capital gains tax, and is treated as if the variation has been made by

the deceased. The only safe course is to ensure that an order is made pursuant to S2 of the 1975

Act. The Capital Gains Tax manual at para 31810 provides as follows:

“Where proceedings are brought under the Inheritance (Provision for Family and Dependants)

Act 1975 and after a full hearing the Court makes an order under Section 2 of that Act, the terms

of that order are deemed to have applied from the date of death for all purposes”.

13.6 Spouses with a foreign domicile

There has been a significant reform in relation to the exemption for transfers to spouses with a

foreign domicile. Since 6th

April 2013, the exempt amount that can be transferred to a foreign

domiciled spouse has increased from the paltry £55,000 to the current Nil Rate band of

£325,000, and is now aligned to the NRB. There is additional potential for tax saving whereby

the non-domiciled spouse of a UK domiciled spouse can make an election to be treated as UK

domiciled for IHT purposes, see S267A & 267B of the Inheritance Taxes Act 1984. This is a

complex area and specialist advice should be taken on behalf of a non-domiciled spouse.

However the possibility of making such an election within the two years after the death of the

deceased death may led to a significant tax saving and facilitate a settlement.

13.7 The court and tax

There is a rather intriguing amendment at S2(3A) of the 1975 Act directing the court to the

following consideration:

“In assessing for the purposes of an order under this section the extent (if any) to which the net

estate is reduced by any debts, or liabilities (including any inheritance tax paid or payable out of

the estate) the court may assume that the order has already been made”.

In the case of Re Goodchild v Goodchild [1997] 1 WLR 1216 Morritt LJ was lukewarm as to the

involvement of the court in endorsing the use of the short-term life interest in order to achieve a

tax benefit. He held:

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“If the order is properly within the jurisdiction of the court the fact that was sought with the

motive of seeking to achieve a better tax position is usually irrelevant: In re Sainsbury’s

Settlement (Practice Note) [1967] 1 WLR 476. But where the effect of the order is to confer a

substantial advantage on the parties at the expense of the revenue it is in my view important that

the court should be satisfied that the order is not only within its jurisdiction but also which may

properly be made”.

Despite this express lack of enthusiasm the courts regularly do approve these types of orders on

behalf of minors and those lack capacity.

I do not think that the inclusion of S2(3A) was designed to encourage tax planning, but rather to

ensure that the court and parties understand the taxation consequences of any potential order.

Miranda Allardice 5 Stone Buildings

Barrister & Mediator mallardice@5sblaw.com

June 2016