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Benham Will Trust – RIP

Brian Walsh, C.T.A.P.S.,TEP

Campbell Hooper

(From Issue9,October 1998)

Mr Justice Blackburne delivered judgment in Re: Ratcliffe on the 19th February 1999, and finally laid to rest the 1994 decision in Re Benham.  He restored to charities their full entitlement under wills, where they share residue with the testator’s family, friends or non-charitable bodies.  This has hopefully cleared the confusion that has reigned amongst the charity world and other areas following the decision in Benham in July 1994.

The Capital Taxes Office are to be applauded for their decision taken very early on to state that Benham only applied to its own facts.  The intention that can be attributed to most testators who direct an equal division between exempt and non-exempt beneficiaries is that those beneficiaries should receive equal amounts.  Before Benham it was assumed (correctly) that whilst that may be the testator’s intention, that intention would be defeated by S.41. IHT Act 1984.

After Benham there was division amongst practitioners as to how Benham should be applied (despite the stances adopted by the Capital Tax Office) which led to confusion to the extent that one leading charity estimated that in the year 1997/1998 the effects of the Benham decision, not in tax, but in extra man hours expended by the charity and their legal advisors, legal costs and delays in completion of the administration of the estate, cost the charity in excess of £500,000.

Whilst the majority of practitioners agreed with the Revenue that Benham was contained by the remarkable wording of Miss Benham’s will, the confusion caused in the industry was considerable, practitioners and banks (for instance, one bank chose to adopt theBenham principle, other banks chose to ignore it another bank chose to accept indemnities in order to distribute on a S.41 basis).  The confusion is best demonstrated by part of documentation produced to the Court which consisted of 15 separate articles written by various prestigious practitioners in the field of IHT, most of them conflicting.

  1. Benham 

By clause 3 of her Will dated the 30th January 1987, the testatrix Jane Mary Benham disposed of her residuary estate under the following terms:-

(a)     She provided a normal clause to her trustees to convert her estate into money and to hold the proceeds thereof together with her ready money upon the following trusts:-

(i)                   to pay all just debts funeral and

(ii)                 testamentary expenses

(iii)                as to the residue after such payment of testamentary expenses, to pay the same to those beneficiaries as are living at my death and who are listed in list (a) and list (b) hereunder and written in such proportions as will bring about the result that the aforesaid beneficiaries named in list (a) should receive 3.2 times as much as the aforesaid beneficiaries named in list (b) and in each case for their own absolute and beneficial use and disposal.

The testatrix then set out in two lists a number of beneficiaries.  In the case of list (a) one was charitable and the rest were non-charitable, in list (b) several were charitable with the rest non-charitable.

The testatrix died on the 9th July 1992.  The executors issued a summons on the 9thDecember 1993 asking the Court for directions on the following:-

(i)                   whether the wording of the will meant that each of the beneficiaries in list (a) should receive 3.2 times the sum taken by each of the beneficiaries in list (b)

(ii)                 whether having regard to the terms of IHT S.41 which precluded attributable tax attributed to the chargeable share of residue falling on any exempt share of residue (charity):-

(a)                 the non-charitable beneficiaries should receive their share subject to inheritance tax, or

(b)                 the non-charitable beneficiaries’ shares should be grossed up; and

(c)                 that extrinsic evidence should be admitted under the Administration of Justice Act 1982 S.21(b) to assist in the interpretation of the will

The Court contended that the choice between the two constructions of clause 3(b) of the will was not so clear that it could be said that there was no real doubt or ambiguity. Extrinsic evidence, therefore, was admitted but unfortunately that evidence was not conclusive or in fact in my view helpful, however, it was enough to tip the balance and the Court found that on construction the effect of clause 3(b) of the will was to divide the residue into two funds, the fund available to list (a) beneficiaries was 3.2 times as large as the fund available to list (b) beneficiaries, the beneficiaries of each fund taking as between themselves in equal shares.

  1. Calculation of Tax 

There are three (and only three) possibilities as to how the tax should be assessed and borne, these possibilities were considered by the court as follows:-

(i)          that the executors should pay the inheritance tax as part of the testamentary expenses and distribute the balance remaining in residue equally between the exempt and non-exempt beneficiaries.  This is the most favourable result for the non-exempt beneficiaries

(ii)         the same calculation is done as in (i) above but the inheritance tax is payable solely out of the shares given to the non-exempt beneficiaries.  The result is, after tax, the shares of the non-exempt beneficiaries are smaller than those of the exempt beneficiaries.  This is the most favourable result for the exempt beneficiaries (charities)

(iii)                the will, in its true construction, directs that the shares of exempt and non-exempt beneficiaries are to be equal on distribution and not merely before tax.  This is the least favourable result for the exempt beneficiaries, it is similar in effect to (i) above save that the gifts to the non-exempt beneficiaries are grossed up with correspondingly higher inheritance tax payable.

– o – o-

Example assumes residue of £800,000  

(after deduction of liabilities other than IHT on residue)

Example (i) Example (ii) Example (iii)
Prohibited by section 41(b) Section 41 calculation Benham calculation adopted by the High Court
Tax of £160,000 Tax of £160,000 Tax of £200,000
Borne as to £80,000 each by the exempt and the non-exempt beneficiary Whole £160,000 tax borne by the non-exempt beneficiary Whole of £200,000 tax borne by non-exempt beneficiary to whom there was however attributed a grossed up (i.e pre-tax) gift of £500,000
Non-exempt beneficiary receives £320,000 Non-exempt beneficiary receives £240,000 Non-exempt beneficiary receives £300,000
Exempt beneficiary receives £320,000 Exempt beneficiary receives £400,000 Exempt beneficiary receives £300,000

– 0 – 0 –
Counsel for the charities in the Benham case argued that the option (1) should not be adopted, as it contradicted completely S.41 of the IHT Act 1984.  The court agreed with this submission.  Surprisingly enough this option was again raised in the Ratcliffe case and again dismissed by the court (it was raised and discussed in one of the articles submitted to the court and submission by both counsels agreed, as did the court, that this option is not available).

3                     Re: Ratcliffe Deceased 

Mrs Ratcliffe by her will dated the 14th November 1989, the terms of which were extremely straightforward, gave three pecuniary legacies (together totalling £25,000) and provided by clause 4, as follows:-

4.           I give devise and bequeath all my real and personal estate whatsoever and wheresoever not hereby otherwise disposed of unto my Trustees upon trust to sell and convert that same into money with power at their absolute discretion to postpone any such sale and conversion for so long as they shall think fit without being answerable for any loss and after payment thereout of my debts and funeral and testamentary expenses to stand possessed of the residue as to one-half part thereof for John Hugh McMullan and Edward Brownlow McMullan (the sons of my cousin Helen McMullan) in equal shares absolutely…..[there is then a substitutional provision which I can ignore]…. and as to the remainder of my estate upon trust for the following Charities in equal shares….”

She then named four charities and declared how her trustees could obtain their discharge for monies they paid to them.

The difficulty the Court faced was to how the two half shares of residue were to be calculated.  Were they to be calculated after providing for the debts, funeral and testamentary expenses (and the three legacies) but before payment of Inheritance Tax due in respect of the McMullens half share so that the net benefit received by the two McMullens would be less (through having suffered deduction of Inheritance Tax) than the net benefit received by the four charities?  This was the view put forward by Counsel for the charities and which the Judge referred to as the “gross division approach”.  Or are they to be equal half shares of net residue after deduction of the appropriate amounts of Inheritance Tax?  This in essence was the view put forward by Counsel for the McMullens.  The Court referred to this as the “net division approach”.

Dependent upon which construction was correct, the consequence in terms of tax payable and the amount of residue available to the two classes of beneficiary was strikingly different.  If the charities’ construction was correct calculations suggested that IHT payable would be in the region of £400,000, four charities between them receiving £1.2 million and the two McMullens receiving £720,000.  If the McMullens’ construction was correct the calculations suggested that IHT payable would be a little under £500,000 with the four charities and the two McMullens collectively receiving £870,000 each.

The originating summons asked the Court’s guidance and declaration as to which of the two ways (and if neither which other way) is the correct method of administering the net residuary estate.

In contending for the net division approach, Counsel for the McMullens submitted (very attractively) that Mrs Ratcliffe is not dividing her gross residuary estate (ie her estate after providing for the legacies, debts and expenses but excluding any Inheritance Tax on her death) into two equal shares; she is only dividing her estate after the payment of her debts and funeral and testamentary expenses within which is the Inheritance Tax on her death.  This is the because Section 211 of the 1984 act provides, so far as material;“(1) where personal representatives were liable for tax on the value transferred by chargeable transfer made on death the tax shall be treated as part of the testamentary administration expenses of the estate; (2) subsection (1) above shall have the effect subject to any contrary intention shown by the deceased in his will”

There was no contrary intention shown by Mrs Ratcliffe in her will.  Accordingly, Counsel submitted, the position is precisely as if Mrs Ratcliffe had expressly included words such as “including all Inheritance Tax payable on my death in respect of my estate” in clause 4 immediately after “funeral and testamentary expenses”.

The Court concluded that Counsel’s construction, however, faced an apparent difficulty in the shape of Section 41.  So far as material, that provision is as follows

“Notwithstanding the terms of any disposition:- 

(b)                none of the tax attributable to the value of the property comprised in residue shall fall on any gift of a share of residue if or to the extent that the transfer is exempt with respect to the gift”.

Counsel anticipated this difficulty and accepting that section 41 refers to property comprised in residue before payment of inheritance tax on the deceased person’s death (rather than to residue after payment of such tax).  Counsel further submitted that Section 41 does not render ineffective a disposition which expressly directs unequal division of the gross residuary estate with a view to achieving equality of division of net residue (ie residue after payment of inheritance tax).  A testator could therefore, provide for a trust for sale and a conversion of his residuary estate with a direction to pay debts and funeral and testamentary expenses (other than inheritance tax on his death) and with a further direction to divide the balance between an exempt and a non-exempt beneficiary in such shares that, after payment of the inheritance tax in respect of the non-exempt beneficiary’s share out of that share, the two shares are equal.  Therefore, he submitted, although Mrs Ratcliffe has not expressly so provided in her will, she could have made express provision along those lines and, if she had done so, the result would be what she has actually provided, namely an equal division of the net residuary estate (after payment of inheritance tax) between the two McMullans and the four charities.

Counsel further submitted that if he was right that Section 41 need not be an impediment to the net division approach, the question, is simply one of true construction of the will, and to that he submitted, there can be no doubt; clause 4 provides for an equal division of the net residuary estate not of the gross residuary estate.  It was therefore entirely consistent with Mrs Ratcliffe’s intentions as revealed by the terms of her will in that directing an equal division of her net residuary estate she had (impliedly) directed an unequal division of her gross residuary estate.  The result therefore is the same as if Mrs Ratcliffe had in terms provided for the unequal division of her gross residuary estate.

Counsel submitted that an unequal division of the gross residuary estate to produce an equal division of the net residuary estate results in the payment of a larger amount of inheritance tax and a smaller payment to the four charities than would an equal division of the gross residuary estate and that is simply a consequence of Mrs Ratcliffe’s testamentary intentions as disclosed by clause 4: it should not affect the question of construction.  So also, is the fact that the processes which have to be undertaken to calculate the tax in order to achieve an equal division involving fairly complex mathematics was again merely a consequence.

Counsel submitted that the result for which he contended is precisely that reached in the Benham Will Trust.  The Court considered the Judgment in that case at some length and the Court concluded that having considered the matter apart from authority the Court was not persuaded that Counsel’s net division approach was correct.

The Court further concluded that the question is of course one of construction of the will.  The terms of the Ratcliffe will are entirely straightforward, indeed they are extremely common place.  The reality however, when arguing in favour of the gross division approach is that the gift of residue to the McMullens contains two elements (1) the tax attributable to it and (2) what remains after the tax is paid.  The McMullen’s net division approach, based upon the unequal division of the gross residuary estate in order, after payment of tax to achieve equality of division of the net residuary estate acknowledges this; whilst the Court acknowledged that the gross division approach is perfectly possible, although fairly tortuous to achieve, it was accepted that the charities argument that this was not what Mrs Ratcliffe had stipulated was right.  Counsel on behalf of the charities submitted that Mrs Ratcliffe could achieve equality of division of her net residuary estate by the Benham approach, but that she had not in fact directly, rather, that by directing an equal division of residue between the McMullens and the charities after payment of her debts and funeral and testamentary expenses, Mrs Ratcliffe was simply directing an equal division of her disposal residue.  The Court agreed.

The Court considered that irrespective of the fact that Mrs Ratcliffe’s personal representatives were liable for the tax and that they were entitled to recover the payment of the testamentary expense that it did not alter the fact that the inheritance tax attributable to the McMullen’s share must be part of her gift to them and as such a part of her disposable residue.  The Court further indicated that it made no difference if the will had omitted any mention of the payment of debts and funeral and testamentary expenses; testamentary expenses would fall to be paid before residue is ascertained and, absent to any contrary indication in the will, inheritance tax would continue to be regarded as a testamentary expense.  For Counsel for the McMullens to succeed on this point, the same effect would occur if instead of leaving a will, Mrs Ratcliffe had died intestate leaving a surviving husband (who would be an exempt beneficiary) and children (who would not be), the provision of the Administration of the Estates Act 1925 would have to be applied by grossing up the children’s half share of residue so as to produce, after deduction of inheritance tax, a net sum equal in amount to the half share in which the surviving husband takes life interest.  The Court agreed that this would be a surprising consequence of the impact of inheritance tax on the operation of the intestacy rules.

The Court therefore concluded that the gross division approach was correct.  An equal division of disposable residue between the two McMullens and the four charities inevitably means that the inheritance tax attributable to the McMullens half share must be borne by that share; to subject the charities’ half share to any part of that burden is prohibited by section 41(b).

That in the event, even if Mrs Ratcliffe was indeed directing an equal division of her residuary estate after payment of all inheritance tax, it does not follow that in making that disposition, she must be taken as intending an unequal division of her gross residuary estate.

The Court concluded that the likely scenario was that Mrs Ratcliffe was impliedly directing an equal division of her gross residuary estate (on the basis that the tax attributable to the McMullens half share would be first discharged as testamentary expense and the balance divided between the two classes of beneficiaries) this of course would fall foul of section 41 (b) the inevitable consequence of which would be that the tax in question would have to be borne by the McMullen’s half share.  It was agreed by both Counsel and the Court that Mrs Ratcliffe could have achieved the result for which Counsel for the McMullens contended, but that much clearer wording would be needed then the common form wording actually used and that therefore it made no difference whether in directing an equal division of her residuary estate Mrs Ratcliffe was referring to net gross residuary estate or her net residuary estate the result was the same.

The Court then considered the question of Benham:

“What then of Re Benham’s Will Trusts?  The difficulty that I feel about that decision is that, with all due respect to the deputy judge who decided it, it is not at all clear why he came to the conclusion that the testatrix’s plain intention was that “at the end of the dayeach beneficiary whether charitable or non-charitable, should receive the same as the other beneficiaries in the relevant list” (my emphasis). 

In the next sentence of his judgment, the deputy judge went on to say that “that result is consistent with the express terms of the will and the statutory provisions that apply”. Those observations do not, of course, throw light on the testatrix’s intention; rather they indicate that, having arrived at this conclusion as to what the testatrix intended, the deputy judge found that the result (ie that each beneficiary in the same list, whether charitable or non-charitable, should receive the same) was not prohibited by section 41 and was “consistent” with what the testatrix had directed.  But even if the testatrix’s intentions was as the deputy judge found it to be, I do not see why that conclusion should have led to the rejection of “the possibility at (3)” (as it was described) in favour of the second of the third possibility.  It is true that section 41(b) prohibits the third of these three possibilities but the fact that the third possibility is prohibited does not mean that that is not what the testatrix was intending.

If I had thought that Re Benham’s Will Trusts laid down some principle, then, unless convinced that it was wrong, I would have felt that I should follow it.  I am not able to find that it does and, accordingly, I do not feel bound to follow it.”

In practical terms the decision means:-

(a)     Charities which have already given indemnities where executors have distributed need not make any provision in respect of them in their accounts;

(b)      Estates which are currently deadlocked may now be distributed;

(c)     In the future no expense and delay need be caused by the executors having to consider whether Benham applies (unless the wording of the will expressly and clearly requires the net division approach).

Leave to appeal was granted on the following grounds:-

(i)           (i)   The decision involved the construction of a common form provision potentially effecting a            great many estates (and intestacies)

(ii)   The question has aroused much interest – and conflicting queries – in the professional             press.

(iii)   I have declined to follow the decision in Re Benham’s Will Trust, which (for all practical            purposes) is indistinguishable.  It is desirable that the question be put beyond doubt by          the Court of Appeal.

In effect, Mr Justice Blackburn’s decision overrules “re Benham” although the decisions are both at the same level and decided in courts of equal standing, it is settled law that; “where there are two conflicting decisions, the latter decision is to be preferred, if it is reached after full consideration at the earlier decision …” 

Those are the words of the late Lord Denning in Minister of Pensions v Higham (1948) 2KB153 (or Mr Justice Denning as he then was) when he refused to have followed a decision of his own because a later decision had considered it and disagreed with it.  The principle has been more recently confirmed in Colchester Estate v Carlton Industries Plc (1986) CH80.

To summarise Benham has finally been laid to rest and an equal division of net residue can be achieved but it must involve two gifts (a) the gift of residue and (b) the gift of tax applicable to that residue.

© Brian Walsh, C.T.A.P.S., TEP
Campbell Hooper