The long awaited Inheritance and Trustees’ Powers Act 2014 (ITPA) received Her Majesty’s Royal Assent on 14th May 2014 and will make important changes to:

• the intestacy rules,
• the Inheritance (Provision for Family and Dependants) Act 1975; and
• sections 31 and 32 of the Trustee Act 1925

A commencement date has not yet been announced but is widely expected to be 1st October 2014.

The Act implements most of the recommendations made by the Law Commission in a report entitled Intestacy and Family Provision Claims on Death (December 2011) . I have already blogged on the changes we were expecting last Autumn.

Intestacy Reform

Entitlement of surviving spouse

Section 1 of ITPA amends the entitlement of the surviving spouse of an intestate.

The distribution of the residuary estate of a person who has died intestate is governed by s 46 of the Administration of Estates Act 1925. Section 46(1)(i) sets out in tabular form what happens if the intestate leaves a spouse who survives for more than 28 days after the intestate’s death.

ITPA entirely replaces this table and provides that:

1. Where the deceased leaves a spouse, but no children or other descendants, the whole estate passes to the spouse.
2. Where the deceased leaves a spouse and children or other descendants:

• the surviving spouse takes the personal chattels (for which ITPA has also provided a new definition) and the statutory legacy of £250,000 (as now), plus 1/2 the balance of the estate outright;
• the surviving children or other descendants take the remaining ½ on the statutory trusts;
• interest accrues on the statutory legacy from the date of death (calculated on a simple basis); and
• the interest rate to be applied is the Bank of England base rate that had effect at the end of the day on which the intestate died.

Changes to the interest rate on the statutory legacy are long overdue and represent a significant cut in the rate of applicable interest which had been as high as 7% in some cases.

Spouse’s statutory legacy

Under current law, the Lord Chancellor has power to set the level of the statutory legacy but is not obliged to do so or to keep the level under review. ITPA provides that:

• The amount of the statutory legacy will remain the same as prior ITPA coming into force.
• The Lord Chancellor may make an order by statutory instrument to specify the amount of the statutory legacy at any time, but must make an order at least every 5 years.
• Unless the Lord Chancellor otherwise determines, the statutory legacy should be increased (but not reduced) in line with CPI rounded up to the nearest £1,000. Note that CPI is not the index that takes into account the cost of housing.
• The Lord Chancellor may set the statutory legacy at any amount, including an amount equal to or lower than the previous amount. If the Lord Chancellor does this, he must report the reason to Parliament and the order setting the statutory legacy must be positively approved by a resolution in each house of Parliament.
• The Lord Chancellor may substitute another index for the CPI by statutory instrument.
• If the CPI rises to 15% or more, in any month, over its base amount (as may occur in times of high inflation), the Lord Chancellor must make an order increasing the amount of the statutory legacy between the five-year review dates. The rate of increase will be at the discretion of the Lord Chancellor. When this mechanism is triggered, the five-year period will be reset to commence from the date of the order.

Personal chattels

Section 3 introduces a new, more modern definition of personal chattels to replace the existing definition we have come to know and love in s55(1)(x) Administration of Estates Act 1925. Gone are the references to carriages, plated articles and scientific instruments. The new definition covers all tangible movable property except for property:

• Consisting of money or securities for money.
• Used at the death of the intestate solely or mainly for business purposes.
• Held at the death of the intestate solely as an investment.

This is hardly radical stuff, the new definition broadly replicates the current definition but the addition of “solely or mainly” provides more clarity in the case of items with both a personal and business use. Only a chattel used primarily for business purposes should be excluded under the exception and should not, therefore, pass to the surviving spouse.

The new exception for property held solely as an investment is narrow and will only apply where there was no personal use of the property at the deceased’s death.

The new definition will not affect the estates of persons dying intestate before the commencement of the new s3. Wills incorporating the statutory definition by reference will be construed as adopting the old definition if executed before commencement of ITPA, unless a contrary intention is shown. Although the statutory definition applies only for the purposes of the intestacy rules, the new Act recognises that the definition is often incorporated by reference in wills so this is something to be aware of for both testate and intestate succession.

The new definition will apply to wills executed on or after commencement of section 3. If a will executed before commencement incorporates the statutory definition for personal chattels, the amended definition will not be imported automatically into the will on republication by a codicil executed after commencement unless the codicil expressly incorporates s55(1)(x) AEA 1925 by reference.

Contingent interests of adopted children

Section 4 of ITPA closes a little-known trap that prevents children who’s adoption is only formally competed after the death of a parent from benefiting from that parent’s estate if they do not have interests that are vested in possession at the time of the adoption. Under the intestacy rules, a child who is under 18 and unmarried can only have a contingent interest. The trap also applies to contingent interests under wills.

The effect of the changes is that a child who already has a contingent interest in the estate of his deceased parent when he is adopted will keep that interest.

The new rules apply to interests under wills and the intestacy rules. However, it does not apply to contingent remainder interests or to the rights of children adopted during a parent’s lifetime. The new provisions apply where the adoption occurs on or after the date of commencement.

The existing rule that adoption bars a claim by a child from bringing an Inheritance Act claim against the estate of his or her biological parent, will not change.

Unmarried fathers on intestacy

Section 5 of the new Act also affects a wrinkle that has resulted from changes in the modern families to which the law has not kept pace.

When a person whose parents were not married to one another at the time of his birth dies intestate, there is a rebuttable presumption that the deceased was not survived by his father or anyone related through his father (see s18(2), Family Law Reform Act 1987). Section 5 of ITPA dis-applies this presumption if a person is recorded as the deceased’s father, or as a parent (other than the mother), on the deceased’s birth certificate.

The amendment would therefore apply where a child, born as a result of fertility treatment on or after 6 April 2009, had a second female parent.

Changes to the Inheritance (Provision for Family and Dependants) Act 1975

Child of the family

Paragraph 2, Sch. 2, ITPA modifies s1(1) IPFDA 1975 so that a person who was treated by the deceased as ‘a child of the family’ can apply to make a claim under the Inheritance Act whether or not this treatment was in relation to a marriage to which the deceased was a party to at any time .

The new requirement is that the deceased must stand in a role akin to that between a parent and child. A family, for these purposes, may consist only of the deceased and the applicant.

Maintenance of dependants

Paragraph 3, Sch. 2, ITPA modifies s 1(3), IPFDA 1975 so that a person may qualify as being ‘maintained by the deceased’ if the deceased made a substantial contribution to that person’s reasonable needs other than for full, valuable consideration under an arrangement of a commercial nature.

This amendment effectively ends what has become known as the balance sheet test whereby a person claiming as a dependant under the IPFDA 1975 may have had to show that the deceased contributed more to the relationship than the applicant did.

Claims by applicants receiving full consideration on a commercial basis (such as lodgers and paid carers) will still be barred.

The court must have regard to the matters set out in s3 of the 1975 Act (as amended by paragraph 5 of Schedule 2 ITPA 2014) when exercising its powers under the IPFDA.

A person who was maintained by the deceased immediately before the death will be eligible to claim under the Inheritance Act whether or not, beyond the fact of providing maintenance, the deceased had formally assumed responsibility for that person’s maintenance.

The question of whether there was such an assumption of responsibility, and its extent, will be one of the factors the court must take into account rather than being treated as a threshold requirement for making a claim.

Court’s powers to make orders

Currently the court has only an ancillary power to vary trusts for the purpose of giving effect to a substantive order, although it has a separate power to create entirely new trusts.

Under s2, IPFDA 1975 as amended by paragraph 4, Schedule 2, IPTA 2014, the Court now has the express power to vary, for the applicant’s benefit, the trusts on which the deceased’s estate is held (whether under a will or on intestacy)

This new provision confirms that, in making an order, the court may treat the net estate as already including the payment of any amount becoming payable as a result of the order, such as a repayment of IHT. An order is treated as if it had effect from the date of death for IHT purposes, for example, an award to a spouse may result in the spouse exemption applying.

Allowing claim under IPFDA 1975 before issue of grant of representation

Paragraph 6 of Schedule 2 to ITPA amends s4 of the 1975 Act to expressly permit an application under the Act to be made before a grant is issued.

Assets held as joint tenants

The court’s treatment of property held by the deceased under a joint tenancy is governed by s9 of IPFDA. Section 9 as amended by paragraph 7 of Schedule 3 to ITPA permits the court to treat the deceased’s share of this property as part of the deceased’s net estate to such an extent as the court considers to be just in all of the circumstances.

The amendments to s9 of the IPFDA 1975 are as follows:

• The court is permitted to exercise the power where an application is made more than six months after the grant is taken out. (The court currently has no discretion to do this.)
• The court has a clear discretion to value the property in question at such a date as the court thinks appropriate.

Clarifying when grant of representation first taken out

Inheritance Act applications are time barred after six months of the date that a grant is first taken out for the estate, unless the court extends this limit. Section 7 and Schedule 3 to the ITPA amend s23 of the 1975 Act that so that the following should be left out of account for the purpose of determining the date the grant of representation was first taken out:

• Grants limited to settled land or to trust property.
• Any other grant that does not permit distribution of at least some of the estate (for example, a grant ad colligenda bona).
• A grant (or equivalent) made outside the UK, except for a grant resealed under the Colonial Probates Act 1892 (but only from the date of the sealing).

Statutory powers to apply income and capital

ITPA brings the statutory powers of trustees to apply income and capital in line with one other. The new statutory amendments now also reflect the amendments that are present commonly made to statutory powers in professionally drafted wills and trusts.

Changes to section 31 of TA 1925

Section 8 ITPA amends the powers of Trustees in relation to trust income under s 31 Trustees Act 1925.

The amendments remove the following requirements for trustees, when applying income for the maintenance, education or benefit of a minor beneficiary, to:

• Apply only the amount of income that is reasonable (by allowing them to apply as much income as they think fit).
• Have regard to specified factors and apply only a proportionate part of all funds available (by removing the proviso to that effect in s31(1) entirely).

Changes to section 32 of TA 1925

The statutory power of advancement is extended to apply to the whole of a beneficiary’s prospective interest in capital rather than only half of it

The amendment also makes clear that:

• The power applies to any trust assets, not just to cash.
• The trustees can treat an advance as a proportionate part of a beneficiary’s share (as opposed to a set amount) when bringing it into hotchpot.

When will the changes to sections 31 and 32 apply?

The amendments to s31 and 32 of the Trustee Act 1925 will apply to all wills and all trusts as follows:

• The s 31 amendments will only apply to trusts created or arising on or after the date of commencement.
• The extension of the power of advancement in s32 to the whole of a beneficiary’s prospective share of capital will only apply to trusts created or arising on or after the date of commencement.
• The other amendments to s32 will apply to all trusts whether created or arising before or after the date of commencement.
• Trusts created or arising by the exercise of both general and specific powers of appointment on or after the date of commencement of ITPA, will benefit from all the amendments to ss 31 and 32, even if the instrument creating the power took effect before that date.