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Practice Direction 57AD – Disclosure in the Business and Property Courts

Introduction  A disclosure pilot scheme (known as PD51U) operated in the Business and Property Courts (the “BPC”) in a number of courts including Leeds, Manchester, Newcastle, and London from 1st January 2019.  Practice Direction 57A (“PD57A”) substantively reproduces PD51U and came into force on 1st October 2022.  Eighteen months on, my experience of PD57A is that it is still slowly filtering through to practitioners and courts, notwithstanding that for practitioners in Leeds, Manchester, Newcastle, and London, these provisions (or some very similar) have been in force for over five years.  This article hopes to de-mystify PD57A and provide some practical assistance to those still grappling with the provisions<a href="#_ftn1" id="_ftnref1">[1]</a>.  You will however still need a copy of the most up to date PD57A to hand, and I apologise in advance for the number of acronyms used.  When does PD57A apply?  The first thing to ascertain is whether PD57A applies to your case, or whether you’re still looking at disclosure under CPR 31.  The clue here is in the title of the article - PD57A applies to existing and new proceedings in the BPC (whether London or the provinces).  It does not apply in the County Court and it does not apply to proceedings which are  <ul class="wp-block-list"> <li>Proceeding under Part 8</li>  <li>Within a fixed costs or capped costs regime</li> </ul>  Which Regime?  Under Appendix 5 of PD57A you will find provisions for a simplified disclosure regime for Less Complex Claims (“LCC”).  An LCC is a claim which by virtue of its nature, value, complexity, and the likely volume of Extended Disclosure (“ED”) may not benefit from the full procedure set out in the main body of Practice Direction 57AD.  Deciding whether your claim is a LCC is akin to deciding to which track your case should be allocated.  If the value of the claim (both financial and non-monetary) is less than £1M then the starting point is LCC, but the other factors (nature, complexity etc) can tip a claim under £1M into the full regime and cases over £1M into a LCC.  The parties can agree to treat a claim as LCC or the court can order it.  If your claim is LCC, you follow the provisions under Appendix 5, so this is something that needs to be agreed at the outset.  If LCC is not agreed, the LCC regime does not apply unless and until the court makes an order to the contrary.  The court may make such an order upon its own volition or by application by any party.  LCC Regime  My experience is that most practitioners agree to designate their cases as LCC and I have therefore considered this regime first so that when you read the main provisions you have in mind the parts which don’t apply or which are varied on the LCC.  However, I’m afraid you still have to read the notes for the Full Regime below as I have not repeated the relevant parts of the Full Regime here.  For LCC, Appendix 5 varies the provisions in the main body of PD57A – paragraph 1 of Appendix 5 provides that all the provisions of the main body apply unless they are expressly varied by Appendix 5.  The simplified LCC procedure is found at paragraph 10 of Appendix 5.  ED is confined to Models A, B, or D.  Models C and E are not available for a LCC (Models considered under Full Regime below).  The relevant Disclosure Review Document (“DRD”) for a LCC (which is referred to in the PD as the “LCCDRD”) is that set out at Appendix 6, and the timetable is that which appears at paragraphs 7 and 10 of the main body and Appendix 7.  The LCCDRD only needs to be completed where one or more parties are seeking ED.  If nobody wants ED or only Models A or B are proposed, there is no need to complete a DRD.  If, however, in circumstances where Model B is proposed, the parties believe that it would be of assistance to identify and agree upon on List of Issues for Disclosure (or to complete any other sections of the LCCDRD), they may agree to do so.  It is the Claimant’s responsibility to ensure that the LCCDRD is completed and a single agreed version filed with the court (although the parties can agree to pass this responsibility to another party).  Completing the LCCDRD – don’t forget that the relevant DRD for a LCC is at Appendix 6.  The only mandatory part of the LCCDRD is section 1 - “Issues for Disclosure and Disclosure Model Proposals”.  The rest of the LCCDRD should only be completed if applicable and relevant.  Paragraph 9 of Appendix 7 encourages the parties to confer about the LCCDRD in person rather than by letter/email, and my experience suggests that this is very good advice.  The timetable for completing the LCCDRD is set out at paragraph 13 of Appendix 7, and I have set this out below.  The parties may agree to revise the timetable provided it does not affect the date set for the CMC.  NOTE – the first deadline in the timetable is “within 28 days of the closure of statements of case”.   HOWEVER  - also remember that under paragraph 5 of the main regime, each party must provide to all other parties at the same time as its statement of case an Initial Disclosure List of Documents with copies of those documents.  Disclosure is not something that can be considered ‘later’.  It needs to be in the forefront of your mind from the start of your involvement with the case,  Timetable for completing the LCCDRD  <figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td></td><td>Stage to be completed</td><td>Deadline</td></tr><tr><td>Step 1</td><td>Each party should state, in writing, whether or not it is likely to request Extended Disclosure Models A, B and/or D on one or more issues in the case. At this point it should not particularise the Model(s) or the issue(s) in the case.</td><td>Within 28 days of the closure of statements of case</td></tr><tr><td>Step 2</td><td>Where one or more of the parties has indicated it is likely to request search-based Extended Disclosure (i.e. Models D), unless the parties agree otherwise, the claimant must prepare and serve on the other parties a draft List of Issues for Disclosure unless the equivalent of such a list has already been agreed between the parties (for example, as part of a fuller list of issues). At the same time, the claimant shall identify for each Issue for Disclosure which Model of Extended Disclosure it proposes for each party. If the claimant fails to take these steps, the defendant may, but is not obliged to, prepare and serve its own draft List of Issues for Disclosure on the other parties.</td><td>Within 42 days of the closure of statements of case</td></tr><tr><td>Step 3</td><td>A party served with a draft List of Issues for Disclosure and proposals on Models shall indicate within section 1 of the LCCDRD whether it agrees with the proposed Issues for Disclosure and corresponding Model(s) for Extended Disclosure by completing the “Issue Agreed” and “Model Agreed” columns in section 1. If the party does not agree, or wishes to propose alternative or additional Issues for Disclosure or other Models, it should set out its alternative or additional proposals in section 1 of the LCCDRD and briefly explain and set out in section 6 of the LCCDRD the reasons why it disagrees with the Issues for Disclosure or Models proposals of the other party the reasons for the alternative proposals it is proposing.</td><td>As soon as practicable but in any event no later than 21 days after service of the draft List of Issues for Disclosure</td></tr><tr><td>Step 4</td><td>Having sought to agree the List of Issues for Disclosure and proposals on Model(s) for Extended Disclosure, the parties should prepare and exchange drafts of the LCCDRD (with all applicable sections of the document completed) in accordance with the guidance in Appendix 7.</td><td>As soon as reasonably practicable and in any event not later than 14 days before the case management conference</td></tr><tr><td>Step 5</td><td>The parties must seek to resolve any disputes over the scope of any Extended Disclosure sought or any other aspect of the completion of the LCCDRD.</td><td>In advance of the first case management conference</td></tr><tr><td>Step 6</td><td>Unless otherwise agreed by the parties or ordered by the court, the claimant(s) shall be responsible for ensuring that the form is completed and a single agreed version is filed with the court.  Related correspondence and earlier drafts should not ordinarily be filed.</td><td>Not later than 5 days before the first case management conference</td></tr><tr><td>Step 7</td><td>The parties must independently file a signed Certificate of Compliance substantially in the form set out in Appendix 3 to the Practice Direction.</td><td>Not less than two days before the case management conference</td></tr></tbody></table></figure>   I cannot urge you strongly enough to engage with this process as early as possible and to meet the deadlines.  If you get to CMC and you have not complied with PD57A you may find that the court simply adjourns your CMC (costing you and your clients both time and money).  It also makes it very difficult (if not impossible) for the court to determine which Model to order if the issues for disclosure have not been identified.  Both of these examples have arisen in cases I have been involved in within the last month.  In relation to the completion of the LCCDRD, ‘issues for disclosure’ has the same meaning as in the main body of PD57A:  <blockquote class="wp-block-quote"> “Issues for Disclosure” means for the purposes of disclosure only those key issues in dispute, which the parties consider will need to be determined by the court with some reference to contemporaneous documents in order for there to be a fair resolution of the proceedings. It does not extend to every issue which is disputed in the statements of case by denial or nonadmission. (see paragraph 7.6 main body) </blockquote>   However, the issues for disclosure in a LCC must be brief, should rarely exceed 5, and should not be defined by reference to sub-issues if that will materially increase the length and complexity of the list.  The list of issues for disclosure is not the same as the list of issues for trial, and the parties should have regard to the function of the list as set out at paragraph 10.5 of Appendix 5, which includes helping the parties to consider, and the court to determine, whether ED is required and, if so, the appropriate Model, and to identify the documents and categories of documents that are likely to exist and are required to be disclosed.  If the parties cannot agree the terms of ED, the court will determine the issue at the CMC.   Full Regime/Main Body of PD57A  Save where expressly modified by Appendix 5, these provisions also apply to a LCC.  The regime starts with initial disclosure and paragraph 5 of the main body of PD57A provides that when a party serves its statement of case, it must also provide to all other parties an Initial Disclosure List of Documents that lists and is accompanied by the key documents that party has relied on and the key documents that are necessary to enable the other side to understand the case it has to meet.  This form of disclosure is known as initial disclosure and is not required where the parties have agreed in writing to defer or dispense with it. In the event of such agreement the parties should record their reasons so as to be available to the court if requested at the CMC. Any disagreements about whether initial disclosure should be dispensed with can be referred to the court.  There is no requirement for a party to search for documents or to disclose adverse documents by way of initial disclosure.  There is also no requirement for any document disclosed by way of initial disclosure to be translated.  In Breitenbach v Canaccord Genuity Financial Planning Ltd [2020] EWHC 1355 (Ch) it was held that documents that were said to be necessary to evaluate and weigh the Defendant’s prospects of success were not key documents, as this went beyond enabling the claim to be understood.  A party seeking disclosure in addition to or as an alternative to initial disclosure must request extended disclosure (“ED”).  Where ED is sought, the parties are expected to complete the Disclosure Review Document (“DRD”) set out at Appendix 2.  ED involves using Disclosure Models which are set out at paragraph 8 of PD57A:  Model A: Disclosure confined to known adverse documents As set out in the title  Model B: Limited Disclosure The key documents a party has relied on in its statement of case and the key documents that are necessary to enable the other side to understand the case it has to meet (ie, Initial Disclosure), plus known adverse documents.  Model C: Disclosure of particular documents or narrow classes of documents The court may order a party to give disclosure of particular documents or narrow classes of documents relating to a particular Issue for Disclosure.  Model D: Narrow search-based disclosure, with or without Narrative Documents Documents which are likely to support or adversely affect a party’s claim or defence or that of another party in relation to one or more of the issues for disclosure. Under D the parties are required to undertake a reasonable and proportionate search in relation to the Issues for Disclosure.  Model E: Wide search-based disclosure Documents which are likely to support or adversely affect a party’s claim or defence or that of another party in relation to one or more of the issues for disclosure, or which may lead to a train of inquiry which may then result in the identification of other documents for disclosure.  Although the parties can (and should where possible) agree the issues for disclosure and the Model, the court retains control and will determine whether to order ED at the CMC.  If the parties cannot agree, the court will determine disputes at the CMC.  A practical point – The parties may, at any time, ask the court to determine any disclosure issues, or provide guidance on any point concerning the operation of PD57A, by issuing an application notice.  This is worth remembering if there are significant areas of disagreement, as the standard time allowed for a CMC may not be sufficient to deal with CMC issues and disclosure.  I have recently had a CCMC adjourned to deal with budgets at a later date as the 90 minute hearing was largely taken up with disputes over disclosure.  Dealing with disclosure at a separate hearing before the CCMC would have been more appropriate.  The Court will only order search based models – C, D, E – if persuaded it is appropriate, and Model E will only be ordered in an exceptional case.  Paragraph 6.4 sets out the factors to be considered when determining whether ED should be ordered:  <ol class="wp-block-list"> <li>the nature and complexity of the issues in the proceedings;</li>  <li>the importance of the case, including any non-monetary relief sought;</li>  <li>the likelihood of documents existing that will have probative value in supporting or undermining a party’s claim or defence;</li>  <li>the number of documents involved;</li>  <li>the ease and expense of searching for and retrieval of any particular document (taking into account any limitations on the information available and on the likely accuracy of any costs estimates);</li>  <li>the financial position of each party; and</li>  <li>the need to ensure the case is dealt with expeditiously, fairly and at a proportionate cost.</li> </ol>  There is no presumption that a party is entitled to search based ED, and it is for the party requesting ED to show that what is sought is appropriate, reasonable, and proportionate.  When it is necessary to decide any question of what is reasonable and proportionate under a particular Model, the court will consider all the circumstances of the case including 6.4 and the overriding objective.  At paragraph 2AA-63.1 the White Book 2024 states:  Approach to determining choice of disclosure model  <blockquote class="wp-block-quote"> In McParland & Partners Ltd v Whitehead [2020] EWHC 298 (Ch), Vos C at [50]–[52] provided guidance on the approach to be taken determining the appropriate disclosure model under the disclosure pilot scheme. The same approach will apply to PD 57AD. Where a party had made a reasonable request for further documentation and disclosure could not be agreed, Model C disclosure was appropriate. Where parties did not trust each other, Model D disclosure was likely to be the simplest, most appropriate choice. Care should also be taken to consider if different disclosure models should apply to different parties. There is no reason in principle why the same issue might not be subject to disclosure Model D for one party, while it is subject to disclosure Models B or C for another party. Model D disclosure may also be appropriate in respect of issues that are central to a party’s pleaded case: Lombard North Central Plc v Airbus Helicopters SAS [2020] EWHC 3819 (Comm), Bryan J, at [20]–[30] following McParland at [51]. </blockquote>   The DRD for cases proceeding under the full regime is found at Appendix 2, and the timetable pertaining to the same is at paragraph 7 of the main body of PD57A.   Again, there is a handy timetable provided (which can be found at the end of Appendix 2).   Timetable for completing the DRD  The timetable should be read in conjunction with paragraph 7 as paragraph 7 sets out exactly what each party needs to do.  <figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td></td><td>Stage to be completed</td><td>PD Ref.</td><td>Deadline</td></tr><tr><td>Step 1</td><td>Each party should state, in writing, whether or not it is likely to request search-based Extended Disclosure to include one or more of Models C, D or E on one or more issues in the case. At this point it should not particularise the Model(s) or the issue(s) in the case.</td><td>Para 7.1</td><td>Within 28 days of the closure of statements of case</td></tr><tr><td>Step 2</td><td>Where one or more of the parties has indicated it is likely to request search-based Extended Disclosure (i.e. Models C, D and/or E), the claimant must prepare and serve on the other parties a draft List of Issues for Disclosure unless the equivalent of such a list has already been agreed between the parties (for example, as part of a fuller list of issues). At the same time, the claimant shall identify for each Issue for Disclosure which Model of Extended Disclosure it proposes for each party. If the claimant proposes Model C Disclosure for any Issue for Disclosure it should indicate, using Section 1B of the Disclosure Review Document, the particular documents or narrow class of documents it proposes should be defined for that purpose. If the claimant fails to take these steps, the defendant may, but is not obliged to, prepare and serve its own draft List of Issues for Disclosure on the other parties together with its proposals on Models and any Model C requests.</td><td>Para 7.2</td><td>Within 42 days of the closure of statements of case</td></tr><tr><td>Step 3</td><td>A party served with a draft List of Issues for Disclosure and proposals on Models shall indicate using Section 1A (and, if applicable, 1B) of the Disclosure Review Document whether it agrees with the proposed Issues for Disclosure and corresponding Model(s) for Extended Disclosure (including any proposals as to how Model C Disclosure should be defined). If the party does not agree, or wishes to propose alternative or additional Issues for Disclosure, other Models and/or other Model C proposals, it should set out its alternative or additional proposals in Sections 1A and 1B of the Disclosure Review Document.</td><td>Para 7.9</td><td>As soon as practicable but in any event no later than 21 days after service of the draft List of Issues for Disclosure</td></tr><tr><td>Step 4</td><td>The parties must discuss and seek to agree the draft List of Issues for Disclosure, the Models identified for each Issue for Disclosure, and the wording of any Model C proposals. They should consider whether any draft Issue for Disclosure can be removed.</td><td>Paras 7.10 and 10.6</td><td>In advance of the first case management conference</td></tr><tr><td>Step 5</td><td>Having sought to agree the List of Issues for Disclosure, proposals on Model(s) for Extended Disclosure and the wording of any Model C requests, the parties should prepare and exchange drafts of Section 2 of the Disclosure Review Document (including costs estimates of different proposals, and where possible estimates of the likely amount of documents involved). Section 2 of the Disclosure Review Document should be completed only if the parties are seeking an order for Extended Disclosure involving a search-based Disclosure Model (i.e. Models C, D and/or E).</td><td>Para 10.5</td><td>As soon as reasonably practicable and in any event not later than 14 days before the case management conference.</td></tr><tr><td>Step 6</td><td>A finalised single joint Disclosure Review Document should be filed by the claimant. Related correspondence and earlier drafts should not ordinarily be filed..</td><td>Para 10.7</td><td>Not later than 5 days before the case management conference</td></tr><tr><td>Step 7</td><td>The parties must independently file a signed Certificate of Compliance substantially in the form set out in Appendix 3 to the Practice Direction</td><td>Para 10.8</td><td>Not less than two days before the case management conference</td></tr></tbody></table></figure>   Guidance on completing the DRD is found at paragraph 10 and in the explanatory notes which come after the DRD in Appendix 2.  Adverse Documents  “Adverse Documents” and “known adverse documents” are defined at paragraphs 2.7 and 2,8:  2.7 Disclosure extends to “adverse” documents. A document is “adverse” if it or any information it contains contradicts or materially damages the disclosing party’s contention or version of events on an issue in dispute, or supports the contention or version of events of an opposing party on an issue in dispute, whether or not that issue is one of the agreed Issues for Disclosure.  2.8 “Known adverse documents” are documents (other than privileged documents) that a party is actually aware (without undertaking any further search for documents than it has already undertaken or caused to be undertaken) both (a) are or were previously within its control and (b) are adverse.  Note as well that a company or organisation is “aware” if any person within the company/organisation with accountability or responsibility for the events or circumstances which are the subject of the case or for the conduct of the proceedings is aware, and at paragraph 2.9 it is expressly said that it is necessary to take reasonable steps to check the position with relevant persons who have left the company/organisation.  If an order for ED is made, the disclosure made must also include any known adverse documents not already disclosed.  If ED is not ordered, all known adverse documents must be disclosed within 60 days of the first CMC, and a Disclosure Certificate provided.   Complying with ED  Paragraph 12 sets out how to comply with an order for ED:  <ul class="wp-block-list"> <li>service of a signed Disclosure Certificate (Appendix 4) confirming all known adverse documents have been disclosed</li>  <li>service of an ED Disclosure List of Documents</li>  <li>production of the documents</li> </ul>  Note paragraph 12.5 -  12.5 A party may not without the permission of the court or agreement of the parties rely on any document in its control that it has not disclosed at the time required for Extended Disclosure (or within 60 days after the first case management conference in a case where there will be no Extended Disclosure). For the avoidance of doubt the party and its legal representatives remain under the duties under paragraph 3.1 (the Disclosure Duties) and 3.2 above.  Where there has been a failure to comply with ED the court may make orders which may include ordering the service of a further, or revised Disclosure Certificate, to make further searches, provide a further or improved Extended Disclosure List of Documents, produce documents, or make a witness statement explaining any matter relating to disclosure.  A party applying for such an order should normally file a witness statement in support and must satisfy the court that making the order is reasonable and proportionate (paragraph 17).  A court may, at any stage, make an order varying an order for ED.  Any party applying for such an order must file a witness statement, and must satisfy the court that varying the original order is both necessary for the just disposal of the proceedings, and that it is reasonable and proportionate (paragraph 18).  Paragraph 14 deals with the right to withhold documents, paragraph 15 deals with confidentiality, and paragraph 16 deals with redaction.  Pursuant to paragraph 21, a party may at any time request a copy of a document mentioned in  <ul class="wp-block-list"> <li>a statement of case</li>  <li>a witness statement, summary, or affidavit</li>  <li>an expert’s report</li> </ul>  Costs  Parties are required to provide an estimate of what they consider to be the likely costs of giving the disclosure proposed by them in the Disclosure Review Document, and the likely volume of documents involved, in order that a court may consider whether such proposals on disclosure are reasonable and proportionate.  In cases where the cost budgeting scheme applies, if it is not practical to complete the disclosure section of Form H in relation to disclosure prior to the court making an order in relation to disclosure at the CMC, the parties may notify the court that they have agreed to postpone completion of that section of Form H.  The court will give a date at the CMC for completion of the disclosure section, and where possible the court will then consider (and if appropriate, approve) that part of the cost budget without an oral hearing.  Nicola Phillipson Parklane Plowden Chambers May 2024  This article has been written by a trusts and probate practitioner for the benefit of practitioners who attended Parklane Plowden’s Annual Trusts Conference in June 2024.  Therefore, whilst this article may be of use to other practitioners, please be aware of the intended audience.  This article is also intended to provide guidance only and should not be relied upon as legal advice.  <hr class="wp-block-separator has-alpha-channel-opacity"/>  <a id="_ftn1" href="#_ftnref1">[1]</a> Please see disclaimer above – this article has been written with trusts practitioners in mind

Letters of Wishes

Nature of a letter of wishes  A “letter of wishes” has been described as being “a mechanism for the communication by a settlor to trustees of the settlement of non binding requests by him to take stated matters into account when exercising their discretionary powers" (see Breakspear v Ackland [2008] EWHC 220). Such a letter may be produced in relation to an inter vivos settlement or a testamentary trust. It will usually state that the wishes expressed in it are non binding.  Letters of wishes are most commonly produced in relation to the issue of how a settlor or testator would like the income and capital of a discretionary trust fund to be applied. However, they might also usefully be produced in relation to the exercise of an overriding power of appointment in relation to a flexible interest in possession trust or the exercise of an administrative power such as a power of investment or a power to add beneficiaries.  One reason that a testator might decide to create a discretionary trust of residue is because there are fraught family relationships and the testator wants to leave it to trustees to make decisions as to how the family are to benefit. They may wish to express sentiments to the trustees about family members which they would not want widely known. In such a case, the production of a detailed letter of wishes is crucial. However, even in less controversial circumstances, a letter of wishes should be produced so that there is no doubt as to what the relevant wishes of the settlor or testator were.  Although a letter of wishes is in essence a non binding document, it is important because it is a relevant consideration to be taken into account by trustees in relation to the exercise of their discretions. It was confirmed in Pitt v Holt [2013] UKSC 26 that “the settlor’s wishes are always a material consideration in the exercise of fiduciary discretions.” The better view is that the trustees must take the contents of a letter of wishes into account although they are not bound to follow it. That process will involve a consideration as to whether it is proper to follow such wishes in the interests of one or more of the beneficiaries of the trust. The trustees must still form their own view and they must not unthinkingly follow the wishes of the settlor or testator.  Whilst a letter of wishes is only one factor for trustees to take into account when considering the exercise of a discretion, in practice, most trustees will endeavour to follow those wishes if they possibly can. As is stated in Lewin on Trusts “trustees therefore rightly give great weight to the settlor’s wishes, either expressed from time to time during his lifetime or recorded, usually in documentary form, before his death.” However, that does involve interpreting those wishes accurately (see Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409). Trustees should also take into account any orally expressed wishes of the settlor or testator but it may be more difficult to establish what they were, if not formally recorded.  A settlor or testator can and should update a letter of wishes from time to time. Earlier letters of wishes may be superceded by later ones as a matter of construction or they may all remain of relevance if they deal with different issues. The first letter of wishes is likely to remain of relevance in any event in determining what a settlor’s purpose was in conferring a particular power on the trustees (see Wong v Grand View Private Trust Co Ltd [2022] UKPC 47).  A letter of wishes is likely to be of diminishing importance where it was made many years previously, particularly if there has been a material change of circumstances such as a beneficiary suffering serious health or financial problems.  When might it be legitimate for trustees to decide not to follow the letter of wishes? It must be remembered that the trustees are subject to an overarching duty to administer the trust for the benefit of the beneficiaries. Therefore, one circumstance would be where those wishes are unreasonable. For example, A created a discretionary trust of residue worth £10m but indicated that he did not want any of his family to ever have access to income or capital as of right. That view was not based on anything in the beneficiaries’ circumstances which made such a view appropriate but simply A’s desire to control his family from the grave. The consequence of following his wishes would be that no use could be made of the spouse exemption and anniversary charges would be incurred, diminishing the trust fund. Another example might be if the settlor or testator wanted the trust fund to be invested in a manner which the trustees considered would prejudice the beneficiaries.  Disclosure  A beneficiary may ask the trustees to provide a copy of the letter of wishes. Trustees must proceed cautiously in that regard. The exercise of discretionary dispositive powers by trustees has traditionally been regarded as an inherently confidential process as it is in the interests of the beneficiaries of family discretionary trusts and advantageous to the due administration of such trusts that the exercise by the trustees of their powers be treated from start to finish as confidential (see Breakspear endorsing the approach in Re Londonderry’s Settlement [1965] Ch 918).  This means that trustees are usually well advised not to give voluntary disclosure of a letter of wishes. If the trustees do not disclose the letter of wishes, it is obviously far less likely that a beneficiary will seek to challenge the validity of any decision they make by reference to that letter. The trustees should also not give reasons for any decision to refuse to disclose the letter of wishes. It was confirmed in Breakspear that they are not obliged to give reasons in that regard, but, that if they give any reasons, then the Court could review the decision.  Despite this, the trustees can still choose to disclose the letter of wishes to a beneficiary if they consider disclosure to be in the best interests of the beneficiaries and the due administration of the trust. In that regard, they are not bound to follow a direction from the settlor or testator that the letter should not be disclosed.  Court application  If the trustees do not voluntarily disclose the letter of wishes, would the Court order disclosure? The traditional view was that a beneficiary had the right to call for accurate information as to the state of the trust and that the trustee had to be ready with their accounts. The beneficiary was also considered to have the right to inspect trust documents at all reasonable times and to take copies at their own expense. However, circumstances might warrant the withholding of disclosure, such as where it related to the exercise of trustees’ dispositive powers.  In Schmidt v Rosewood [2003] UKPC 26 the Privy Council held that a beneficiary did not have an automatic right to the production of trust documents but they could apply to the Court to seek disclosure of them. Whether disclosure would in fact be ordered was in the discretion of the Court. This was an aspect of the Court’s jurisdiction to supervise trusts and to intervene in their administration and it extended to discretionary beneficiaries. However, the Court still recognised that the need to protect confidentiality was one of the most important limitations to the disclosure of trust documents.  Although a letter of wishes is an important part of the trustees’ decision making process and it can be argued that disclosure would enable beneficiaries to ascertain whether trustees are acting properly, the Court will usually not order disclosure of it. In Breakspear it was stated that “it is therefore brought into existence for the sole purpose of serving and facilitating an inherently confidential purpose. It seems to me axiomatic that a document brought into existence for the sole or predominant purpose of being used in furtherance of an inherently confidential purpose is itself properly to be regarded as confidential.”  There can be exceptions to this. In Breakspear itself disclosure was ordered of the letter of wishes on the basis that it would have to be disclosed in relation to the trustees’ intended application for Court approval of the exercise of their dispositive discretions and disclosure now was likely to avoid delay and cost.  Another exception would be in relation to litigation between the trustees and beneficiaries, such as a challenge to the exercise of powers by the trustees. There the beneficiaries’ entitlement to disclosure is based on their status as litigants and not beneficiaries. In that context, relevance and necessity are the governing criteria and confidentiality is a subordinate consideration. However, the Court warned in Breakspear that the Court would adopt a robust approach to spurious litigation brought by beneficiaries as a fishing expedition simply to secure disclosure of the letter of wishes.

The Tractor Tax

Inheritance Tax (“IHT”) is levied on the value of the estate of the deceased or on a gift made by the deceased less than 7 years before death, that is to say a potentially exempt transfer (“a PET”). Transfers to a spouse or civil partner are exempt. After the deduction of the applicable nil-rate band, the IHT which is payable depends on the nature of the assets in the estate or given during the lifetime.  At present, nearly all of the assets used in a working farm will attract either agricultural property relief (“APR”) or business property relief (“BPR”) at 100 per cent. Agricultural land attracts APR limited to the “agricultural value” of the same, while farm equipment, machinery and livestock attracts BPR. The reliefs are mutually exclusive, but the test is broadly the same. Agricultural land will attract APR at 100 per cent if it was occupied by the owner or his or her civil partner for two years before the death or transfer or occupied by someone else for 7 years. Farm business assets attract BPR if such assets were in use not more than two years before the transfer. APR relates to the land. An investor who owns agricultural land can claim APR, but only if the land is farmed.  100 per cent APR and BPR was introduced by the John Major Government in 1992 to ensure that the death of a farmer would not lead to the enforced sale of the farm to pay IHT. This is the regime which everyone has become used to.  As a general rule, farmers die rather than retire. Capital gains tax (“CGT”) and IHT are not payable in relation to the same event. Where the interest in a farm passes on death, the beneficiaries of the estate are treated as having received such interest at the current probate value. This sets their base cost for CGT. They only pay CGT on any future sale to the extent that the price paid exceeds the probate value. As APR and BPR are at 100 per cent, there is every incentive to provide an up-to-date valuation of all farming assets to HMRC with the IHT400 form and this is what is usually done.   The applicability of APR or BPR at 100 per cent on all or the vast majority of farm assets has meant that most farmers have never needed to take tax planning advice unless they have diversified into other businesses, the land has development potential or there is a particularly valuable farmhouse. Normally, significant changes to IHT are brought in over extensive time with prior consultation. There was no consultation here. Indeed, it is reported widely that DEFRA was not informed about the changes until the evening before the Budget.      From April 2026 100 per cent APR and BPR on any transfer by death or lifetime transfer will only apply to the first £1million of assets. Thereafter, APR and BPR will be at 50 per cent. IHT is payable at a rate of 40 per cent.  It is important to set out specifically what was said in the budget (taken from the official transcript)  <blockquote class="wp-block-quote"> “From 2026, the first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all …. …. but for assets over £1m, inheritance tax will apply with 50% relief, at an effective rate of 20% This will ensure we continue to protect small family farms … …. and three-quarters of claims will be unaffected by these changes.” </blockquote>   The dots do not represent omitted passages. They record the manner in which the budget speech was delivered.  At first sight, the £1 million figure seems to relate to the whole assets of the farm and not to the interest of an individual spouse or civil partner in the same. There is no reference to partnership in the Budget speech and so it is unclear whether the £1 million figure applies to the capital account of the deceased partner. However, a partner does not have any interest in specie in partnership property, so the figure ought to apply to the capital account (see Popat v Shonchhatra [1997] 1 WLR 1367).  Although this change does not apply solely or even mainly to tractors, it has been referred to imaginatively as “the tractor tax”. In reality, it applies primarily to land. Farm equipment and machinery are depreciating assets. Land is not. The Good Lord is not making any more of it. The value of agricultural land has increased significantly since 1992. Whether this is due to 100 per cent APR is unclear. The value of residential land has also increased over this period. Some of the increase can also be traced to the replacement of agricultural holdings with farm business tenancies. Tenants of an agricultural holding enjoy security of tenure, succession rights and rent protection. Farm business tenancies have none of these rights.   This article is aimed at farmers who own their own farms. Recent reports indicate that institutional landowners are terminating farm business tenancies at an alarming rate in anticipation of the new regime. Farm business tenancies have no real security of tenure. This seems to be an example of the law of unanticipated consequences.  The Chancellor of the Exchequer has stated that the “effective” threshold for IHT on farms could be as high as £3 million. It is difficult to see how this figure has been calculated. The single transferable nil-rate band still applies. Where one spouse or civil partner dies and does not use up their nil rate band for IHT, the balance can be used by the second spouse or civil partner to die. The single transferable nil rate band is now £650,000 (with a higher figure for a dwelling-house), so the “effective” threshold could be said to be £1.65 million. However, the nil rate band of the first to die can only be used by the second if the marriage or civil partnership was ended by death. Insofar as the Government has considered this in assessing the burden on farmers, it fails to take into account the record rate of divorce in the farming community. The individual nil rate band is only £325,000 and there are many “small family farms” with assets of over £1.325million.  As far as it is possible to tell, the Government has not made any sensible estimate of the yield from this alteration to IHT. In reality, it is impossible to do so. The effect of partnership options (as described below) has not been taken into account. We are moving from a regime where farmers have generally not taken tax planning advice to one in which they will be foolish not to do so. The effect of simple and non-aggressive tax planning will probably reduce any anticipated yield significantly. The value of agricultural land may decrease significantly at least in the short term, but the effect on individual regions is difficult to estimate. In reality, IHT will fall on farmers who have not planned ahead due to the speed of the changes or who are just unlucky.  Aside from making full use of the spousal exemption and any transferable nil-rate band, the most obvious form of tax planning which could be used is merely for the farmer to give an interest in the farm or its land to his children during his lifetime and hope to survive for seven years. However, it is not as simple as this. If such a gift is made and the farmer continues to use the land as before, the gift with reservation of benefit rules (“the GWR rules”) will apply.   As regards farms, the effect of the GWR rules is largely untested due to the applicability of APR at 100 per cent. HMRC has no interest in taking points which do not lead to additional IHT being payable. Realistically, where a farmer gives land to a child and then continues to use that land in his own business, the GWR rules will apply unless there is a tenancy agreement providing for rent at a market rate. The rent would have to be paid or the arrangement might be viewed as being a sham. The farm might not be able to sustain such a payment.   What farmers must not do is make unadvised sales during their lifetime to avoid the proposed changes to IHT which will generate a CGT charge.  To date, partnership has not generally been viewed as part of farming tax planning due to the availability of 100 per cent APR or BPR. However, partnership does enable value to be transferred between generations in a manner which other forms of business association do not.  In this regard, there are two situations to consider. The first is pre-existing partnerships. The second is partnerships to be formed in response to the changes.  Pre-existing partnerships  Partnerships property is held under the trust created by section 20(1) of the Partnership Act 1890. Section 20(1) removes the need for a document of transfer for land or any other asset entering a partnership (but not leaving it). The interest of a partner is manifest in his or her capital account as there is no interest in specie.  Where a partner transfers property into the partnership, he is credited with its current value as an addition to his capital account. Partnerships are not required to revalue assets. A farming partnership might have land included as partnership property which was brought into the partnership decades ago. The capital profit (that is to say the profit generated on sale) is divided in profit shares unless the contrary is agreed.  Not all farming partnerships have a written partnership agreement or deed. Where they do, then there will usually be a clause giving the surviving partners the option of purchasing the interest of a deceased partner. This will either be at historic book value or subject to revaluation. In determining which applies, the Court uses normal principles of contractual construction and there is no presumption either way (see Drake v Harvey [2011] EWCA Civ 838). Up until the end of the last century at least, the former was the norm as revaluation takes time and costs money in surveyor’s fees. The effect of this is that the interest of the deceased could be purchased at a very low historic cost. Presumably, it would be this cost which is used to calculate IHT.  Even where there is a partnership agreement, there may be real difficulties in identifying what is partnership property and (thereby) subject to an option. Even though no transfer document is required, land and any other assets can only be transferred into a partnership by express agreement. The Court does not treat the partnership accounts as helpful in establishing such an express agreement as many accountants include all assets used by a partnership as partnership property even if there is no agreement to do so (see Wild v Wild [2018] EWHC 2197 (Ch)).  I have had many claims where the estate of the deceased has fought against such a book value option. This is on the basis that land is held outside the partnership, on the basis that the partnership agreement is not binding (because more recent partners have not been made parties to the same or accepted its terms) or on the basis that the option (when properly construed) enables revaluation. Presumably, the effect of the changes will be that such arguments will no longer be pursued. The estate will just fall on its sword or deals will be negotiated between the estate and the continuing partners at the threshold for IHT.  Could the partners in a pre-existing partnership enter into an agreement including such a book value option? A disposition is only a gift if this is intended (see section 10 of the Inheritance Tax Act 1984). It is not a gift if “it was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other”, that is to say a normal commercial transaction. It would be difficult for HMRC to argue that such a partnership agreement operated as a gift given that this type of agreement was the norm and is still used. In any event, such an option is against the interests of the first to die, but this might not necessarily be the parent.  New partnerships  Where a farmer admits a child as a partner, the agreement will not create a PET unless the initial capital account of the child is credited with part of the value of the property transferred into the partnership. If the farmer is credited with the full value of the property transferred by him into the partnership as his initial capital account, then there is no gift. The partnership agreement can give the child a significant share of the profits of the business moving forward. As capital profits follow income profits, the child will receive a share in the increase in the value of the partnership property from the time of his or her admission. In addition, if the farmer has drawings which exceed his share of profits, this will over time reduce his capital account naturally. As a partner has no interest in individual assets, the only interest which can be transferred on death is this capital account. Accordingly, this natural reduction will reduce the IHT. The partnership share of the child can be increased each year without varying the partnership agreement.  The requirement that property should be brought into the partnership at full value means that this type of arrangement is only valuable for tax planning looking at future growth.  This type of arrangement also works in principle for LLPs. However, LLPs are not usually used to hold assets. The arrangement does not work with companies because shares which have a right to participate in profits have a value and will be classed as a gift.

11 July 2023 | Half day Trust and Probate Conference, The Queens Hotel, Leeds

Join our Probate, Inheritance & Trusts specialists at our annual half day conference for an afternoon of talks and networking. This conference will be held at The Queens Hotel, Palm Court, Leeds.   Guest speaker <a href="https://www.9sjs.com/our-people/barristers/richard-price/">Richard Price</a>, barrister from Nine St John Street, will be discussing Mediating Trust Disputes. Richard is a CEDR accredited mediator specialising in Business and Property disputes and head of Chambers’ Mediation Group.  This seminar will be relevant to all professionals practising Probate, Inheritance & Trusts.  Programme  12:00 - 13:00: Registration and lunch  13:15 - 13:30: Welcome  13:30 - 14:00: Sarah Harrison - Applications under the Variation of Trusts Act  14:00 - 14:30: Anna Metcalfe - Challenging the exercise of Trustee Powers  14:30 - 15:00: Richard Price - Mediating Trust Disputes  15:00 - 15:20 : Tea Break  15:30 - 16:00: Greg Pipe - The Interface between Trusts and Commercial Disputes  16:00 - 16:30: Sean Kelly - Knowing Assistance and Tracing Remedies  16:30 Onwards: Networking and Drinks  The price per delegate is £75.00 + VAT and includes lunch, afternoon refreshments and a post-conference drinks reception.  Tickets for this event are now sold out.

Proprietary estoppel after Guest v Guest

Written by <a href="https://www.parklaneplowden.co.uk/our-barristers/sean-kelly/">Sean Kelly</a>  Background  For some time, the Court has had to deal with an increasing number of proprietary estoppel claims brought by a son against his parents in relation to the family farm. This may be the result of changes in family relationships or just due to the increasing value of farming land. The majority of claims used to be made against the executors of the parents following the realisation by the son that the will contained no bequest to him of the family farm.  The new norm is for the claim to be made during the lifetime of the parents following a breakdown in the relationship. The ability to make such a claim during the lifetime of the parents was first established by the decision of the Court of Appeal in Gillett v Holt [2001] Ch 210. Although some claims are made by daughters (such as Davies v Davies [2016] EWCA Civ 463), the majority are still made by sons.  In most cases the promise, representation or assurance relied upon is “One day, all this will be yours”. The promise leads to the expectation that all or part of the family farm will pass to the son at some point in the future and the son spends his entire life working on the farm (often at low pay) instead of pursuing other career options. There is no contract to rely upon and the lack of certainty in the promise precludes a constructive trust claim. The son has to make his claim in proprietary estoppel.  Proprietary estoppel is a judge-made remedy which had been the subject of considerable case law including two decisions of the House of Lords (that is to say Cobbe v Yeoman’s Row [2008] 1 WLR 1752 and Thorner v Major [2009] 1 WLR 776) albeit that such decisions are of limited scope. Thorner v Major confirmed that the promise could be in very general terms and it was the function of the Court to interpret it. Cobbe v Yeoman’s Row confirmed that proprietary estoppel had no application to commercial negotiations.  The Court has usually adopted a two-stage test. In the first stage, it determines whether “an equity” has been raised which makes it necessary for the Court to intervene to provide a remedy. The second stage is the crafting of a remedy to “satisfy the equity”. The principles are set out succinctly by Lewison LJ in Davies v Davies at paragraph 38 in a passage that has become a template for later decisions:  1) Deciding whether an equity has been raised, and if so, how to satisfy it is a retrospective exercise looking backwards from the moment when the promise falls due to be performed and asking whether, in the circumstances which have actually happened, it would be unconscionable for a promise not to be kept either wholly or in part.  2) The ingredients necessary to raise an equity are (a) an assurance of sufficient clarity (b) reliance by the claimant on that assurance and (c) detriment to the claimant as a consequence of his reasonable reliance  3) However, no claim based on proprietary estoppel can be divided into watertight compartments. The quality of the relevant assurances may influence the issue of reliance; reliance and detriment are often intertwined, and whether there is a distinct need for a “mutual understanding” may depend on how the other elements are formulated and understood.  4) Detriment need not consist of the expenditure of money or other quantifiable financial detriment, so long as it is something substantial. The requirement must be approached as part of a broad inquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances.  5) There must be a sufficient causal link between the assurance relied on and the detriment asserted. The issue of detriment must be judged at the moment when the person who has given the assurance seeks to go back on it. The question is whether (and if so to what extent) it would be unjust or inequitable to allow the person who has given the assurance to go back on it. The essential test is that of unconscionability.  6) Thus, the essence of the doctrine of proprietary estoppel is to do what is necessary to avoid an unconscionable result.  7) In deciding how to satisfy any equity the court must weigh the detriment suffered by the claimant in reliance on the defendant’s assurances against any countervailing benefits he enjoyed in consequence of that reliance.  8) Proportionality lies at the heart of the doctrine of proprietary estoppel an permeates its every application. In particular, there must be a proportionality between the remedy and the detriment which is its purpose to avoid. This does not mean that the court should abandon expectations and seek only to compensate detrimental reliance, but if the expectation is disproportionate to the detriment, the court should satisfy the equity in a more limited way.  9) In deciding how to satisfy the equity the court has to exercise a broad judgmental discretion. However, the discretion is not unfettered. It must be exercised on a principled basis.  Lewison LJ went to set out the “lively controversy” as to the purpose of the remedy, that is to say whether the purpose was to give effect to the claimant’s expectation unless it would be disproportionate to do so or whether it was to compensate the claimant for the detriment which he had suffered as a result of reliance on the promise.  The “lively controversy”  In Guest v Guest [2022] UKSC 27 (delivered on 19th October 2022) the Supreme Court was required to resolve this “lively controversy” and determine the purpose of the remedy.  The facts in Guest v Guest are complicated given that the promises were given over the whole lifetime of the son. However, for the most relevant facts could be said to be as follows:  1)  There was a breakdown in the relationship between the claimant son and his parents during their lifetime. Accordingly, the claimant son was seeking an interest in the family farm now rather than when it was promised and his interest was being accelerated.  2) The family farm had a farmhouse which was still occupied by the parents  3) As a result of repeated promises over his whole life, the claimant son expected to conduct the dairy farming business until the death of his father. On the death of the second parent to die, the claimant son expected to receive one half of the dairy farming business and one half of the farm (including the farmhouse). A brother was to receive the other half of the farm.  4) While the claimant son and the parents had been in partnership for a short period, this partnership had been dissolved and no consideration was given to the effect of it.  5) Any remedy would involve the sale of the dairy business and the farmhouse. This was bound to create an immediate CGT charge.  In contrast with Davies v Davies (where liability and remedy were tried separately), HHJ Russen, QC ([2019] EWHC 869 (Ch)) tried both together. The parents put all of their efforts into defeating the claim and made no detailed submissions as to remedy. The Judge determined that it was unconscionable for the parents to go back on their promises and that a remedy should be provided to satisfy the equity. The Judge considered that the most proportionate remedy was to make a lump-sum award to the claimant son calculated on the following basis:  1) 50% after tax of the market value of the dairy business  2) 40% after tax of the value of the farm and 40% after tax of the value of the farmhouse taking into account a decrease to be generated by the assumption that the same was subject to a notional life-interest for the parents.  Other than the reference to the assumed life-interest of the parents, there was no express reference to the effects of acceleration and how there could be a discount to reflect this effect.  The Court of Appeal refused the appeal, so the award was not altered.  In the Supreme Court, there are two competing opinions. The majority opinion (3) is given by Lord Briggs, with the minority opinion (2) given by Lord Leggatt. They could not be more different.  1) For the majority (paragraph 61) the unconscionability is the repudiation of the promise, and the purpose of the remedy is to prevent the defendants from doing so. It must naturally follow that the remedy to be crafted by the Court will involve ensuring that the reasonable expectation of the claimant is fulfilled save where this would be “out of all proportion to the detriment”. The burden of proof is on the defendant to plead and prove that the remedy would be out of all proportion to the detriment (paragraph 76). Although not stated expressly, as a matter of logic, this would also mean pleading and proving some other more proportionate remedy to achieve the same purpose.  2) For the minority (paragraph 191) the unconscionability is not the failure by the defendant to keep a non-binding promise. It is the failure by the defendant to accept responsibility for the consequences of the claimant’s reasonable reliance on the promises. Accordingly, the remedy is there to deal with the consequences of detriment, and this is the starting point for crafting any remedy. The minority then went on to seek to determine the real financial loss suffered by the son.  The majority did not object to the principle of a lump-sum order but objected to the order made by HHJ Russen, QC due to its failure to deal expressly with the effects of acceleration. However, it did not substitute its own order. If necessary, this issue would be remitted to the trial judge. The minority substituted a detriment-based award calculated so as to accord with the loss of earnings or other lost benefits of the claimant son.  It is unfortunate that it has taken so long for the purpose of this remedy to be determined at the highest level. The two views cannot be reconciled, and the position has now been resolved by the principle of majority rule. The starting point is that the Court should craft its remedy in order to ensure that the reasonable expectation of the claimant is satisfied unless this would be out of all proportion to the detriment. It is for the claimant to set out what his expectation is and how this is to be satisfied by order of the Court. The claimant needs to plead and prove detriment, but not in financial terms. It is for the defendant to set out why this would be out of all proportion to the detriment and put forward another remedy to achieve the same end.  As regards the test of unconscionability, proportionality is still important. Repudiation of the promise (or refusing to give effect to the expectation if different) only requires the intervention of the Court if this is unconscionable. The extent of the detriment suffered is relevant to this. As the majority clarified, it is not necessarily unconscionable for parents to repudiate the promise if their financial circumstances change.  In the majority of farming cases, fulfilment of the expectation will involve the transfer of assets which are in monetary terms out of all proportion to the financial detriment suffered by the son in working on the farm for his whole life. The value of many of the family farms which are the subject of the most recent cases is measured in millions if not tens of millions of pounds.  This is a natural result of the increase in the value of farming land. Clearly, the majority in the Supreme Court took the view that this increase in the value of land is not a good reason of itself to refuse to fulfil the expectation. Something more is required. This might involve prejudice to the interests of other members of the family or the need to provide for the parents in retirement.  Outstanding Issues  Following the decision of the Supreme Court, the following issues remain unresolved:  1) Will the need to fulfil the claimant’s expectation make the Court more reluctant to provide any remedy?  2) What factors make it out of all proportion to fulfil the expectation of the claimant?  3) How should the Court deal with tax concerns?  4) How should be Court deal with the acceleration which results from having to provide a remedy during the lifetime of the parents?  5) What difference (if any) would it make if the parents and the son had been partners.  1) Provision of some remedy  Some of the decisions of the Court involving a lump-sum payment can be explained on the basis that the Court considered that the claimant ought to be compensated in some way but not by the fulfilment of his expectation. Jennings v Rice [2002] EWCA Civ 159 would be the most obvious example. If proportionality were to permeate every part of the judicial process, then it would allow the Court to award something which allows the claimant to progress with his life without fulfilling his expectation of ownership of a particular farm or farming somewhere else. It remains to be seen whether the requirement to fulfil the expectation in full reduces the number of successful claims.  2) Disproportionate relief  It is always difficult to apply other principles of equity by analogy. However, where a person receives money which is transferred in breach of trust, his liability in knowing receipt is based on his knowledge (express or implied) of the transaction. The underlying test is one of unconscionability. If it is unconscionable for him to keep the money, he has to pay it to the beneficiary of the trust.  There is no question of him paying only some part if it depending upon how unconscionable it is for him to receive it. A sliding scale principle does not work with unconscionability. It is a binary issue. Logically, if it is unconscionable for the parents to resile from their promise to transfer all or part of the farm to their son, then his expectation can only be fulfilled by a transfer of some, or all of that particular farm and a lump-sum payment can never be an adequate alternative.  A lump-sum payment can allow the son to operate a farm somewhere else. However, that was not the expectation. The majority in the Supreme Court do not seem to be troubled by this. On this basis, the factors which a defendant can plead and prove include (a) the interests of other members of the family (b) the need for the parents to be provided with an income and housing in retirement and (c) the availability of means by which the son can acquire a similar farm.  3) Tax concerns  In the normal course of events, if the son is to inherit the family farm upon the death of the last parent to die, then there will be 100% agricultural relief for inheritance tax. Any CGT will be washed out. If the family farm is given to the son during the lifetime of his parents, then this will be a PET (albeit one to which agricultural relief could apply). As it is a PET, CGT is chargeable immediately at the true market value. If the son elects to do so, he can hold over the gain for CGT purposes. While it is unwise to predict future tax changes, it is reasonable to assume that CGT rates will increase significantly to fund the budget deficit.  Bringing a proprietary estoppel claim during the lifetime of the parents can give rise to a tax charge. If the farm needs to be sold to a third party, this will give rise to immediately chargeable CGT. If the son is to receive all or part of the farm, he will need to agree to accept the election for him to be taxed and for the CGT be rolled over.  It would be fair to say that the Court is not particularly concerned about the effects of taxation on the crafting of the remedy. It is often said that it is not the job of the Court to save the party's tax. In any event, the Court is poorly equipped to consider the tax aspects of any remedy. Orders requiring the farm to be transferred to the son subject to continuing periodic payments to the parents (such as Moore v Moore [2018] EWCA Civ 2669) have been made. Such a route has the merit of avoiding the CGT on sale, but this is not the reason for the Court’s choice of the route.  4) Acceleration  There is really no assistance from the Court in any case as to how the acceleration in the entitlement of the son to the family farm should be dealt with.  As regards the lump-sum method, the effects of acceleration were not considered in any detail in Davies v Davies. While the lump payment awarded by the High Court in Guest v Guest was criticized, no real guidance was provided as to how it should be done. There was merely a suggestion that actuarial tables could be used.  As to the transfer of the farm subject to a periodic payment method, the order of the High Court in Moore v Moore provided for a weekly payment of £200 to the parents, in relation to a farm worth several million. While this payment was set aside as being far too low and a higher payment substituted, there was no real guidance as to how such a figure should be calculated. Presumably, it should bear some relation to the value of the farm to be transferred or (at least) the ability of the farm to generate income.   5) Partnership issues  These were not addressed in Guest v Guest. In Moore v Moore the claim arose in relation to an interest in a farm held in partnership. Even though the case started as a winding-up claim, there was no real discussion as to whether the existence of a partnership affected the nature of the expectations of the son or the relief to be granted. These issues remain unresolved.  When a parent takes a son into partnership, the relationship must change to a predominantly commercial one. The expectation of the son as regards what is to occur when the partnership is dissolved ought to accord with the position under the partnership agreement or the general law of partnership. The decision in Cobbe v Yeoman’s Row precludes a proprietary estoppel claim in relation to a purely commercial relationship. Logically, the decision should preclude the son from asserting rights greater than those which arise as a partner. Unfortunately, this point was not raised in Moore v Moore.  Another feature of partnership proprietary estoppel claims is the widespread assumption that all land farmed by a partnership is partnership land. A son might work on the family farm as a partner for many years on the assumption that the farm is partnership property only to realise much later that it is still owned by the parents. In such a situation, there is no promise. There is merely a misunderstanding of the law.  The role of mediation  In relation to the assessment of whether it would be unconscionable for the parents to repudiate the promise made by them, mediation has a limited role. However, in most cases it is relatively obvious whether the son has a claim with merit and the real issue is as to remedy.  In relation to remedy, mediation is really the best way of proceeding. The Court is ill-equipped to provide a sensible pragmatic solution to the problem especially if tax is an issue. A mediator will probably be concerned primarily with what the claimant requires in order to continue to farm whether at the family farm itself or otherwise. In reality, there are likely to be many different solutions each with pros and cons which can be examined in detail during a mediation.  Author  <a href="https://www.parklaneplowden.co.uk/our-barristers/sean-kelly/" target="_blank" rel="noreferrer noopener">Sean</a> undertakes a broad range of chancery and commercial work with emphasis on partnerships, company law, banking, contractual disputes, land law (including land registration), landlord and tenant and administration of estates.

Death and the family partnership

Written by <a href="https://www.parklaneplowden.co.uk/our-barristers/sean-kelly/">Sean Kelly</a>  The death of a member in a family partnership is an event which creates legal complexities as well as straining personal relationships. This article deals with common issues arising on the death of a member of a family partnership.  The situations created on death are infinitely varied, but a common scenario involves a partnership conducted between the father (“F”) and a son (“S”) where F makes a will appointing S and another child who has had no involvement in the business (“D”) as executors. The issue referred to above, is explored by reference to the consequences of the death of F while the partnership is continuing.  The grant of probate  There is at least a potential conflict of interest between the position of S as executor and as continuing partner. However, this is a conflict which has been created by F and this conflict (of itself) should not prevent S from proving. Indeed, S will need to provide much of the information required in order to compile the IHT forms. Compiling these forms without his operation will be difficult. However, S will need to ensure that he takes all necessary steps to advance the interests of the estate against his own. Otherwise, his conduct may create an actual conflict of interest which would justify his removal under section 50(1) of the Administration of Justice Act 1985.  The fact that S is a proving executor will not prevent him from bringing a claim under the Inheritance (Provision for Family and Dependents) Act 1975 (“the 1975 Act”) and will not prevent D from bringing a claim for winding-up of the partnership against S using CPR Part 19.3.  As IHT has to be paid before the grant of probate is made, S and D will need to reach some form of agreement as to the value of the interest of F in the partnership at death and to what (if any) properties held by F and S as joint tenants at law pass to S by survivorship. Care needs to be taken in the compiling of the IHT returns so that S and D both understand the basis upon which the partnership has operated is recorded accurately. HMRC will expect the IHT forms to be complied by reference to dissolution accounts.   Even before probate, D is entitled to see all of the accounts and accounting records of the partnership. Without these D will have little ability to understand how it has traded.  Partnership accounts  D will need to understand the operation of the partnership and (in particular) the nature of partnership property and will look to its annual accounts. No Statement of Standard Accounting Practice applies to partnership accounts and there is no requirement to update property values. Accordingly, it can be very difficult to determine which assets have been treated as partnership property from its accounts. Whenever an asset is brought into the partnership, the accountants ought to produce a note of the asset and the attributed value for future reference. In practice, this is done rarely.    Construction of gifts of assets associated with a partnership  A partner has no interest in any individual item of partnership property and merely has a net interest in all of the assets after the payment of all of the debts (see Popat v Shonchhatra [1997] 1 WLR 1367).  This is a single cause of action which cannot be divided. The cause of action is the right to have the partnership wound-up. It is similar to a right to due administration of an estate. Partnership property cannot be held as tenants in common or as joint tenants as these forms of trust can only apply to individual assets.  The will of F may not describe correctly his interest in the business conducted by the partnership and F may well forget that assets (particularly land) which were previously owned by him beneficially are now partnership property.  A bequest of F’s “business” or his “share of the business” are normally construed as being F’s interest in the partnership which conducts the business (see Re Barfield (1901) 84 LT 28).  A number of cases decided before the Partnership Act 1890 (“the Act”) (and in particular Blake v Shaw (1860) Jo 732 and Farquahar v Hadden (1872) 7 Ch 1) appear to accept that there can be valid bequests of individual assets used in a partnership business. If that asset is not partnership property, then there is no objection to the asset passing by will in the usual way. However, if the asset is now partnership property, then it cannot pass in this way as the interest of F is not divisible. Any case decided before the Act needs to be treated with caution and it is unlikely that any Court would now accept this possibility.  Continuation of the business of the partnership  If it so provides, S may be able to or required to purchase F’s interest in the partnership following death under the terms of their partnership agreement. This could arise automatically or pursuant to an option. In either case, S’s decision to continue with the business on his own account is made at the time of death or the exercise of the option.  Where there is no contractual mechanism to allow S to purchase F’s interest in the partnership, the death will lead to a general dissolution where all assets of the partnership have to be sold. As executor of F, D has no right to participate in the management of the business of the partnership. Accordingly, S must wind-up the affairs of partnership.  Section 38 of the Partnership Act 1890 requires a continuing partner to complete transactions “begun but not unfinished” at the time of dissolution. In practice, this is a very limited requirement and S will need to decide at an early stage whether he wants to continue the business of the partnership on his own account or whether he merely wishes to wind it up.  For a partnership which operates a shop, winding-up involves the sale of the stock at the date of dissolution. However, it is very difficult to sell stock in this way. Customers expect stock to be replenished and are unlikely to buy slow-moving stock unless fast-moving stock is also available. Accordingly, it is difficult to merely wind-up a partnership of this nature. For agricultural partnerships there is normally an annual growing cycle, and the partnership transactions are completed at the end of that cycle.  Once S commences his own business using the assets of the partnership, the estate of F can claim an account under section 42 of the Act against him until winding-up has been completed.  Contractual purchase of the interest of F  In many ways, the most important part of any well-drafted partnership agreement is a mechanism under which the interest of a departing partner can be purchased thereby avoiding general dissolution. There are two main mechanisms being automatic purchase at death (that is to say an accruer) and options granted either to the estate or to the continuing partner to purchase. No contractual mechanism can operate if the partnership has already been dissolved (by agreement) before death.  The main advantage of an automatic purchase mechanism is certainty. The only issue left outstanding is the determination of the sum to be paid. The problem with accruer clauses is that HMRC takes the view that they are agreements for the sale of a partnership share within section 113 of the Inheritance Tax Act 1984 so that the deceased is no longer conducting business at the time of death. On this view, business relief will not be available (see McCutcheon at paragraph 28-26).   Options to purchase avoid this IHT difficulty but they create many other problems. Some problems arise due to the nature of options generally. These include determining when the option is to be exercised and how notice is to be given. Particular problems arise on death because F can neither give nor receive an option notice.  Some person needs to represent F and that person may need a grant of probate to give or receive an option notice. This may take time and the option period may elapse before a grant is made. A well drafted partnership agreement will deal with these issues, but many do not. If there is merely an option to purchase F’s interest in the partnership, then a failure to exercise the option will lead to a general dissolution.  In either type of mechanism, the price to be paid for F’s interest in the partnership can be determined in three ways being (i) using the last set of partnership accounts (ii) using accounts to be drawn up to death but on the same basis as previous accounts and (iii) using accounts to be drawn to death but with a revaluation of the assets. The third basis approximates most closely to the position on general dissolution and is the fairest. However, there is no presumption that any purchase mechanism adopts the third basis. The Court will construe each mechanism under normal contractual principles (see Drake v Harvey [2011] EWCA Civ 838). However, in practice the Court normally prefers to construe the clause so as to allow revaluation unless constrained to do so otherwise (see Ham v Ham [2013] EWCA Civ 1301). Revaluation normally leads to a fairer result.  If the assets of the partnership are to be revalued, this necessarily requires the instruction of a surveyor who might or might not be instructed as an expert. There will be a delay in obtaining the valuation (particularly if either party thinks that it is wrong) and this necessarily leads to the issue of whether the purchase price of payable on death (or the exercise of the option) or upon determination (see Liddle v Liddle [2019] EWCA Civ 346).   Any purchase mechanism has to adopt the treatment of assets in the partnership accounts. Assets cannot be re-valued unless a value is attributed to them in the accounts. Accordingly, purchase mechanisms do not overcome issues relating whether individual assets are partnership property.   As contractual mechanisms use pre-existing accounts or current accounting bases, goodwill will not feature, and no sum will be paid for the same.  Winding-up following general dissolution  Section 43 of the Act gives the impression that the interest F in the partnership is converted into a debt at the time of his death. At least in the case of a partnership holding assets, this is not the case. Partnership property is defined by section 20(1) of the Act to be property held upon the trusts of the partnership. The interest of F in partnership property is not sold or otherwise transferred on death. Partnership property remains partnership property until it is all sold on winding-up. F’s estate is entitled to his share of the capital profits arising on any increase in the value of partnership property on sale.  D or S can both apply to the court for winding-up. It is a joint cause of action, but both can take advantage of CPR Part 19.3. Issues relating to winding-up have little or no connection with the administration of the estate.  Section 23 of the Limitation Act 1980 prescribes that the time limit for the taking of an account is six years. This time limit has little practical application because it would be very rare for dissolution accounts of some kind to be prepared not least because of the requirement to value the interest of F in the partnership for IHT purposes.  Although a partnership is not wound-up until all of its assets are sold, it is common to prepare dissolution accounts in advance of any such sale. The value of the assets of the partnership at F’s death is needed because a section 42 account proceeds on the basis of the value of the capital account of F at death. Necessarily, such dissolution accounts will contain estimated values for partnership property. Unless there is a need to produce distinct winding-up accounts for tax purposes, the dissolution accounts will be adjusted when the assets are sold as estimated values will be replaced by actual values.   S may well wish to buy some or all of the assets of the partnership so that he can carry on the business on his own account. S can apply to the court for a Syers v Syers order enabling hm to purchase the assets at a valuation. In practice, D will normally agree to such an order provided that S does not seek to cherry pick the assets required. Provided that S pays the market value for the assets, D can have no proper cause for complaint. The issue will only come before the court if D has some good reason not to agree. Hence the comment of Hoffman LJ in Hammond v Brearley that Syers v Syers is more often cited than followed.  A good reason would normally involve some difficulty in undertaking the valuation exercise. D and S may have wildly different views on the value of particular land depending on its potential for development. It may not be appropriate for the court to determine this issue rather than the market.  It is very likely that there will be disputes as to what assets are partnership property and which pass to S by survivorship. As stated above, this needs to be considered before the IHT forms are completed because S may find it difficult to change his position from that stated in the IT forms. This is not likely to be a problem for D as D has to rely upon the partnership accounts. The general rules are as follows:  1)         Partnership accounts are a starting point for the exercise but will not be definitive (see Barton v Morris [1985] 1 WLR 1257). Accountants often include assets in partnership accounts without explaining the significance to the partners.  2)         No formalities are required for an asset to become partnership property as section 20(1) of the Act merely requires an asset to be “brought into the partnership”. Bringing in is an issue of fact. It is normally proved by appropriate bookkeeping entries. The partnership is credited with the value of the asset and the capital accounts are adjusted to make the accounts balance.  3)         Transferring partnership property out of a partnership requires formalities as there is no provision corresponding with section 20(1). For land, there will need to be a contract for sale complying with section 2(1) of the Law of Property (Miscellaneous) Provisions Act 1989 and then a deed.   4)         An asset bought with partnership money is deemed to be partnership property under section 21 of the Act unless the contrary can be proved. Money distributed to a partner as drawings and then used to buy an asset is no longer partnership money.  5)         Only assets which are bought and sold by a partnership in the ordinary course of its business have to be partnership property (see Miles v Clarke [1985] 1 WLR 1257). Any other assets can be held outside the partnership.   In principle, on winding-up the goodwill of the partnership should be sold whether to S or to a third-party purchaser of the business. If there is saleable goodwill, then this will increase the capital account of F. Realistically, it is unlikely that the partnership will have saleable goodwill which can be differentiated from the personal goodwill of F and S.   Section 42 account  A section 42 account only applies to income profits.  Although section 42 of the Act gives D the right to claim the share of profits generated from S’s use of F’s interest in the partnership, this exercise is complicated as much of the profit may have been generated from S’s efforts. D will usually only opt for claiming a share of profits in a business which generates profits without much active involvement (such as property letting).  Where D seeks interest by way of a section 42 account, this is calculated based on the value of F’s capital account at death. Necessarily a section 42 account can only actually be taken after winding-up because winding-up is the final date of the account. Since 2008 at least an interest rate of 5 per cent per annum has been generous.  Inheritance Act claims  These can arise either where S brings a claim seeking provision to enable to continue the partnership business without paying the full value of F’s interest to the estate or where a third party seeks provision from F’s estate.  In any such case the court has to determine the value of F’s interest in the partnership as best it can. It cannot embark upon a full winding-up exercise.  Author  <a href="https://www.parklaneplowden.co.uk/our-barristers/sean-kelly/" target="_blank" rel="noreferrer noopener">Sean</a> undertakes a broad range of chancery and commercial work with emphasis on partnerships, company law, banking, contractual disputes, land law (including land registration), landlord and tenant and administration of estates.

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