Inheritance and Trustees’ Powers Bill [HL]

Lord McNally Excerpts

Tuesday 22nd October 2013 Grand Committee

Moved by

[Lord McNally]

That the Committee do consider the Bill.

[The Minister of State, Ministry of Justice (Lord McNally) (LD)]

My Lords, it gives me great pleasure to introduce this Bill and to remind the Committee that we have had the invaluable help of Professor Elizabeth Cooke of the Law Commission, the law commissioner who led on the initial Law Commission project. I am a great supporter of the House using its powers in this area to get Law Commission reports into law. There was a period when, for far too long, they gathered dust on the shelves. The process that we have adopted enables us to do some useful work. We are always very grateful to the noble and learned Lord, Lord Lloyd, for volunteering to chair proceedings on these Bills.

The Inheritance and Trustees’ Powers Bill is a fairly short but technical Bill to amend certain aspects of the law of England and Wales as it relates to inheritance and trustees’ statutory powers. The fundamental issue at the heart of much of the Bill—arrangements for disposing of a person’s property after their death—is not one that many of us relish engaging in. It brings unwelcome thoughts of our own mortality. However, these issues must be faced by most of us in some form during our lifetime. In an ideal world such arrangements would be set out in a will—and I repeat that as the first message from this Committee: in an ideal world, the most sensible thing that individuals can do is set out their intentions in a will. However, we do not live in an ideal world. Many people, for one reason or another, do not leave such a document. It is only right that the law, in the form of the intestacy rules, makes appropriate and fair provision for the disposal of their property.

I know that several noble Lords present today have had the advantage of attending the briefing on the Bill by Professor Cooke which we held last week. The Government are very grateful to the Law Commission for the help that it has given in the preparation of the Bill for introduction and its continuing support for the Bill as it goes through Parliament.

The Bill will implement, with some modifications, the legislative reforms recommended by the Law Commission in its 2011 report Inheritance and Family Provision Claims on Death. The project that culminated in that report was prompted by a 2005 government consultation on increases to the statutory legacy. Responses to that consultation included calls for a wider review of intestacy rules with almost all consultees agreeing that such a review was necessary. The Law Commission was asked to examine this area of the law and duly published a consultation paper in 2009, followed by the report, which was accompanied by a draft Bill, in 2011. The Ministry of Justice then carried out a public consultation on the draft Bill earlier this year and then published a response in July, explaining the changes it proposed to make to the Bill. This extended and comprehensive consultation process has resulted in a measure that I believe has broad support and is suitable for the Law Commission procedure in your Lordships’ House.

Noble Lords will be aware that the Law Commission’s previous work in this area included recommendations regarding rights for cohabiting couples on intestacy. The Government decided that it would not be appropriate to take these proposals forward in the Bill now before us. Indeed, the Law Commission recognises that its work on cohabitation raised issues that do not apply to the Bill. The issue of legal rights for cohabiting couples is complex and potentially far-reaching. I believe that there is already more than enough to occupy this House in the Bill as it stands. In addition, the family justice system is already in the middle of a comprehensive reform programme and I do not believe that it would be wise to consider further reform in this area until that process is complete.

The first seven clauses of the Bill deal with two aspects of the law on inheritance: the intestacy rules and family provision. The former dictate the division of property when a person dies without leaving a will. The latter permits certain family members and dependants to apply to the court to vary the distribution of a deceased person’s property, whether that is under the intestacy rules or the terms of a valid will. The Bill will streamline and modernise the intestacy rules, reducing the cost of administering intestate estates and bringing them into line with public expectations. It will also correct some technical deficiencies in the operation of the family provision legislation.

Clause 1 amends Section 46 of the Administration of Estates Act 1925 and, most importantly, makes changes to the entitlement of a surviving spouse or civil partner of a person who dies intestate. The Bill proposes that in a situation where the intestate leaves no children or other direct descendants, the surviving spouse or civil partner will be the sole beneficiary of the estate. This changes the current law under which a surviving parent or full sibling or sibling’s issue is entitled to share whatever is left in the estate after the spouse or civil partner has received the deceased person’s chattels and what is commonly called the “statutory legacy”—in this case, the first £450,000 of the estate. This brings this part of the intestacy rules into line with public expectations. Empirical research has shown that the majority of people favour giving priority to a surviving spouse.

Clause 1 also proposes that where the intestate does leave children or other descendants, the surviving spouse or civil partner is absolutely entitled to the deceased’s personal chattels, a statutory legacy of £250,000 and half of whatever remains of the estate. The other half of the remainder will be shared between the children and other descendants. Under the current law, a surviving spouse or civil partner is only entitled to a life interest in his or her half of the remaining estate. Life interest trusts can be a source of confusion and cost, often for only marginal gain, and the Bill removes them.

Finally, Clause 1 makes several technical changes to the rate of interest which accrues from the date of death of the intestate on the statutory legacy. Clause 1 simplifies the sharing of assets on intestacy in a way that is fair to those who have been closest to the deceased: the surviving spouse or civil partner and any children or their children. Our aim here is to ensure that spouses and civil partners are appropriately provided for. By focusing solely on those closest to the deceased, we aim to simplify the current law on intestacy so that it can better reflect the arrangements that an individual is likely to have made had he or she executed a valid will.

It is impossible to design intestacy rules which satisfy every view of what is right or fair. The rules stand as a legal default position. They should reflect the shape of contemporary society and replicate what most people think is an appropriate division between family members. The changes in the Bill are intended to reflect real-life expectations of what provisions the intestacy rules should make.

Clause 2 and Schedule 1 make a number of changes to the way in which the statutory legacy, or fixed net sum as it is more properly called, is determined. Under the Bill, this sum is, of course, the amount to which a surviving spouse or civil partner will be entitled where the intestate deceased has also left children or other descendants. The most important of these changes impose a new requirement on the Lord Chancellor. At present, the Lord Chancellor has the power to set the level of the statutory legacy but is under no obligation to do so or to keep the level under review. The Bill proposes to change this state of affairs by requiring the Lord Chancellor to make an order setting the level of the statutory legacy at least every five years. As to the actual level to be set, the Bill provides that, unless the Lord Chancellor determines otherwise, the level should be set according to a procedure specified in legislation. The procedure will index link the statutory legacy by increasing it by an amount that reflects any increase in the consumer prices index measure of economic inflation. The legacy can therefore only increase; in the event of no inflation or deflation, the level of the legacy will not change.

Clause 2 enables the Lord Chancellor to set the level of the statutory legacy without using this index-linking mechanism such that he is at liberty to set a level that is equal to or even lower than the pre-existing figure. However, in such circumstances, he will be required to report to Parliament to explain why the mechanism has not been used. These provisions create a legislative framework that will govern the level of the statutory legacy and will ensure that it does not slip behind inflation and lose its real-world value. The changes will benefit surviving spouses and civil partners.

Clause 3 deals with the statutory definition of personal chattels. Under the current law on intestacy, a surviving spouse or civil partner is entitled to all the deceased’s personal chattels that are not otherwise disposed of under a will. The Bill does not change that but it does propose to amend and update how these chattels are defined. Personal chattels are defined in the Bill as “tangible movable property”, replacing an anachronistic and arbitrary list of property and categories of property in the current law. The Bill also includes three defined exceptions to this definition.

The first is money and securities for money. This is not new. The second exception is for property used, at the death of the intestate,

“solely or mainly for business purposes”.

The words “solely or mainly” are new and will ensure that property—for example, a vehicle such as a van that was regularly used in the course of a business—would be excluded from the definition. The third exception is wholly new and relates to property which is held, at the death of the intestate, solely as an investment. This is a narrow exception that would only apply to property owned as an investment and which had no personal use whatever. For example, valuable jewellery which was worn by an individual, even if only occasionally, would still qualify as a personal chattel and would pass to the surviving spouse or civil partner, even if it was also bought and kept in the expectation that its value would increase.

The remainder of Clause 3 provides that where personal chattels are referred to in a will or a codicil to a will, the current pre-Bill definition of personal chattels will be used if the will itself is executed before Clause 3 comes into force. This will be the case even where a codicil is made after the date that Clause 3 takes effect. However, it is also still open to the person making the will or codicil to expressly state that the new definition of personal chattels should apply.

Clause 4 seeks to protect the position of children who are adopted after the death of a parent. The general rule in these matters is that after adoption, a child is regarded as the legal child of the adoptive parents and has no other legal parents. However, Clause 4 ensures that a child whose parent has already died before the adoption takes place will not lose, as a result of adoption, a contingent interest that he or she already holds in the estate of the deceased parent. This provision is relevant where a child is adopted, perhaps by other members of his or her family, as a result of the birth parents’ death. Adoption in these circumstances is typically open, involving no secrecy. The child has been tragically orphaned, and an aunt, uncle or other relative adopts the child. No one intended, in that situation, that the orphaned child should lose his parents’ estate; yet that is what will happen in cases where inheritance—as a matter of sensible estate planning—is contingent on the child reaching a particular age.

It is important to note that this provision affects only children who are adopted after the death of a birth parent. I believe that this is an important distinction and it is right that the law preserves the rights of children who, at the date of the adoption, already hold a contingent interest in the estate of their birth parents. The law already preserves vested interests held by a child at the point of adoption and ensures that those interests are not lost. Clause 4 simply adds contingent interests into that existing provision. It is wrong that the law can strip away a child’s inheritance simply because she has been adopted. Clause 4 will correct that injustice.

Clause 5 proposes to disapply Section 18(2) of the Family Law Reform Act 1987 in certain circumstances. This section provides that where a person dies intestate and his parents were not married to each other at the time of his birth, the administrators of his estate may presume that he was predeceased by his father and any other person to whom he may be related only by virtue of his father. In the case of a person who has a female parent other than his mother as a result of Section 43 of the Human Fertilisation and Embryology Act 2008, his administrators may presume that he was not survived by this second female parent or by anyone related to him through this parent. This is a pragmatic rule which derives from a time when it was common for the identity of the father of a child born out of marriage to be unknown. Tracking such parents down could present real difficulties to those administering intestate estates. The rule discriminates against unmarried fathers and, in practice, can make it less likely that the deceased’s estate will pass under the intestacy rules to such a parent. Nowadays, it is quite usual for both unmarried parents to be identified as such, and the practical justification for the rule is much reduced.

Clause 5 disapplies this presumption if a person is recorded as the intestate’s father or as a parent other than his mother in a specified formal register of births. In such a case, the estate’s administrators will have the same responsibility to the deceased’s father or other parent as they would to any other relative entitled under the intestacy rules. This amendment clarifies that where such a parent has been formally acknowledged as such, irrespective of the absence of a marriage certificate, that parent should, in general, have the same rights as his married counterpart.

Clause 6 amends various provisions in the Inheritance (Provision for Family and Dependants) Act 1975 by way of Schedule 2. Noble Lords will know that it was formerly the Government’s intention to create an additional ground of jurisdiction for family provision claims in this Bill. This was to enable claimants who were habitually resident in England and Wales to bring such a claim, regardless of the deceased’s place of domicile. Scottish Government colleagues have raised significant concerns about how this additional ground would operate in practice, particularly its potential to displace Scots law to the possible detriment of those who had inheritance rights under that law. We have carefully considered these concerns from our colleagues across the border. I do not now believe that it is possible to engineer a compromise on this point that would answer these concerns and retain the benefits of our original proposal. I am also aware that there has been a previous lack of consensus on the nature of the additional ground of jurisdiction—the relevant provision is at variance with both the Law Commission’s original proposal and the majority view expressed in response to the Government’s public consultation.

On that basis, my intention is to bring forward an amendment to the Bill prior to consideration by the Public Bill Committee which will delete the additional ground of jurisdiction in its entirety. I hope that, by doing so, parliamentary consideration can be better focused on the Bill’s other, equally important and worthwhile provisions.

The first of the remaining changes to the procedure for family provision claims is to extend one of the categories of person who can apply to the court for adequate provision from a deceased’s estate, whether distributed by will or intestacy. We wish to clarify that a “child of the family”—not a biological or adopted child, but a person who was treated as such—should now be understood by reference to any family in which the deceased had a parental role. Such a family need consist only of the deceased and the potential applicant. Currently, such an individual could bring a family provision claim only if they could prove themselves to be a child of the family in relation to the deceased’s marriage or civil partnership. This provision reflects the Bill’s attempts to modernise the law of succession to better reflect the realities of modern family life, and ensures that a claim by a deserving child will no longer be barred simply on the basis of the status of his or her parents.

Clause 6 also amends the wording of the 1975 Act, which defines a person who may make a family provision claim because they are considered to be a dependant of the deceased. The interpretation of the current law requires that when deciding such status, the court must balance the deceased’s contribution towards the applicant’s needs against any benefits flowing the other way. If the applicant is found to have contributed more to the deceased than vice versa, the applicant cannot be deemed to be a dependant. The Bill proposes to remove the “balance sheet test” while preserving the other, fairly strict requirements imposed on a person applying for family provision as a dependant. This reflects the important understanding that “dependency” can be mutual, and its benefits need not all, or largely, flow one way.

The remainder of Clause 6 makes a number of fairly technical changes to the procedure for family provision claims. I do not propose to set these out individually, but they include changes to arrangements governing a court’s power to make an order following a successful claim and changes to the way in which the net estate of the deceased is calculated. These changes, though technical in nature, have a significant practical effect and form part of a package of changes designed to modernise and generally improve the current arrangements for family provision claims.

Clause 7 makes various amendments to provisions which require certain types of grant to be left out of account when one is determining the date when representation with respect to the estate of a deceased person was first taken out. These are important changes, but technical, and they will be relevant in only a minority of cases. Again, I do not propose to go through each in detail. There is some uncertainty under the current law as to which grants start time running for these purposes and others and which do not. Clause 7, by way of Schedule 3, aims to clarify these uncertainties by replacing all the current provisions in this area with provisions that clearly and comprehensively set out which grants start time running and which do not.

Clauses 8 to 10 deal with trustees’ powers. Clause 8 concerns a situation where a trustee is able to use income from a trust for the maintenance, education or benefit of a beneficiary who is under 18. The Bill proposes that the amount of income that can be used for such purposes should be a matter entirely for the trustees’ discretion. Currently, an objective test of reasonableness is applied, together with a proviso listing factors that the trustees must consider—for example, a beneficiary’s age—and a specific restriction on the amount that can be paid out. These requirements are not necessary. They are sterile technical burdens and are commonly written out when trusts are professionally drafted. Clause 8 removes them. Given that the trustees must still comply with their fiduciary duties, the reform presents no threat to the interests of beneficiaries. It is right that trustees should in future be able to exercise their discretion flexibly and free from unnecessary restrictions.

Clause 9 deals with a similar situation in which trustees are able to use their power of advancement to make payments of capital to beneficiaries where this is thought necessary. Currently, such payments are limited to one-half of a beneficiary’s future share. The Bill removes this limit so that trustees could, if they think fit, pay out the whole of a beneficiary’s share under this power of advancement. This gives the trustees the flexibility that they would almost certainly be given if they were acting under a professionally drafted will or trust. It has no effect on their fiduciary duty to act in a beneficiary’s best interest, which is imposed by the general law. However, any such payments may still not amount to more than that beneficiary’s future share. Clause 10 sets out, in some detail, transitional arrangements for Clauses 8 and 9.

That concludes my brief description of the substantive provisions of the Bill. The Bill will modernise and simplify the law in a number of areas for the benefit of many people at particularly difficult times of their lives. It is a technical piece of law but no less important for that.

Finally, I must add, as I have done in introductions to previous Bills of this nature, that a Bill such as this demonstrates the importance of having a body like the Law Commission that can prepare expert recommendations for reform of the law in areas that would otherwise remain unchanged and possibly out of date. The Bill also demonstrates the advantages of having in your Lordships’ House this procedure that allows appropriate Law Commission Bills to be scrutinised as far as possible off the Floor of the House. This is the sixth Bill to be introduced under that procedure and I commend it to the Committee.

--- Later in debate ---

[Lord McNally]

My Lords, we have had a good debate, which I am sure bodes well for very interesting discussions in the Public Bill Committee. I again put on record my thanks to the noble and learned Lord, Lord Lloyd, for taking on the responsibility as chair of that Committee. As noble Lords will have gathered, I am also much reassured by the presence close by of Professor Cooke as I try to give answers to matters raised by noble Lords.

The first of my noble friend Lord Henley’s questions was about the situation where there is no surviving spouse or children. In such a case, the law remains the same. As to how the fixed sum was reached, that came out of a study in 2005, which made me think that it might be ripe for looking at again. On the question of whether this is a surprisingly large sum, one of the factors is housing, which makes it relatively easy for an estate to have quite large sums in it. Nevertheless, I am told that it affects at the moment only 2% of estates, partly because, as was mentioned, people who have a house and realise that its value is rising have the incentive to make a will.

The point that my noble friend raised about chattels is one that we may well explore in Committee. As I think my noble friend Lady Hamwee said, it is in respect not just of jewellery but of paintings and other things where there might be a wavy line between investments and chattels. That is certainly something to look at. For the same reason that I will refer to when I come to the interventions of my noble friend Lord Marks, I assure my noble friend Lord Henley that this procedure will be used only for non-controversial reforms. That is its strength and why Parliament has confidence in it. We should keep to that kind of discipline.

As the noble Lord, Lord Beecham, said, the noble Lord, Lord Wills, took us to interesting areas. However, the noble Lord was right to point out the danger of mischief and of the abuse of elderly and isolated individuals. Much of that is the responsibility of the Office of the Public Guardian, which also comes within my ministerial responsibilities. Allegations of theft or overcharging by any professional are serious and concerning but I do not believe that this Bill is the right place to tackle such misconduct. The Inheritance and Trustees’ Powers Bill does not directly deal with wills but instead focuses largely on situations where no will has been made. Dealing with the concerns raised by the noble Lord would not only expand the content of the Bill to deal with wills but would mean taking it into the territory of professional legal regulation, which would be a very significant step and is already dealt with under the auspices of the Solicitors Regulation Authority and the Law Society. However, the Committee will undoubtedly consider the points made by the noble Lord, Lord Wills, carefully unless the chairman rules that out. Not that I am not suggesting that will happen—we look forward to an interesting debate on any amendment tabled by the noble Lord, Lord Wills.

My noble friend Lord Marks gave us a glimpse of the detail into which Liberal Democrat conferences go in making policy. I cannot quite remember the debate myself, but I am sure there were many speeches from the floor that dealt with our policy on this. I have to say to my noble friend that he used a good deal of his speech to talk about things that we have not done and were not in the Bill. These are very relevant and may well need to be brought before Parliament, but he gave the game away at the end of his peroration when he described the issues that we have left out of the Bill: he will see when he reads Hansard that several times he used the word “controversial”. It is because they were controversial that they fell foul of the request of the noble Lord, Lord Henley, that we stay clear of that.

[Lord Marks of Henley-on-Thames]

My Lords, I draw my noble friend’s attention to a distinction that I hoped I had made between controversial proposals of the Law Commission, which I suggest ought to be brought before Parliament for legislation, and non-controversial proposals, such as are included in the Bill, which are suitable for this procedure. I hope I was making it clear that I do not suggest that this fast-track procedure is suitable for controversial legislation, but I do suggest that the Law Commission should not be frightened or intimidated away from introducing controversial proposals. Indeed, when considering its new, 12th—I think—programme of law reform, it has made it clear that it does not propose to steer clear of controversial proposals. I believe that that is thoroughly laudable.

[Lord McNally]

I could not agree more. I also say that I take very seriously my responsibility to bring the non-controversial parts of the work before the House.

Whether we should take the non-domicile question out of the Bill can be looked at in Committee. It seems to me that what we have done is no more than to recognise the realities we face in our relations with our Scottish colleagues, but I take on board the point made by my noble friend Lord Marks that in an increasingly international world some of this might have cross-border dimensions.

My noble friend Lady Hamwee made the point about housing now being a big part of any inheritance. She also raised the question of inheritance tax implications. We can look at that in Committee if necessary, but on her specific question about the commencement provision, there is no precise timing as yet, but the intention is that commencement will be all at one time.

I was extremely pleased by the contribution of the noble Lord, Lord Shaw, both for his welcome for the Bill and for the personal example that he gave, which was extremely helpful to the Committee. I shall treasure the compliment of the noble and learned Lord, Lord Lloyd; I shall tuck it away. We will have to leave it to the historians to decide whether it is Wills, Ashton, Etherton or one of the joint parentages we were talking about earlier in the debate. Nevertheless, the fact that the noble and learned Lord has been willing to take on the chairmanship has given an impetus and confidence to this procedure.

I was greatly sorry that the noble Lord, Lord Beecham, did not take this opportunity to give us a quote from Bleak House. Surely there is one somewhere here.

[Lord Beecham]

I have done that so often.

--- Later in debate ---

[Lord McNally]

It is the classic. There is an old joke of which I saw a picture in a bar in Scotland: one farmer was pulling a cow’s horns, another farmer was pulling its tail and underneath was a lawyer milking the cow. However, the noble Lord, Lord Beecham, made a spirited defence of his profession and put into perspective some of the suggestions made about malpractice. As I mentioned when I dealt with the contribution of the noble Lord, Lord Wills, this is looked at elsewhere in the law.

On the issue of two wives, only the wife of a marriage that was legally recognised under English law would be relevant as regards intestacy rules. However, if noble Lords would like to pursue this in Committee, we can look at it in more detail. You do not have to be a Muslim or a Mormon to have some interesting domestic arrangements; this is not personal, but I can think of one or two which might come into this category.

That just shows why it is extremely sensible to use this procedure and the careful research and advice of the Law Commission in carrying this forward. I hope that we can now move into Committee and do this work, which is one of the more satisfactory exercises in Parliament. As the noble Lord, Lord Shaw, pointed out, we manage to pick up pieces of the law that have fallen out of date and address them in an extremely practical way.

Motion agreed.