The High Court refused to grant summary judgment to the defendant solicitors, in a claim for damages by a residuary beneficiary of an estate, alleging negligence and breach of duty of care resulting in the estate becoming liable to pay IHT, where, in the light of previous authorities, a trial of the action was necessary to establish whether the defendants owed a duty of are to the claimant as alleged.

Facts

The first defendant was a London firm of solicitors. The second to fourth defendants were partners in a Jersey based firm of solicitors. The second defendant, at the relevant time, had also been a partner in the first defendant.

In 1965, the claimant's mother acquired the freehold of an office building in London. In 1985 and 1986 she received tax planning advice from the first defendant. In July 1986, she decided to make a gift of the freehold of the property to the claimant. The property was transferred to G Ltd which held the legal title as nominee for the claimant. On 22 July, the claimant transferred his beneficial ownership of the property to S Ltd in exchange for 5,000 shares in that company. On 19 September, the claimant, as settlor, created a discretionary settlement. The potential beneficiaries included the claimant and his sister, M. On 21 September, the 5,000 shares in S Ltd were transferred to the trustees of the settlement. The gift of the property made by the mother gave rise to a capital gains tax (CGT) liability. In June 1988, in order to meet that liability, she took out a bank loan secured against her own home and G Ltd's freehold interest in the property. In January 1989, G Ltd sold the property for a substantial sum, the bank having released the charge granted by G Ltd to enable the sale to take place. A replacement security was obtained in respect of a cash deposit account held by a company as nominee for the trustees of the settlement.

In 1992, the settlement was restructured following a breakdown in the relationship between the claimant and M. The cash account held as security for the loan was appointed for the benefit of the claimant. The Jersey firm gave advice in relation to the transactions of 1988, 1989 and 1992. The mother died in September 2000. By a will dated 15 September 1989, she left a number of specific gifts and the residue of her estate on trust for the claimant and M equally. The property was included in the mother's estate for the purposes of calculating the inheritance tax (IHT) liability on the basis that, notwithstanding that she had disposed of her freehold interest more than seven years before her death, the charges given in 1988, 1989 and 1992 had involved a reservation of benefit.

The claimant paid the amount of IHT demanded but later issued proceedings alleging that the IHT liability had arisen because of the negligent estate planning advice provided by the defendants. He argued, inter alia, that, in relation to the 1988 to 1989 transactions, the defendants had structured the transactions in such a way as to give rise to a reservation of benefit and a potential IHT liability. In relation to the 1992 transaction, they had failed to consider adequately, or at all, the IHT implications of those transactions, namely, that they involved a reservation of benefit. The claimant asserted that he had suffered loss and damage equivalent to the amount of IHT he had paid. The defendants applied for summary judgment on the claim on the ground that the claim against them disclosed no reasonable cause of action and/or had no real prospect of success and there was no other reason for a trial.

Issue

Whether any duty of care had been owed by the defendants to the claimant; and whether any properly pleaded cause of action had been statute barred.

Decision

Morgan J (dismissing the application) said that the question whether the claimant had a proper cause of action could not be disposed of by summary judgment.

In deciding whether a solicitor owed a duty of care to an intended beneficiary under an intended will, whether by reason of negligence in relation to the making of a will or to the advice sufficiently connected with the will-making process, the court had been concerned to investigate whether, in the absence of a duty of care owed to the intended beneficiary, there would be an undesirable lacuna in the law. Such a lacuna would arise if it were held that the intended beneficiary had no claim and either the estate of the deceased would have no claim, because it had suffered no loss, or any moneys recovered by the estate of the deceased would go to other persons and not to the intended beneficiary (White v Jones [1995] 2 AC 207 and Carr-Glynn v Frearsons [1999] Ch 326 considered).

Accordingly, for the purpose of considering whether the court ought to find the existence of a duty of care owed by the solicitors to the claimant in the present case, it was relevant to ask whether a similar lacuna would arise, in the absence of such a duty, and for that purpose to ask what claims the mother's estate would have against the solicitors by reason of the alleged negligence in respect of the estate becoming liable to pay IHT.

In Daniels v Thompson [2004] PNLR 638, on similar facts to those assumed on the present application, the Court of Appeal held that the deceased had never been at risk of having to pay any IHT. That was a risk to which the estate alone was exposed. Once it was appreciated that the deceased could never have suffered a liability to IHT, it became clear that she did not suffer any loss as a result of the defendant's negligence on the facts of that case.

On the present applications, the defendants had asserted that, in relation to the claim that there was a duty of care owed to the claimant as a residuary beneficiary, the claim did not disclose a reasonable cause of action and/or did not have a real prospect of success. In the light of the judgment in Daniels v Thompson and the possibility that a court at trial might find that there was a lacuna which needed to be filled by extending a White vJones duty to the residuary beneficiaries in the present case, it was not possible to hold that the claim should be dismissed on the ground that there was no such duty of care.

Furthermore, if the claimant was able to establish that the solicitors were in breach of a duty of care owed to him, then he would be able to show that he had suffered loss as a result. The alleged negligence resulted in a reduction in the value of the estate available for distribution and that affected the amount available to be distributed to the claimant as one of the two residuary beneficiaries. Although the pleaded claim was to recover the full amount of IHT paid by the claimant on behalf of the estate, that claim could only be in relation to the reduction in the claimant's own share of the residuary estate, which could not exceed one-half of the IHT and interest which he had paid. Although he was entitled to be indemnified by the estate which bore the liability to pay the IHT and interest, that would reduce the amount of the estate available for distribution and the amount ultimately distributed to the claimant.

Chancery Division.
Judgment delivered 11 March 2008.