Every word used in a trust deed counts and that is one good reason why drafting them is par excellence a job for experts. In one striking High Court case, a single mistaken syllable risked triggering seven-figure Inheritance Tax (IHT) liabilities.
A father had established two trusts, with assets totalling about £18.5 million, of which his children were the principal beneficiaries. He was anxious that the children should not come into money when they were too young and, as originally drafted, the trusts granted them a right to draw income from the funds once they reached the age of 25.
Fiscal changes introduced by the Finance Act 2006, however, meant that the trusts were no longer tax effective and it became necessary to modify them so that the children would take their equal shares of the trust funds absolutely on their 25th birthdays. In making those amendments, however, the word ‘revocably’ was used, as opposed to ‘irrevocably’. That single error had a dramatic impact and potentially exposed the trusts to £3.4 million in IHT liabilities over a 10-year period.
In coming to the trustees’ assistance, the High Court found that the drafting error had arisen from a perfect storm, comprising a lack of relevant experience on the part of the draftsman, a supervisor who had too much to do and ambiguous instructions. The intention that lay behind the amendments was, however, clear and the Court rectified the documents so as to achieve the objective that had been desired.