Inheritance and Trustees’ Powers Bill [HL]

Memorandum by the Ministry of Justice

for the House of Lords

Delegated Powers and Regulatory Reform Committee

Introduction

This memorandum describes the purpose and content of the Inheritance and Trustees’ Powers Bill (“the Bill”). It identifies the general content of the Bill; every provision for delegated legislation in the Bill with appropriate background information; explains the purpose of the delegated power proposed; describes why the matter is to be dealt with in delegated legislation; and explains the nature of and justification for any parliamentary procedures which apply.

Background of the Bill

The Bill will give effect to the Law Commission’s legislative recommendations in relation to intestacy, family provision claims on death and certain trustees’ powers (Law Commission Report No. 331) subject to minor modifications.The Bill has been introduced into Parliament under the House of Lords procedure for uncontroversial Law Commission Bills.

The Bill makes a number of changes to the intestacy rules (ie the rules which govern how a person’s property must be divided if they die without a valid will). Where the intestate leaves a spouse[1]but no children, then all the property to which the intestacy rules apply will go to that spouseinstead of being shared between the spouse and the intestate’s surviving parents or siblings as under the current law. Where a spouseand children or other descendants are left,under the intestacy rules the spousewill take all of the intestate’s personal chattels and a fixed net sum (the “statutory legacy”), as under the present law, and the remainder of the estate will be divided as to one-half to the spouseand one-half to the children. This reforms the current law under which the remainder is divided so that the children take one-half and the spousetakes a life interest in the other half, with the children entitledto the remaining capital of that share on his or her death. Provision is also made for the regular review and updating of the statutory legacy, and to modernise the definition of “personal chattels” for the purposes of the intestacy rules.

The Bill also preserves contingent interests (those subject to a condition which must be fulfilled before the beneficiary has an absolute entitlement; egon intestacy a child’s inheritance is held in trust until the beneficiary is eighteen) which under the current law may be unjustly lost on the adoption of the beneficiary; and removes the presumption of prior death in so far as it applies to an unmarried father who appears on the register of births.

In relation to claims for family provision various amendments are made to the Inheritance (Provision for Family and Dependants) Act 1975 to refine and improve the operation of that Act. Among other things,where under the current law a claim for family provision can only be made when the deceased is domiciled in England and Wales, the Bill will also allow a claim for family provision to be made where the claimant is habitually resident in England and Wales regardless of the domicile of the deceased.

Finally the Bill makes changes to two statutory powers of trustees – the power to apply income for the maintenance, education or benefit of a beneficiary, and the power to make payments of capital for the advancement of a beneficiary. These changes are,in general terms, intended to clarify the law and reflect current practice.

Of the delegated powers under the Bill, all but the commencement provision relate to the statutory legacy. It is therefore worth considering that subject further here.

Where an intestate is survived by a spouse and either children or descendants or at least one parent or full sibling, the intestacy rules provide that (in addition to the spouse receiving the personal chattels):

… the residuary estate of the intestate (other than the personal chattels) shall stand charged with the payment of a fixed net sum, free of death duties and costs, to the spouse or civil partner with interest thereon from the date of death at such rate as the Lord Chancellor may specify by order until paid or appropriated … .[2]

The fixed net sums referred to are specified by statutory instrument under section 1 of the Family Provision Act 1966:currently £250,000 where there are children or other descendants, and £450,000 where there is only a parent or sibling of the deceased (although note that the higher level will no longer be relevant following the reforms in the Bill).[3]

Provision is made in the Bill to enable the Lord Chancellor to alter the rate at which interest accrues on an unpaid statutory legacy, and to ensure that the value of the statutory legacy is kept under regular review and is updated automatically to keep pace with inflation.

More detailed information about the purpose and effect of the Bill and the background to the proposals can be found in the Explanatory Notes published with the Bill.

Delegated Powers

The Bill contains four delegated powers:

- the Lord Chancellor may by order amend the definition of “Bank of England rate” for the purposes of section 46(5) of the Administration of Estates Act 1925 (“the 1925 Act”)(added by clause 1(4) of the Bill) (section 46(6) of the 1925 Act (added by clause 1(4)));

- the Lord Chancellor may by order amend section 46(1A) of the 1925 Act(added by clause 1(3) of the Bill) so as to substitute a different interest rate (however specified or identified) for the interest rate provided by that subsection, and to make consequential amendments or repeals (section 46(7) of the 1925 Act(added by clause 1(4)));

- the Lord Chancellor may by order from time to time specify the amount of the statutory legacy, and must make such an order updating the statutory legacy in line with the consumer prices index (or such other rate as the Lord Chancellor determines by order) every five years (paragraphs 3 to 7 of schedule 1A to the 1925 Act (added by schedule 1 of the Bill)).

- the Lord Chancellor may bring the Bill into force by commencement order (clause 12(2), (3)).

Clause 1(4)–Power to amend the definition of “Bank of England rate” for the purposes of the statutory legacy (Administration of Estates Act 1925 section 46(6)); and power to alter the interest rate for those purposes (Administration of Estates Act 1925 section 46(7))

Background

When a person dies there is an inevitable, and in some cases considerable, delay between death and the distribution of his or her assets. In order that it retains its value, the statutory legacy therefore accrues interestbetween the date of death and payment.Under the current law, a surviving spouse of an intestate is entitled to interest on the statutory legacy “at such rate as the Lord Chancellor may specify by order”. The current rate of 6% per annum has not changed since 1983.[4]It now appears very high compared with a Bank of England base interest rate that has remained at 0.5% since March 2009.

The Bill clarifies that the statutory legacy accrues interest from the date of death calculated on a simple as opposed to a compound basis, and provides for that interest to be calculated at the Bank of England rate which had effect at the end of the day on which the intestate died.

For the purposes of the Bill “Bank of England rate” is defined as being either the rate announced by the Monetary Policy Committee of the Bank of England as the official bank rate, or any equivalent rate determined by the Treasury in exercise of its emergency powers under section 19 of the Bank of England Act 1998 to give the Bank directions with respect to monetary policy.

Amending the definition of “Bank of England rate”

THE DELEGATED POWER

The Bill gives the Lord Chancellor power to amend the definition of “Bank of England rate” which the Bill inserts into the 1925 Act.

THE REASON FOR THE POWER

The power to amend the definition reflects the fact that “Bank of England rate”is a concept which may be subject to a change either of sense or expression which could alter the meaning of the Bill or render the current definition meaningless. If, for example, the Bank of England ceases to publish a rate using the term “official bank rate” this change would need to be reflected in the definition.

PROCEDURE

Any order made by the Lord Chancellor under section 46(6) of the 1925 Act must be made by statutory instrument (section 46(6))and is subject to annulment by a resolution of either House of Parliament (section 46(8)).

This negative resolution procedure is appropriate as the power is limited to altering the definition of “Bank of England rate” and its effect will therefore be restricted. It is, moreover similar to, although less extensive than, the Lord Chancellor’s existing delegated power in section 46(1) of the Administration of Estates Act 1925, which has a negative resolution procedure (see section 46(1A)).

Amending the rate of interest

THE DELEGATED POWER

The Bill gives the Lord Chancellor power to substitute a different interest rate for the prevailing rate and to make any consequential amendments to the relevant section of the 1925 Act.

THE REASON FOR THE POWER

The power to substitute a different interest rate is necessary because it allows the Lord Chancellor flexibility in the unlikely event that the Bank of England rate proves to be administratively unworkable, or if a change in policy makes a higher or lower rate appropriate. That the rate should be set by statutory instrument is desirable because it should allow practitioners to discover the appropriate rate with relative ease and certainty.

As noted above, this new power replaces an existing delegated power; under section 46(1A) of the 1925 Act the Lord Chancellor may specify by order such interest rate as he considers appropriate.

PROCEDURE

Any order made by the Lord Chancellor under section 46(7) of the 1925 Act must be made by statutory instrument (section 46(7)) and must be approved by a positive resolution of each House of Parliament (section 46(9)).

This positive resolution procedure is appropriate because the power will allow the Lord Chancellor to make substantive changes to the operation of the Act. Such changes will require Parliamentary approval.

Schedule 1 –Power to determine the statutory legacy (Administration of Estates Act 1925 schedule 1A)

Background

As noted above, the amount of the statutory legacy is currently set by the Lord Chancellor by order under section 1 of the Family Provision Act 1966; it stands at £250,000 where there are children or descendants and £450,000 where there are surviving parents or full siblings of the deceased (the higher level will no longer be relevant when the Bill comes into force). There is no statutory requirement on the Lord Chancellor to review the level of statutory legacy at any particular interval or at all. Between 1966 and 1993, the power was exercised at intervals of between four and seven years. There was then, however, a 16-year interval between 1993 and the most recent update, which took effect for deaths from 1 February 2009. The current levels of statutory legacy were chosen following a lengthy process which included public consultation by the Ministry of Justice.

The delegated power

The Bill reproduces the Lord Chancellor’s power to set the level of the statutory legacy by order. However, in contrast to the previous power, the Bill requires the Lord Chancellor to make an order setting the fixed net sum at least every five years, and, unless the Lord Chancellor otherwise determines, the statutory legacy will be index-linked to the consumer prices index (CPI)measure of economic inflation. Which is to say,at least once every five years, the statutory legacy will be increased by an amount that reflects the increase in CPI. The Lord Chancellor has a further power, under paragraph7(1) of Schedule 1A, to substitute for references to CPI references to another index, and make amendments consequential on that substitution. This power must be exercised by order made by statutory instrument.

The reason for the power

Although the power restates an existing power, it is also designed to effect a default procedure by virtue of which the statutory legacy will be kept updated in line with inflation. Using a statutory instrument in this way will ensure that the new statutory legacy is discoverable by practitioners and other interested parties with ease and certainty.

It is important that the Lord Chancellor retains his underlying discretion, however, to allow for policy changes in the future – if for example, the consumer prices index becomes administratively unworkable, or shifting social attitudes require the statutory legacy to be set at a different level.

Procedure

Any order made by the Lord Chancellor under paragraph 3(1) of schedule 1A to the 1925 Act must be made by statutory instrument (schedule 1A para 3(1)) and is, in general, subject to annulment by a resolution of either House of Parliament (schedule 1A para 3(4)).

This negative resolution procedure is appropriate where the power is limited to updating the statutory legacy in accordance with the CPI.

However, where the Lord Chancellor specifies by order an amount other than that dictated by reference to CPI, or substitutes for CPI another index, such an order may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament (schedule 1A paras 5(3), 7(2)). The Lord Chancellor must also lay a report before Parliament stating the reasons for the determination (schedule 1A para 5(2), (4)). It is appropriate that where the Lord Chancellor elects to make a different order, or to change the index by reference to which the statutory legacy is updated,it should be subject to more acute Parliamentary oversight.

Clause 12(2), (3) Commencement

The delegated power

Clause 12(2) enables the Lord Chancellor to bring the provisions of the Bill (other than clause 12 which comes into force on the day the Act is passed) into force on such day or days as he may appoint by order. Clause 12(3) allows the Lord Chancellor to appoint different days for different purposes under clause 12(2).

Why the power is necessary and procedure

The clause 12(2) power is a standard power exercisable by statutory instrument and is not subject to any resolution procedure. It will enable adequate time for those affected to make the necessary preparations. It may be the case that the provisions of the different clausesare brought into force at different times.

Territorial Extent

The Bill extends to England and Wales only. The Bill deals with one provision, relating to the adoption of children, which is within the legislative competence of the National Assembly for Wales. The consent of the National Assembly will be sought for this provision and any future amendments which fall within their competence.

Ministry of Justice

June 2013

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[1] For these purposes “spouse” should be taken to include civil partner.

[2] Administration of Estates Act 1925 s 46.

[3]Family Provision (Intestate Succession) Order 2009, SI 2009 No 135

[4] Intestate Succession (Interest and Capitalisation) Order 1977 (Amendment) 1983, SI 1983 No 1374.