Feature

posted 16 Sep 2002 in Volume 7 Issue 5

The assessment of quantum in Inheritance Act claims

Part one: income needs and capitalisation

Family provision legislation was introduced by the Inheritance (Family Provision) Act 1938. At that time, there was little question of how to capitalise income requirements as the Court could only order periodic payments. Since then, however, there have been successive amendments to the Act and 1975 Act cases predominantly feature lump sum rather than periodic payment awards. Sidney Ross, a barrister at 11 Stone Buildings, begins this two-part article with an examination of payment awards over the years and how capitalisation of income needs have so far been approached.

When the Family Provision legislation was first introduced, in the form of the Inheritance (Family Provision) Act 1938¹, the question of how to capitalise income requirements, did not arise, since the Court could only order periodic payments unless the value of the net estate did not exceed £2,000. In such cases, it could order a lump sum payment, to be quantified in accordance with the provisions governing the quantum of periodic payments. Under the 1938 Act in its original form, if an award of income was made, it could not exceed two-thirds of the income produced by the estate if the testator left a spouse and another dependant, or one-half if there was only a spouse or only another dependant. The first part of this note is concerned with the way in which capitalisation of income needs has been approached in family provision cases.

The methods employed – “Father knows best”

The judges of the Chancery Division who, at that time, had exclusive jurisdiction were in any event, not disposed to engage in any calculations. Thus, in the case of Brown v Knowles (1955) 105 L.J.169, an application by a surviving spouse, Wynn-Parry J went so far as to say that a judge, when exercising his discretion, should do no more than name a figure and should not condescend to an analytical statement of how he arrived at that figure. The application succeeded, but the reporter appears to have been infected by the judge’s reticence, since the report fails to state what award was made.

TABLE 1

Types of award in cases decided in the period 1940-2000

Type of award	1938 Act²	1975 Act
Entire estate	1	1
Specified share of estate	None	6
Specified property or interest therein	2	4
Periodical payments	40	2³
Lump sum	13	36
Periodic payments + lump sum	None	4
No award	17	24

Successive amendments to the 1938 Act increased the extent of the Court’s jurisdiction to award lump sums but, as the table below shows, orders for periodic payments were made in the majority of 1938 Act cases, whereas lump sum awards predominate in 1975 Act cases.

The first reported case in which capitalisation of income needs were considered was Re Elliott, briefly reported only in The Times (18 May 1956) and the Current Law Yearbook⁴. Out of a net estate of £2,670 Danckwerts J awarded the 48-year old

applicant such lump sum as, calculated on the government annuity tables in accordance with her age, would produce an annuity of 15s per week.

It was to be nearly thirty years before this course was followed again in a reported case⁵, though in Re W, 1975 (119) Sol Jo 439, the brief report states that out of an estate of £28,000, the applicant was awarded £11,000, which would be sufficient to buy an annuity and give some protection against future uncertainties.

“We can work it out (but some of us would rather not)”

The question of how to calculate a capital equivalent of a future recurring expense or loss of income was not a new one at that time. It had, of course, been a feature

of personal injury litigation for many years. However, actuarial calculations were regarded with some suspicion by the courts, as the following extract from Mitchell v Mulholland [1972] 1 QB 65 shows:

“The need for caution in relation to actuarial evidence, because of its general nature, has long been recognised. Lord Pearson said in Taylor v O’Connor [1971] AC 115 at 140:

‘I do not think that actuarial tables or actuarial evidence should be used as the primary basis of assessment. There are too many variables, and there are too many conjectural decisions to be made before selecting the tables to be used. There would be a false appearance of accuracy and precision in a sphere where conjectural estimates have to play a large part. The experience of practitioners and judges in applying the normal method is the best primary method for making assessments.

For these reasons I am not persuaded that the actuarial method has any advantages over the conventional approach. On the contrary, I think that it may ensnare one into treating as virtual certainties that which in truth are mere chances.’”.

There is no reason why the methods used for capitalisation of income needs in other types of claim should not be used in Inheritance Act claims. Indeed, it has been said that:

“There does not seem to be a distinction of fundamental principle between providing for the future needs of plaintiffs in personal injury litigation and applicants in proceedings under the Matrimonial Causes Act 1973 or the Inheritance (Provision for Family and Dependants) Act 1975.”

The multiplier-multiplicand approach, which was conventional in personal injury cases at the time, was first employed in a 1975 Act case by Hollings J in Malone v Harrison [1979] 1 WLR 1353, an application under s.1(1(e). The applicant was 38 at the time of the hearing. Hollings J found that:

The deceased had assumed full responsibility for the applicant’s maintenance for a period of 12 years immediately before his death;
He had maintained her to the extent of at least £4,000 per year excluding certain non-recurring items and the annual value of the accommodation he had bought for her;
Her actuarial life expectancy was 38 years.

Based on those findings and assumptions he arrived at an award of £19,000 as follows:

Income need of £2,000 per year over 22 year period from age 38 to 60

Multiplier of 11 applied gives lump sum of £22,000

Income need of £4,000 per year over 16 year period from 60 to 76

Multiplier of 5 applied gives lump sum of £20,000

Total lump sum £42,000

LESS applicant’s free capital £23,000

Lump sum award £19,000

He assumed that she would be able to work until she was 60 and earn an average of £2,000 per year, and he sought to enable her to have, in income and capital, about £4,000 per year, which would allow her to live in her present flat in a reasonable but not extravagant style.

This approach has had a mixed reception from both commentators and judges. In Re Wood [1982}, L.S.Gaz Mervyn Davies J found that the calculation along those lines was “interesting and instructive” but declined to adopt it. The evidence was that the applicant had a life expectancy of 30 years and her income shortfall was £1,243 per year. The calculation produced a figure of £15,126 and he awarded her £15,000, to include the £1,737 to which she was entitled on her father’s death intestate.

In Clark v Jones, an unreported case heard on 2 December 1985, the Court of Appeal declined to vary the award at first instance. It appears from the transcript that at the hearing at first instance, all parties had put forward multiplier-multiplicand calculations and it may be that the award of £6,000 was arrived at on such a basis. On appeal it was argued on behalf of Mrs Clark that the award to her was too low having regard to the extent of her dependency on the deceased. Dillon LJ said that the approach of calculating a dependency and a multiplier might be convenient but there was no hard and fast rule. Considering all the facts of the case and abstaining from precise calculations, there was no basis for interfering with the judge’s decision. Again, in Williams v Roberts [1986] 1 FLR 349, Wood J was referred to the calculations in Malone v Harrison but did not find the approach of great assistance.

Thereafter, the approach seemed to have fallen completely into disuse until Re Pearce, which was heard at first instance in November 1996, when the plaintiff was awarded £85,000 out of a net estate of £285,000. The defendants appealed and the appeal is reported at [1998] 2 FLR 705. The plaintiff was the 34 year old son of the deceased and had five children, of which the eldest was seven and the youngest, one year of age at the date of the hearing. He put his case on the footing that his financial needs were for money to cover the cost of acquiring a building to house his plant, and thus make his business more profitable, (which was found to be £50,000) and to put his house into repair, (which was found to be £35,000). Dealing with the objection that such payments were not maintenance, the judge took the view that:

If the plaintiff had to lease a building at a rent, and was awarded a sum of money by way of rent, it would have to be capitalised and the figure would not be very different;
If he borrowed the money to repair his house, the provision of a capital sum would be indirect maintenance for him, in the sense that if he did not have to service the borrowing, so much more of his income would be available to discharge his daily living expenses⁶.

Having arrived at the figure of £85,000, the judge then looked at it in another way, which was:

“To consider that the plaintiff and his wife and five children are now living off an income of between £8000 and £9000pa. It seems to me that by no stretch of the word can it be said that if they had a further income of between £6000 and £7000pa, which would put them up to an income of a maximum of £16,000pa would the matter go beyond the question of maintenance and when one has regard to the age of the plaintiff and the sort of multipliers which would be awarded in a personal injury case, one would arrive at a multiplier of somewhere between 12 and 13”.

If one applies that to the additional income need that the judge thought necessary for maintenance, the lowest figure is £72,000 and the highest, £91,000, so the £85,000 which he awarded is towards the higher end of that bracket.

In the view of the Court of Appeal, it could not be said that the method of capitalising the £6,000 to £7,000 per year was one that the judge could not reasonably have adopted. There was no adequate basis for interfering with his decision, which had achieved substantial justice between the parties.

“Lies, damned lies and statistics”

The multiplier-multiplicand method is generally thought to be a fairly crude method of estimating the immediate capital sum that would reflect the benefit of accelerated receipt of future income and allow for other contingencies. In the Appendix to the judgment in Wells v Wells [1997] 1 All ER 673⁷, Thorpe LJ said that the use of the multiplier-multiplicand approach in Inheritance Act claims was short-lived but, as discussed above, the Court of Appeal considered it to have been properly adopted in Re Pearce.

In that appendix, which supplemented the judgment of the Court of Appeal in Wells v Wells, Duxbury calculations and calculations based on the Ogden Tables are compared. Thorpe LJ came down in favour of the Duxbury calculations principally on the ground that the then current (3rd) edition of the Ogden Tables involved assumptions as to the incidence of income tax which were “crude, unrealistic and unduly favourable to plaintiffs”. The particular assumption was that the net rate of return should be reduced by a flat rate (at the time, 25 per cent). The working party responsible for the present (4th ) edition⁸ seem to have taken note of this criticism. Paragraph 15 of section A omits the passage in the 3rd edition that excited Thorpe LJ’s disapproval⁹, though it implies that an adjustment by way of an overall flat-rate reduction to take account of income-tax might be applied. However, paragraph 16 is to the effect that, in cases where the impact of personal income tax and CGT is likely to be significant, a more accurate calculation of the value of the payments net of tax may be desirable, and suggests that the necessary calculations might be carried out using software “of the type referred to in paragraph 73”; that is, software similar to that used for Duxbury calculations.

In fact, neither Duxbury nor Ogden calculations have yet been commonly resorted to in accessible decisions on Inheritance Act claims. In the unreported case of Nott v Ward¹⁰, a claim under s1(1)(e), an income need of £29,000 per year for an applicant with a life expectancy of 25 years was quantified at £325,000 on a Duxbury basis with an assumed yield of 4.25 per cent. In Singer v Isaac [2001] WTLR 1045, which is discussed more fully in part two of this article, the figure required to meet the applicant’s income shortfall of £26,000 per year was quantified at £285,000 using the Duxbury figure for a woman aged 60.

The Ogden Tables have been used in one reported case, that of Rees v Newbery and the Institute of Cancer Research [1998] 1 FLR 1041. In that case, it had been held that the deceased was maintaining the applicant by providing him with living accommodation at a rental substantially below the open market value. The income that the court had to capitalise was the difference of £4,656 pa at the date of the hearing, between the open market rent and the rent that the applicant (who was then 50 years of age) was paying. HH Judge Gilliland QC followed the Court of Appeal approach in Wells in that he took a yield of 4.5 per cent as the kind of return which a prudent investor would obtain if he had to invest in a mixed portfolio of equities and gilts. The Ogden Tables (in that case the 2nd (1994) edition) gave the present value of an annual expenditure of £4,650 as £65,565 for a man aged 50. He used these in preference to Parry’s Tables¹¹, which are devised for use in connection with the capitalisation of rental flows and used for the calculation of the value of reversions on leases.

The main point on which the House of Lords reversed the Court of Appeal decision in Wells has not yet arisen in a reported Inheritance Act case. It had arisen in three personal injury cases and the appeals were heard together. In each case, the judge at first instance had assumed, for the purpose of calculating the appropriate lump sum, that the plaintiff would go into the market and purchase the required amount of index-linked government stock (ILGS) so as to provide for his or her future needs with a minimum risk of their damages being eroded by inflation. In one case, the judge applied a discount rate of 2.5 per cent, in the other two cases, 3 per cent. The Court of Appeal held that in such cases the court should fix the award on the assumption that the plaintiff would adopt a prudent investment strategy and include in his investment portfolio a substantial proportion of equities, rather than taking the minimum risk. They therefore applied a multiplier consistent with a rate of return of 4.5

per cent rather than one determined by reference to returns on ILGS, thus substantially reducing the awards. The House of Lords reversed them on this point, holding that the return on ILGS provided the most accurate way of calculating the present value of the loss that the plaintiffs would actually suffer in real terms. The average gross redemption yield on ILGS at the time when the judgments at first instance were given was in the region of 3.5 per cent and the damages were recalculated on the basis of a net rate of return of 3 per cent, representing a deduction of 14 per cent to allow for the impact of taxation.

In ancillary relief applications it appears from Dharamshi v Dharamshi [2001] 1 FLR 736 CA, at 741 that the Duxbury tables, although of limited utility, represent the ‘industry standard’ for ancillary relief capitalisations. However, it remains to be seen whether capitalisation of income needs with the aid of either the Duxbury or the Ogden tables will become standard practice in Inheritance Act claims. u

Reference

Which came into force on 13 July 1939
These figures include applications by former spouses who have not remarried under s.3 of the Matrimonial Causes (Property and Maintenance) Act 1958 and s.26 of the Matrimonial Causes Act 1965
One of these included a lump sum in order to avoid backdating the award
[1956] C.L.Y.9249
Re Crawford (1983) 4 FLR 273. The applicant, then aged 59, was awarded £35,000, being a sum sufficient to purchase an annuity of £4,000 per year.
For which principle see Re Dennis [1981] 2 All ER 140, at 145j-146a
Reversed, [1998] 3 All ER 481, HL
Published in the year 2000
It appeared at paragraph 10 of section A and is quoted in the Appendix at 703c-d.
13th December 1994, HH Judge Bromley QC sitting as a High Court Judge
These produced a substantially lower figure but no evidence explaining why this was so was adduced.

Sidney Ross is a barrister at 11 Stone Buildings. He can be contacted at sidneyr@11StoneBuildings.com.