I am hoping the forum can answer a question for me, a client of mine, the week before she died made several cheques out to her grandchildren and children and posted them, they were not cashed before she died, this is a taxable estate.
I am of the opinion, from my STEP studies! That the cheques are unperfected gifts and fail because they had not cleared before she died however I have had a conflicting opinion in that because she didn’t cancel them they are valid still.
I need to know the correct answer because a) has she successfully used her annual allowance if they are valid?
b) can they be cashed once we have probate?
I thought I was pretty certain as to the answer but would be grateful of your help.
A transfer of money by cheque is not completed until the cheque is cleared, because the transferor can cancel the cheque before then (Owen, Re [1949] 1 All E.R. 901, Swinburne, Re [1926] Ch. 38 and (before the Special Commissioners) Curnock v Inland Revenue Commissioners [2003] UKSC SPC00365)
In Curnock Mr Avery-Jones quoted Sir Ernest Pollock MR:
“A cheque, as explained by Lord Romilly, MR, in Hewitt v Kaye [(1868) L.R. 6 Eq. 198] is nothing more than an order to obtain a certain sum of money, and it makes no difference whether the money is with the bankers or elsewhere. It is an order to deliver the money; and if the order is not acted upon in the lifetime of the person who gives it, it is worth nothing.”
Unless each gift can be categorised as a donatio mortis causa, the gifts will fail
Until the cheque is honoured the gift is not completed [Re Owen [1949]. See Curnock v IRC [2003] re IHT and the annual exemption for a cheque which had been paid into the bank before the drawer’s death but cleared only after death.
Uncashed cheques will not qualify as DMCs [Re Beaumont [1902]; Hewitt v Kaye (1868)).
My first instinct would be to say that it would fall into his estate because if it was cheque to settle a debt say, the debt would be owing to the estate, it wouldn’t be cancelled merely because of the donee’s death.
Having said that you are talking about a gift scenario and the above answers combined with the fact that the person to whom the cheque has been made too is no longer alive to draw on said cheque, would lead me to agree with your feeling too Kathy.
My understanding is that the mandate of the bank of the deceased donee terminates on the donee’s death (or possibly as and when the bank has been noticed of the death). In which case the donee’s bank will be unable to accept any credits after the donee’s death.
A lot of banks will allow credits to the deceased’s bank account after a death certificate has been registered, eg dividend cheques. I would attempt to pay the cheque into the account.
I’m not sure it actually matters whether the deceased donee’s bank will accept a post death credit - its more matter of whether a right to payment is created by the act of issuing the cheque, if so then the deceased’s estate has a right to the payment. The deceased’s bank account is merely an option for collection of payment. I suspect that there would only be a right to payment where there was consideration for the cheque - so that a pure gift by cheque doesn’t in itself give the payee the right to the money.
Surely it all depends upon what the Donor’ s intention was. If for example the cheque had been given to the Donee A few months before he died as a gift and he had forgotten to pay it into his bank account, I would find it rather strange that the donor would want to cancel the gift. I would suggest that, if possible, it should be paid into the account and depending upon the amount involved, the personal representative should enquire of the Donor if he wishes to have the money returned. The question then arises as to what the IHT position would be! These things have a habit of causing unexpected complications.
If the cheque has now cleared-what does that mean? Does the money have to be returned, or is it a gift to the beneficiaries of the estate as the cheque was not cancelled after the death? If it is £1m the answer will be
important, if £100 less so!
A recent case in Australia (the website did not give its name) found:
On
this question the court considered the intention of the deceased and found that it was clear that the payment was a gift and that the bank paid the cheque before being notified of the death. It also considered the effect of the Cheque Act 1986 (Cth), community
usage of cheques together with modern judicial reasoning. The court concluded that although the established legal principle is that Equity will not usually assist someone who has an imperfect gift it will not strive officiously to defeat them. As a result
the person who had received the gift in this case was able to retain the money and did not have to repay the estate.
This was the more normal scenario of the deceased having made the gift and the cheque being uncleared. So presumably the same principle applies and the money is not repayable, but perhaps not as the donee is dead in this
case.
This is clearly not an enforceable debt, but does the promise to pay, although not enforceable, have a value, particularly as the cheque was not cancelled? HMRC may well argue it does.
I assume the cheques relate to gifts (not for goods or services provided).
The bank acts as agent of the customer under the relevant mandate.
Once the bank has been notified of a customer’s death then that mandate terminates (BEA 1882 s.75).
As a consequence, the bank is unable to pay any cheques drawn by a customer prior to the customer’s death. Similarly, the bank cannot accept any cheques for credit to the customer’s account following death.
Until honoured, the gifts are not complete.
A cheque is not, I would suggest, a right to payment but merely an order given by the drawer of the cheque to his agent, ie the bank, to pay the relevant sum to the payee. At any time prior to clearance, the drawer may revoke the cheque (BEA 1882 s.75).
It doesn’t depend on the donor’s intent. The law is clear, if a lifetime gift is attempted to be made, but the gift is not perfected by the time of the death, it fails. There may be tax ramifications of a debt owed that was paid by cheque, and if the cheque doesn’t clear by the date of death the debt is still due against the estate. But in the circumstances we have here, it is clear that what was attempted was a number of lifetime gifts which would have reduced the size of the estate, and in those cases the gifts were not perfected and so are brought into account for all tax purposes.
I think Malcolm Finney has misread my post (and its Leney!) What I said was that a right to payment arises if there is consideration, and that a gift does not establish a right to payment. I think we are all agreed, that uncleared cheques by way of gift are not a liability of the estate and thus the uncleared funds form part of the estate.
I think it is worth pointing out that the legal position in Scotland is markedly different. Unilateral gratuitous obligations are binding and enforceable. Therefore if a gift cheque is sent, and then stopped by the donor, the donee has an enforceable right of payment. In that sense, the gift is complete when the cheque is received, and sometimes even before that.
Section 5(5) IHTA 1984 prevents the liability being deductible for IHT purposes in terms of the donor’s estate, making the position, in effect, the same as in England. However, there is no such corresponding provision for the donee, as far as I am aware. Therefore if the donee dies before encashment, the payment obligation will still be an asset of the estate, and subject to IHT.