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  1. Law
January 27, 2016updated 11 Feb 2016 10:54am

Death and debts pressure heirs to the WH Smith fortune

By Spear's

Does a debt get extinguished on death asks Caroline Cook following the dispute within the Hambleden family, heirs to the WH Smith fortune.

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The current 5th Viscount Hambleden, heir to the WH Smith fortune and long-term partner of ABBA singer Frida Lyngstad, is in a bitter dispute with his step-mother Lesley, Viscountess Hambleden, widow of the late 4th Viscount Hambleden, over unpaid debts owed to the late Viscount’s estate. The 5th Viscount, together with the trustees of the 4th Viscount’s estate, took legal action against the Viscountess in 2014 over the unpaid debts, with the trustees claiming £1.73 million and interest and the 5th Viscount £150,000 and interest.

The 5th Viscount maintains that in the month before his father died, the Viscountess had agreed to sell a property in Carmel, California, where she had lived with the late Viscount, and hand over the proceeds to repay loans owed to him. The property was apparently sold in May 2013 for about £1.8 million but the Viscountess allegedly failed to repay a penny. An out of court settlement was reached, yet the 5th Viscount maintains he has not received all that was owed to him.

So what does happen to a loan owed to you on your death? Any debts owing to the deceased are an asset of the estate, and should be included in the value of the estate for inheritance tax purposes. However, this is subject to any waiver of the debt in the Will. It is therefore important that the executors make relevant enquires of the family about any debts due.

If you make a loan, it will help your estate if there is a written agreement or record of it (and any repayments and interest arrangements) which is kept and stored with your Will. The executors will then know what is outstanding and can contact the debtor to ask for repayment. The loan agreement could specify a notice period for repayment, but the executors may otherwise make a demand for immediate repayment, a shock to those owing.

It is fairly common for parents to make loans to their children, for example to buy a property, but these could be repayable on death unless the terms are documented properly and/or the loan is waived by the Will or a deed of release. The parents might want to waive part of the loan and interest each year up to the amount of their available annual inheritance tax exemption, so as to ensure that the full amount of the loan is not subject to inheritance tax on their death, but this should also be documented in a deed.

The executors will need to make reasonable enquires to find the debtor and could consider formal legal action against them, as in the Hambledens’ case, if they fail to repay the estate. Where a debtor refuses to pay, the executors have two options. They could serve a statutory demand and pursue bankruptcy proceedings against the debtor; but if the loan was not secured against an asset, the executors would be an unsecured creditor and rank behind the secured creditors when repayments are made. The alternative is to commence default or summary judgment proceedings in the county court, which can give the executors a choice of enforcement and more control.

It remains to be seen what, if any, further legal action is taken by the 5th Viscount against his stepmother to recover the outstanding debts owed to him, but the dispute is a stark reminder of the legal issues that can arise, and the importance of documenting the loan at the beginning so everyone is singing from the same hymn sheet (or ABBA track). And in the case of the 5th Viscount, Mamma Mia! is clearly not top of his list.

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Caroline Cook is a Senior Associate, Wedlake Bell LLP

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