Badly Drafted Charitable Gift in a Will - help!

Trusts Discussion
1

A testator intended to leave 10% of her net estate to charity to benefit from reduced rate IHT. The will was drafted to include the following clause:-

“I give 10% of my estate (before the payment of legacies) to my Trustee upon trust for such charitable object… and I DECLARE that if inheritance tax is payable in respect of my estate the above percentage share is to apply to the net value of my residuary estate after the payment of inheritance tax and shall be appropriately adjusted to achieve this result.”

This is an estate of approximately £1.3 million with a full NRB and no RNRB. There are further 19 pecuniary legacies ‘free of tax’ totaling £912,000.

The first part of the clause is straight forward - although there will be insufficient funds to pay the legatees in full.

The second part of the clause complicates matters. 10% after the payment of inheritance tax will not satisfy requirements for reduced IHT. In addition, the charitable gift will have suffered IHT.

The will writer has offered to do a deed of variation to remove the second part of the charitable gift clause; however, all pecuniary legatees will have to agree as it will change their abated gifts.

Any advice on how best to proceed would be greatly appreciated - in particularly, the legacies will have to suffer the tax as there will be no residue - does this mean the tax will have to be apportioned between them?

Sarah Walker
Goodswens

2

If I have understood the last line correctly – that there can be no residue to which the second limb of the gift can apply, it is redundant.

The question then is whether the clause is effective to negate the first limb of the gift – the 10% entitlement to the net estate. It is not an “either or” gift and so, if IHT is payable, I believe the first limb is effectively negated, regardless of whether there is any residue in which the charity might share.

As regards the other legacies, on the basis that the full NRB is available, the grossed up value of £912k I calculate to be £1.303 million, so pretty close to the value of the estate. Depending on the value shifts in the assets, there could be a notional residue, although this could well be absorbed in administration costs, etc. However, where gifs are grossed up, the IHT is treated as a general legacy and abates accordingly. On the basis the 19 legacies are all general legacies, they will all abate by the same proportion. If, after payment of IHT and the costs and expenses of administering the estate, there is, say £890k available for distribution, each legatee will receive 890/912 of the amount specified in the will (i.e. 97.5877%).

Paul Saunders