We have a client who has three properties and not insubstantial cash assets. He has no children and is a divorcee hence only his £325,000 allowance available.
He wishes to gift the properties to three separate non exempt beneficiaries and the residue to bear the IHT. Two of the properties are subject to mortgage but he wishes the gifts to be stated as ‘free of mortgage’.
If there is insufficient residue to discharge debts and IHT, how would the mortgage liabilities and IHT be apportioned between the three properties?
The gifts will abate proportionate to their values-best to ask whether he is happy with that or would prefer to include a clause specifying the order of priority for abatement.
As IHT is a testamentary expense (s.211 IHTA 1984), all gifts are “free of tax” unless stated otherwise.
I understand that freeing a property of the mortgage debt is a general legacy, whereas the property gifts will each be a specific devise.
Accordingly, when ascertaining the extent of any abatement, it will be necessary to look separately at the gifts of property and of the mortgage debts.
To the extent that residue is insufficient to satisfy all liabilities of the estate, the gifts of the mortgages will abate rateably, and the gifts of the properties will abate only if there is still a cash deficiency in the estate once the gifts of the mortgages have abated in full.