Interest on a Statutory Legacy (Intestacy)

Trusts Discussion
1

We have been dealing with an intervention matter which has included obtaining compensation from the SRA. We did not administer the estate or arrange the distributions.

The deceased died in September 2005 and there was a lengthy delay settling the widow’s £125,000 Statutory Legacy. An interim payment of £19,000 was made in May 2006, the ‘final’ payment of £106,000 was made in January 2014. One reason for the delay was looking into development potential for land/property the deceased owned. The problem which has arisen is the interest on this Stat Legacy, which, for the period in question, was 6% from the date of death.

We arrived at a 5 figure sum of outstanding interest calculated on a simple interest basis at 6%, taking into account the two payment dates. Initially the interest was calculated as accruing to the final payment date, which we initially believed would be an additional ‘one off’ payment due to the widow. However, we now understand that the above payments should possibly have been apportioned between interest and capital e.g. £19,000 would have been approx. £14,000 capital and £5,000 interest etc. As such, there is, in effect, still a sizeable capital sum due with interest still accruing.

My questions are:

a) Are we correct in respect of the capital/income apportionment?

b) if so, can anyone point me in the right direction for some definitive reading/reference material as we have been unable to locate anything despite trying numerous sources

c) is there a limitation for the widow to claim the interest? Probably a long-shot, but worth asking. You will probably not be too surprised to hear the widow and the step-son do not get on so an agreement is unlikely.

We are considering instructing a Barrister (probably will), but I’d very much appreciate any insight members may have.

Final point on this cautionary tale; it seems to me if there are to be any delays settling the Stat Legacy, full explanation of the interest must be given to all parties in the estate. Admittedly the interest rates in place now are far less severe, but still should be considered.

Karl Taylor
Parker Rhodes Hickmotts

2

a) Yes – where a payment is made on account of a legacy, it wil first be applied I the discharge of any interest outstanding, before being applied to reduce the balance of the legacy remaining unpaid.

b) Re Morley’s Estate, Holldenden v. Morley [1937] 3 All ER 204

c) I believe there is no limitation on the payment of interest, although am unable to point to any specific authority. Certainly, counsel’s opinions on matters where this issue has arisen in the past (usually where an intestacy arises on the death of the surviving spouse) have been consistent in referring to interest being payable back to the date of the original death

The interest is payable out of capital without the deduction of tax, but is a taxable receipt in the recipient’s hands (another example of double taxation).

At the risk of rekindling previous discussions of the forum, I recall interest on the statutory legacy is payable at the same rate as on a judgment debt, so, from the step-son’s viewpoint, it may still be somewhat “penal”.

Paul Saunders

3

I agree with everything Paul says, except why is the interest paid out of capital? Is it not an income payment, and deductible on the R185 as such? This is relevant in one matter I have where it was due to a life tenant
who died before it was paid. Should this not be a deduction from the income account at her death, rather than be a deduction for iht from capital?

Simon Northcott

4

I have looked in
Mellows taxation for executors and trusts, who confirms that:

** If
the income of the estate is insufficient to meet the** interest**
due to the surviving spouse or civil partner, capital will have to be used for this purpose**

He also confirms that interest on general legacies is also payable from income. However I have also reminded myself that this
interest is not deductible on the R185.

Therefore in my case it appears that the estate of the life tenant of the statutory trust will be due interest on the statutory
legacy at her death, a debt due to her on which she will pay iht, and once paid income tax will be due on it (I think there may be income tax relief against the iht due on the accrued interest), and half the interest will come from income she would have received
as life tenant of half of the residue (so no double iht on that as it is paid from her income), but that interest will not be deductible for higher rate income tax purposes in relation to the estate/trust income.

Simon Northcott

1 Like
5

Whilst I’ve not been able to trace the notes which underpin my understanding that the interest is payable out of capital, so cannot respond to Simon on this aspect. However, if he is corrcect certainly any shortfall in the income account would need to be made up out of capital.

With regard to Simon’s comment that interest is not deductible for income tax purposes, I note that HMRC allowed it as a valid deduction under s.697(1) ICTA 1988 (which practice was also extended to interest on legacies payable out of a trust fund after the death of a life tenant). It seems to me that s.666(2) Income Tax (Trading and Other Income) Act 2005 effectively replicates that provision, so that the interest paid on any legacy (provided that it is charged against the residuary estate) should reduce the income vouched to a beneficiary under Part 5, Chapter 6, ITTOIA 2005.

Paul Saunders

6

Thanks Paul, that is good to know.

Simon Northcott

7

Thanks for your replies. The income generated was way off the accrued interest on the Stat Legacy. The firm that was acting made an interim distribution on account of the son’s residuary share. As things stand, though only due to the SRA compensation, there is enough money to settle the outstanding stat legacy (cap/income).

Karl Taylor
Parker Rhodes Hickmotts