I am dealing with an estate where Ms A died in 2016. Her niece and nephew are the executors and residuary beneficiaries of her estate.
Ms A was the life tenant of trusts established in her parents’ Wills over their house (which was the sole asset of their estates). The Wills provide for Ms A’s life interest to come to an end upon her death and for the trust property to fall into their residuary estate. Ms A’s parents died in 1989 and 1991 respectively.
Their residuary estates are left to Ms A and her brother (Mr B) in equal shares if they shall both be living at their parents’ deaths. Mr B died in 2007 but was alive when both of his parents died.
We have taken counsel’s advice, who confirmed that the residuary estate will pass 1/2 into Ms A’s estate and the other 1/2 into Mr B’s estate.
Mr B died intestate and no Grant of Representation to his estate has been obtained. The executors of Ms A’s estate (niece and nephew) are the only children of Mr B’s first marriage. However, Mr B married a second time and his second wife is still alive (Mrs B).
We know Mrs B will receive the statutory legacy and interest on this sum; however we would like to clarify how we calculate the interest.
Technically the legislation provides for interest at 6% from the date of Mr B’s death up to the date that the statutory legacy is paid to Mrs B. But this does seems like it will unfairly benefit Mrs B.
We think that there is an argument that the interest should run from the date of Ms A’s death – which is when her life interest came to an end and Mr B’s interest as one of the remaindermen of his parents’ estates crystallised.
The current interest rate on statutory legacies is Bank of England base rate (1% when Ms A died and only 0.25% at the moment) and again it does unfair to us to calculate the interest at 6% given current interest rates.
Has anyone had a similar situation, or can anyone give me any guidance or thoughts on how to calculate the interest?
A grant de bonis non will be needed for Mr B’s estate, and a valuation obtained of the solely owned assets in his estate at that time. This will include any assets which were in his sole name, and were perhaps encashed without the need for a grant. Add to this the proceeds of half the house, and the widow will get her £250,000 plus interest from the date of B’s death, with a life interest in half the remainder, but there must be deducted any assets she took at the time of his death.
At B’s death the asset in the trust was a reversionary interest with a value. If that had been sold then, the widow would have got her £250,000 then. As it is she has been out of pocket since 2007, so it is fair she gets her interest now, although 6% is a pretty generous return!
Interestingly, it looks as though Ms A owned half the house absolutely with effect from her parents’ death and it was only Mr B’s half that was a trust asset.
Mrs B has had to wait to receive the statutory legacy since 2007 so she is definitely entitled to interest.
The statutory legacy and interest is likely to use up all of the 1/2 sale proceeds passing through Mr B’s estate and leaving nothing to pass to his children/life interest trust - so we did want to check how to calculate the interest carefully because of this.
Apologies if I have made incorrect assumptions but we have not been told the value of the residential property in question and whether or not a half share exceeds the 250k potentially due to Mr B’s widow, although it sounds as though it was considerably less if, as suggested, estimated interest will exceed half the proceeds. If so then the widow might not get the whole 250k in any case?
However, a reversionary interest of the half share valued in 2007 would be fairly low by comparison with the eventual proceeds and may well be considerably below 250k. The widow would not have got 250k for the reversionary interest in 2007 but rather a greatly discounted figure based on the time value of money, life expectancies and other actuarial considerations. This lower value would presumably be the figure on which any interest should be calculated - not the eventual proceeds?
Also, if as suggested, the other half share was already Ms A’s absolutely and not in trust, then surely half the proceeds are not available to be taken into account in any calculations and would pass directly to the nephew and niece (net of any IHT and Estate admin expenses).
Maxine Higgins
Citroen Wells
The statutory legacy in 2007 was £125,000 and only increased to £250K for
deaths on or after 1 Feb 2009, in case this affects your sums. Obviously,
the spouse was also entitled to the personal chattels and a life interest
in any residue.
The statutory legacy was £125,000 at the time that Mr B died.
Half of the value of the house is slightly more than £125,000, the key question really is how to calculate the interest on the statutory legacy.
Should it be calculated at 6% from the date of Mr B’s death (in which case the statutory legacy + interest is more than the half share of the house).
OR interest at 6% from the date of Ms A’s death (again, would mean that the stat legacy and interest still exceeds the half share).
OR is there an argument that it should be the current interest rate (Bank of England base rate). In which case the interest would be considerably less and there would be a remaining balance to be held on a life interest/divided between nephew and niece.
As the intestate death was before 1.10.14 the rate is 6% and the widow is entitled to interest from the intestate death on the statutory legacy. The value of the estate at the date of death of the intestate is irrelevant. It is the value at the date of distribution that determines if there is enough to pay this priority legacy, just as it would have been if it had been a pecuniary legacy in a Will
I believe that interest on a statutory legacy, as with a general legacy, is deemed to be paid before the corpus of the legacy, so that the legacy itself will not be payable until all the accrued interest has been paid. Interest will continue to accrue on any unpaid element of the corpus of the legacy.
Furthermore, even if the interest is paid out of taxed income, as with a general legacy it is deemed to be paid without the deduction of tax and, therefore, subject to income tax in the recipient’s hands.
With regard to the rate of interest, whilst I note the various references to the 6% rate, I recall that a couple of years ago there was a long thread on the TDF, at the end of which it was concluded the applicable rate had been varied and was much lower, being linked to the rates paid by the Court Funds Office. Whilst I have been able to trace that thread, others might recall and, perhaps, be able to access it.
I question whether Paul Saunders’ post is compatible with the tax case of Dewar v CIR [1935] 2 KB 351- the ratio of which appears to be that a payment has to appropriated by either the payer (or in default, by the payee) as interest before it can be recognised as such
If I have correctly understood Tim Gibbons’ observation, where the question is covered in the text books, the case of Re Morley’s Estates, Hollenden v. Morley [1937] 3 All ER 204 is normally cited in support of the general principle that distributions are treated as being appropriated first to the interest accrued at the date of distribution and then, to the extent of any balance, to the principal amount of the legacy. So far as I am aware, HMRC will raise assessments reflecting this principle.
The court funds office rate applies to late paid pecuniary legacies. 6% applies to the statutory legacy for deaths between 1.10.83 ad 1.10.14-as applies in this case.
If the estate is less than the statutory legacy, the spouse receives it all. I would have assumed in the hands of the spouse this is all capital, as there was not enough also to pay interest.
If the estate is more than the statutory legacy, but less than the legacy plus interest, as in this case, I would have said £125,000 is capital and the rest is interest.
I do not see how hmrc can say part of what I would treat as capital in either example is interest. How do you calculate it if it is? You cannot say in the first example she should have interest on £125,000 as a prior sum, if there was not £125,000 in the estate-it does not make sense, does it?