Can anyone offer an opinion on the scenario below please?
I have an estate where the will leaves a nil rate band legacy to children and the residue to charities. There is insufficient cash to settle the legacy and so part of the net proceeds of sale will be needed.
My understanding of the position is that even though part of the property will be used to settle the legacy to qualifying beneficiaries, the estate will not benefit from the RNRB because the residence is not specifically left to a direct descendent.
No, the residence nil rate allowance is not available to the estate in these circumstances.
However, even if it were, would it have any effect?
Unless the definition of the nil rate sum passing to the children was such as to include the residence nil rate allowance, the children’s entitlement would be limited to the deceased’s nil rate band. The question is not dissimilar to that of whether such a legacy would be uplifted by reference to any available transferable NRB.
The NRB legacy of 325k is IHT exempt. Gifts to charities are IHT exempt.
As the children are not inheriting the property, and the rest of the bequest is to charity why is there a question of the RNRB.
Unless I have missed the point of the question - or are you saying that the beneficiaries also inherit something in excess of the NRB?
Assuming the children and the charities are the only beneficiaries of the estate, the deceased’s NRB is available then since the children are only given a legacy amounting to the NRB, surely there is no IHT to pay and therefore use of the RNRB is unnecessary.
I am not sure it is correct that the property must be specifically left to direct descendants. If that were so, very few estates would qualify for the relief because in the past wills have not normally been drafted in terms of leaving a property as a specific
devise. Usually there are legacies payable out of the estate as a whole and gifts of residue.
I would claim the RNRB if on the facts sufficient of the value in the property must be used to satisfy the childrens’ legacies.
The position would be more uncertain if there were in fact sufficient other realisable assets to pay the legacies but even then it does not see to follow that the property must be allocated to residue. If half of the estate goes to children as legacies, that
half arguable includes half the property.
I had a Will made in 2004 under which the son was left a legacy the value of which equals the maximum amount which could be given to him without inheritance tax or other duty being payable. The residue of the estate is left to charity so no IHT payable.
The gross value of the estate is just over £1 million of which £500,000 relates to the deceased’s former residence.
My question was whether the RNRB could be used in calculating the value of the legacy and I have yet to see anything that has convinced me that it should. s8J IHTA refers to B inheriting where there is a disposition of the property to B. In a situation where the legacy is of an amount calculated by reference to available NRB’s isn’t this just a pecuniary legacy? Even if the executors have no other choice than to use part of the property to meet that legacy I do not see it as falling within s8J.
Where in these cases the residue is left to charities I can’t see HMRC getting involved because there is no tax at stake but it is important from the point of view of making sure the estate is correctly allocated between the legatee and the charity.
Just to add to the discussion I have a similar case in which we have a very widely worded gift of the maximum amount available free of IHT to deceased son with Residue to Charity. The whole intention behind the Will was to get the maximum possible to the son and only if there was anything left over would the Charity benefit. At the time the Will was drafted this would simply have covered two nil rate bands, which would probably have covered the entire estate. However with property inflation the value of the estate is now around ÂŁ800,000. Our belief is that the Residence Nil Rate band can be claimed and therefore that the entire estate passes to the son. We have been in contact with the Charity who seem to accept this interpretation.
What I think might have been interesting is what would have happened had the value of the estate exceeded the total of 2 Nil Rate Bands and 2 RNBRs? While I have not fully examined this my instinct is to think that in those circumstances the RNBR might have been restricted because we no longer have the entire estate passing to a direct descendant.
Whilst I can see merit of Malcolm’s observations, unless the property is gifted elsewhere it forms part of the residuary estate and the residence nil rate allowance will be available if residue includes qualifying beneficiaries.
Even if legacies can only be satisfied if there is recourse to the proceeds of sale of the property, I do not believe the allowance is available.
Perhaps there might be a case for a deed of variation converting general cash legacies to qualifying beneficiaries into cash payments specifically charged on/payable out of the proceeds of the property?
Malcolm Gunn is I believe correct in stating that “I am not sure it is correct that the property must be specifically left to direct descendants” as the RNRB applies if the property is inherited as part of the deceased’s residuary estate.
However, the property must be “closely inherited” ie the property must pass under a will or intestacy to the deceased’s lineal descendants; more specifically, X inherits the property if there is a disposition of it (whether effected by will, etc) to X [IHTA 1984 s.8J]. In the current situation is it not the case that there has been no disposition of the property to the children? Any appropriation of the property will still not cause a disposition to occur.
With regard to Nigel’s closing observation, does not the residence nil
rate allowance, or any transferable NRB, need to be claimed?
If an executor uplifts the value of an NRB gift to non-exempt
beneficiaries by reference to the residence allowance or transferable
NRB without involving HMRC, do they not create an IHT liability. Without
appropriate disclosure to HMRC, this could come back to bite them.
I am sorry Anthony but as per my previous post I do not believe the position you have come to is correct even if the Charity has accepted it. Clearly both NRB’s will be available to calculate the legacy but the RNRB has a qualifying condition that I do not believe has been met which is that the son “inherits” the property from parent. As I see it the son has an entitlement to a sum of money as a legacy and it is the executors who have to meet that legacy from whatever assets are available. I appreciate in your situation the property may make up the bulk of the estate so in effect it meets the legacy but I do not think that is the same as either a specific legacy of the property to the son or a share in residue.
Taking this a step further, what if there was significant cash assets in the estate which could meet the legacy without recourse to the property. Surely we cannot be in a position where if the executors use the cash for the legacy and pass the property to the charity no RNRB’s are available but if they use the property to settle the legacy and pass the cash to charity they would be?
Just picking up on Paul’s point and to clarify my earlier post in which I said that HMRC would not be interested I was not suggesting that the allowances should not be claimed if they are due but rather I was commenting that HMRC will not get involved in the does the RNRB apply question as either way there is no tax at stake.
This has been an informative thread, and I found Malcolm Gunn’s suggestion interesting.
Consider an estate comprising only a house worth ÂŁ450,000 and cash of ÂŁ50,000.
Scenario 1-
The deceased leaves a legacy of £450,000 to his son, and the residue to the deceased’s brother. Malcolm’s argument is, I believe, that £400,000 value from the property must be paid to the son, so RNRB must be available.
Scenario 2-
The deceased leaves a legacy of £450,000 to his brother, and the residue to the deceased’s son. It seems highly improbable that HMRC would accept the availability of full RNRB on the basis that the house passes to the son as part of residue. The residue would only be £50,000, so only that amount of RNRB could be claimed. The remainder of the house must be used to pay the legacy to the brother.
The arguments appear equivalent. Of course, this is all based on valuation and a scheme of division at date of death, but that underlies the whole basis of inheritance tax on death.
To clarify my earlier posting, I do not know the view of HMRC on the scenario where the deceased’s home must on the facts be applied to satisfy legacies to children - the Manual is unclear save that an appropriation of a property to children will not be taken
into account. So it was no more than an arguable point. I can see the force of the argument that a cash legacy is not a gift of the property but then HMRC acknowledge that the RNRB is given even where a property is sold to satisfy entitlements under a will.
There will undoubtedly be many cases where the deceased has used available resources to fund care and is just left with a property in the estate. They will have left legacies to children to ensure that they are provided for primarily out of the estate and will
not appreciate that it is best to redraft the will to cater this change in the law.