Statutory interest

I am dealing with the administration of an estate, where the Will includes a gift of, “the largest sum of cash which could be given…without any inheritance tax becoming due…”.

The nil rate band at the date of death was £300,000 and the estate is still in administration 10 years after the date of death. The estate also includes some shares which qualified for 100% BPR, so I am satisfied that both the £300,000 and the shares need to be transferred to the trustees. In reality though they will receive the shares and an IOU from the deceased’s spouse for £300,000.

I am unsure whether or not the PR’s also need to make a payment of statutory interest to the trustees in respect of late payment of the legacy and if so, whether or not interest is payable by the estate on, a) the IOU for £300,000, b) the value of the shares, c) both, or d) neither.

My understanding is that statutory interest is only payable on pecuniary legacies that are general legacies, i.e. where the Will does not specify a fund from which the legacy should be paid, but I cannot seem to find the answer to this particular scenario anywhere!

Any pointers would be gratefully received! Thank you.

Anna Howat
Chattertons Solicitors

Yes, the trustees are entitled to interest on the legacy once the executor’s year has expired.

Any payment in satisfaction/part satisfaction of the legacy is first applied to discharge the interest, before reducing the outstanding balance of the legacy.

If the gift is of “the largest sum of cash”, I question why the BPR shares are being included within the gift as, unless the testator has created their own definition of “cash” to include such shares, they are not “cash”.

If the executors accept an IOU from the residuary beneficiary and assent that to the trustees, then the question arises as to the value of that IOU as at the date of appropriation. If it carries no right to interest or appreciation then, provided the IOU satisfies the legacy in full, there is no further interest due. However, can such an IOU realistically be valued at par, even if repayable on demand? In the current climate, where banks pay 0.05% annual interest on deposit accounts, it could be argued that the potential level of discount is so low it can effectively be ignored, but that leaves open the question of interest rates when the IOU was appropriated to the trustees.

Paul Saunders

It is not as simple as that. You have to calculate the proportion of the estate which is non relief property and gross up the nil rate band figure to give the value that applies to the formula. So if half the estate is bpr, the sum passing under the formula will be £600,000. The statutory interest applies to that figure and you then appropriate assets worth that at current values to satisfy the legacy.

Simon Northcott

On the point about putting the shares in the trust, unfortunately BPR does not work well with bequests on nil rate band trusts.

The gift to the trust is a cash legacy and not a gift of business property. In such circumstances s 38 IHTA 1984 effectively spreads the BPR over all bequests/legacies under the will, except only where there is a specific bequest of business property - any such bequest does benefit exclusively from the BPR on the asset given. There is an example at para 7.7 of Tolleys Inheritance Tax. The calculation can become mind boggling if there is also partly exempt residue. The fact that the executors choose to appropriate to the nil rate band trust a business asset in satisfaction of the sum due does not alter the IHT calculation under s 38. You might be able to improve the IHT results with a deed of variation.

Malcolm Gunn

M B Gunn & Co Ltd