I am dealing with a poorly thought out Will for an estate worth £800,000 (only £325,000 in NRB available), and it has raised uncertainty about where burden of IHT will fall, and the particular calculation. The key terms of the Will are paraphrased as follows (values in Italics are not in the text, I included them to give a better understanding of the problem in terms of IHT):
I give my residence Blackacre [value £500,000] to my friend “A” free of inheritance tax:
Residue [total value £300,000]: [standard definition of worldwide estate, obligations to collect, pay all taxes, admin and testamentary expenses] then:
My trustees shall hold my Residuary Estate as follows:
Money in my in my French bank account FrancBanc [value £100,000] to go to my friends B, C, and D in equal shares “after payment of tax as is liable.”
‘Distribution of residual funds held in the UK:’ with 70% going to UK charities, 30% going to taxable beneficiaries E, F and G.
I know a couple of things, such as that we will need to go through a grossing up exercise for the tax-free gift of the residence.
Where I am in two minds, however, is whether:
A. Treat the gift of the French bank account as part of the residue (by converting the value of the bank balance into a percentage of the value of all the assets apart from the residence already gifted) - this seems to make sense in that it is placed within the residuary clause, but goes against the explicit wording of the gift (which looks more like a specific legacy). This results in the French beneficiaries B, C and D receiving less because not only is the French account bearing the burden of its own IHT, but it also shares a burden of the IHT on the ‘tax-free’ residence with the rest of the residuary estate.
OR
B. Ignore the fact that the gift of the French bank account is within a section purportedly dealing with the residuary estate, and treat it as a specific gift of the bank account subject to its own share of tax. This results in French beneficiaries getting more (ignore the question of French tax for now), and UK beneficiaries (both charity and non-charity) getting less.
I’ve put both scenarios into the grossing up calculator and the overall difference in tax payable to HMRC is around £12,000 more under option B, but the amount going to the charities falling by around £30,000.
The key question is whether interpretation A or B as set out above is the better way of interpreting the Will? When is a gift of a portion of residue actually a specific gift???
We have to rely on the disclosed extracts from the Will. But from this snapshot the gift seems to be one of residue although partially restricted to a defined source comprised in it.
IHT, as you say grossed up because of the specific gift made expressly free of tax, will fall on residue as a whole. I suggest that the apparent carve-out is an indication by the testator that there should be a preferential share of NET residue so far as is possible, being the contents of the French bank account or if less the entire net residue.
We have to rely on the disclosed extracts from the Will. But from this snapshot the gift seems to be one of residue although partially restricted to a defined source comprised in it.
IHT, as you say grossed up because of the specific gift made expressly free of tax, will fall on residue as a whole. I suggest that the apparent carve-out is an indication by the testator that there should be a preferential share of NET residue so far as is possible, being the contents of the French bank account or if less the entire net residue.
I’m inclined to agree that it should be treated as part of residue (otherwise why put it in that section) - what I refer to as option A, but I cannot see any justification, once it is treated as part of residue, for it not to bear the same proportional burden of the total tax as the other non-exempt beneficiaries.
From my calculations the difference in approach is the French bank account suffering an effective tax rate of 52% under option A, or 20.3% under option B, or about a £30k difference, so French beneficiaries will obviously not be happy with that interpretation (although the charities will like it)!
To my mind, the staring point is to ascertain the testator’s intentions.
If the will was professionally drafted - request the will-drafter’s file. It might be that the will fails to reflect the testator’s intentions and may be subject to rectification.
Alternatively, after having seen the will file Chancery counsel might opine as to the most appropriate interpretation to be placed on the actual wording of the will.
If the will is home-made, so that there is nothing else available from which to glean the testator’s intentions, it might be preferable to share the options with the beneficiaries of the French account and the (remainder of) residue to try and reach a common understanding.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Definitely a sensible idea, although it looks like it was home-made (no mention of any firm). Testator must have used some template because the amateurish drafting is visible in the structure, not so much the individual clauses.
Hopefully a more or less amicable agreement can be reached between the French beneficiaries and the charities (these two categories see the most drastic changes in fortune depending on which option is selected) - the difference of £30k is enough for people to care about, but not so much as to justify legal proceedings!