I have a Will drafted and entered for probate where the residue is divided into four equal parts, three to charities and one to a family member. The total estate is approx £650,000 which means that the non-charitable part of the estate is £162,500 and below the IHT threshold.
The Will is silent on the settlement of IHT, however am I correct in thinking that because the residue to the family member is below the IHT threshold and no IHT payable the family member is entitled to a full 1/4 share of the estate.
The family member is entitled to a quarter share of residue which, as the other three-quarters of the estate is given to charities, will bear any IHT liability in relation to that share.
As the estate is within the IHT nil rate band and no IHT is payable, the result is that the family member is entitled to receive the equivalent of one-third of what the charities receive, i.e. a quarter share of the distributable estate.
If any legacies had been payable, the IHT on those would be shared between the residuary beneficiaries in proportion to their entitlement.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I think Paul is (of course) correct in his interpretation, but the question seemed to suggest that the element believed to be within the NRB was the 1/4 going to the non-exempt beneficiary and that the issue of IHT was otherwise relevant. You say the estate is about £650K. If we assume that it is the right side of that number and that there was a full transferable NRB and no failed PETs et cetera to reduce the NRB available to the estate, then IHT will not be payable. If however, IHT is payable on the estate as a whole then grossing up becomes relevant as the residue is divided between exempt and non-exempt beneficiaries and you can’t just do a 1/4 split as proposed.
If the estate is £650,000 and three-quarters is given to charities, charity relief applies to three-quarters of the estate, making that proportion exempt from IHT. That leaves a quarter of the estate - £162,500 - subject to IHT. As no IHT is payable (according to the original post) the family member is entitled to a full 1/4 share of the estate (as anticipated by Colin Wells).
If, say, the estate had amounted to £2 million, the same principles would apply – charity relief would exempt three-quarters of the estate, leaving as taxable the one-quarter given to the family member, who would receive that less any IHT payable (depending upon whether there was any TNRB, RNRB or TRNRB available in addition to the deceased’s own NRB).
Unless there were legacies payable before residue to non-exempt persons, there would be no need for any grossing up.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I completely agree with Paul if the estate is non-taxable, but imagining for a moment that it is subject to tax (let’s say the estate is worth £4m so the 1/4 share is over the combined NRB), then surely we are in Re Benham v Re Ratcliffe territory? We are told that the Will is silent on tax, but in some way the decision will have to be taken as to which calculation to apply and if the answer were to be the Re Benham division after tax, then grossing up would be required of the non-exempt beneficiary’s share (which often leads to more IHT and a smaller amount to the charities).
If it is a Re Ratcliffe situation then yes, there is no grossing up and the charities get their 75% tax free regardless of the size of the estate, but the burden of IHT is on the non-exempt beneficiary and overall when looking at the net estate, the charities will have a bigger % of the net estate and the non exempt beneficiary will have a smaller % of the net estate than that set out in the Will.
In regard to the point about legacies, then, yes, that complicates things if a non-exempt beneficiary is a legatee as their legacy would need to be grossed up to satisfy s42 IHTA84.
Certainly in most cases grossing up won’t be necessary as re Ratcliffe will normally apply if nothing else is stated to the contrary (which is the case in this Will, so far as we know), but I suppose the take-away is that the wording of the Will must be checked in each case because you cannot assume the outcome and I was exploring the possibilities rather than replying to Colin specifically!