I am dealing with an estate where wording has been included in the Will which causes me to question whether it is a Re Benham type calculation. The residuary estate is a mixture of exempt/non-exempt beneficiaries receiving varying shares and the estate is taxable. The wording is as follows:
“I am aware that this clause includes according to their identity beneficiaries who will both be exempt and non exempt from Inheritance Tax and I declare that that if Inheritance Tax is payable in respect of my residuary estate the above percentage shares are to apply to the net value of my residuary estate after the payment of Inheritance Tax and shall be appropriately adjusted to achieve this result.”
When I read the clause I thought it was a Re Benham scenario, due to the percentage shares being calculated after the payment of tax. Does this appear correct or does anyone have a different view?
It’s not the best wording in the world, but I agree that the intention appears to be that each beneficiary receives the same net amount in the (presumably) percentages outlined.
Thanks. I thought so too. I don’t like the drafting but that appears to be the effect of the wording to me. The client has calculated tax himself using Re Ratcliffe default method and HMRC has issued a clearance certificate to him. However, based on the wording of this clause, I think more IHT should have been paid by grossing up the non-exempt shares. DofV is probably the best way out of this potential risk!
It was a formal certificate requested using an IHT30 form. I don’t know whether this now prohibits HMRC from requesting the additional IHT of the Re Benham calculation. I assume they have overlooked the clause in the Will, but I would be surprised if this leaves HMRC in a position where they could not pursue the additional tax.
Notwithstanding this there is still the risk to my client that HMRC may pick this up in the future (which I doubt), or based on my advice the client is now obligated to report it to HMRC? Also the chargeable beneficiaries may pursue him for incorrectly calculating their shares based on the terms of the Will. In the light of all this, even with formal certificate issued, a deed of variation appears to be the best way forward?
Thinking this trough a bit more, the client has placed you in a difficult position.
As you know the tax has not been properly declared and paid, if your professional body has signed up to the PCRT, you cannot turn a blind eye.
However, having distributed on the “Radcliffe” basis when the “Benham” basis applies, to correct the situation the client either needs to call money back from beneficiaries (the charities) or persuade all of the beneficiaries to enter into a variation to change the distribution basis. The non-exempt beneficiaries will benefit if the Benham basis applies and not all of them may be amenable to part of their entitlement had the will been correctly administered going elsewhere, albeit to “good causes”.
The “better” way forward is still likely to be by a variation, although the client will need to ensure the beneficiaries are fully informed when asking them to enter into the variation. In order to comply with s.142(3A) IHTA 1984, the charities will need to be aware of the variation, if not party to it, as they will be receiving a benefit.
There is a risk that when the variation is submitted to HMRC it will raise questions about the IHT 400 submitted showing IHT due on the “Radcliffe” basis. Whilst it may be arguable that as the IHT has already been paid in full there is no strict requirement to submit the variation to HMRC, the current clearance under s.239 IHTA 1984 will no longer be valid and the client will ned to consider applying for a fresh clearance including reference to the variation.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks for your input Paul, very helpful. The deed of variation is the way forward in this case and we will have to proceed with this. As it happens, we are close to the 10% threshold for the 36% rate of tax, so the non-exempts, all being close family members of my client, are happy to increase the legacy to the charities as part of the deed of variation (also correcting the Re Benham issue) to benefit from the lower rate of tax. I will need to send this to HMRC to reclaim the tax, and I am assuming the charities do not need to sign the deed, the loss being to the non-exempts. Clearly I will need to send evidence to HMRC of the payment of the legacy.
On the basis that s.142(3A) states that s.142 “does not apply to a variation by virtue of which any property comprised in the estate immediately before the person’s death becomes property in relation to which section 23(1) applies unless it is shown that the appropriate person has been notified of the existence of the instrument of variation”, if the charities are not party to the variation then HMRC may require sight of the correspondence with the charities (including their acknowledgement) so as to be satisfied that they have been informed of the increased amount to which they are entitled under the variation.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals