Contingent Legacies

In the case of a contingent pecuniary legacy which does not carry intermediate income, what is the status of the fund until the contingency is met? Will the residuary beneficiary have an IPDI since the income must pass into the residue? If so, am I correct that:

  • If the trustees wish to advance funds to the legatee under s,32, the residuary beneficiary must consent (effectively surrender their IIP) as a person with a ‘prior interest’.
  • If the residuary beneficiary dies before the contingency is met, or within seven years thereafter, the fund will aggregate with their estate for IHT, potentially resulting in a shortfall in the legacy fund when it comes time for the executors to pay the legatee.

Some textbooks suggest that this is not an IPDI situation, but simply a relevant property trust.

Tobias Gleed-Owen
Hewitsons LLP

The residuary beneficiary(s) is entitled to the residuary estate, which is subject to payment of the fixed sum to the contingent beneficiary as a future (specified) date.

My understanding is that the residuary beneficiary’s entitlement is absolute, so that there is a bare trust subject to a liability, and any income or capital gains arising are theirs and reportable on their personal tax returns.

If the residuary beneficiary dies before the contingent legacy vests, the funds held are an asset of their estate (not merely a fund that aggregates with the estate) and their personal representatives should claim a reduction for the amount payable in relation to the contingent legacy. HMRC might seek to discount the liability in view of the length of time before payment, and the potential for the contingent beneficiary to fail to fulfil the contingency. The IHT is payable out of the residuary legatee’s estate and not specifically out of the fund retained by the executors.

Paul Saunders