I am hoping for a bit of advice on dealing with an estate where grossing up is to be carried out.
The Will specifies that legacies totalling £800k are left free of tax to a number of non-exempt beneficiaries, £750k of legacies free of tax are to be left to a number of charities and the residue to further charities. There was also a PET of £15k that failed.
I have calculated the IHT using HMRC’s grossing up calculator, but I am not 100% sure who bears the IHT liability. Does it come from the estate after legacies have been paid, in which case the residuary charities end up having their legacies reduced by the IHT payable and the non-exempt and exempt legacies are paid in full?
Does the failed PET affect matters?
Many thanks for your help
The IHT on the grossed up legacies is payable out of residue generally, so is payable proportionately by the exempt and non-exempt residuary beneficiaries.
The IHT on the residuary gifts is payable proportionately between the no –exempt residuary beneficiaries.
By way of example, if £1,000 IHT is payable on the grossed up gifts, and residue given 50% to a charity and 25% each to 2 non-exempt individuals. The charity would pay £500 of the IHT on the grossed up legacies, and the individuals would pay £250 each.
If the IHT on residue is, say, £2,000, this would be wholly payable proportionately by the non-exempt residuary beneficiaries – the 2 individuals.
I summary, the charity would pay £500 IHT (being its share of the IHT on the grossed up legacies) and the individuals would pay £2,500 IHT between them (£1,250 each), being their share of the IHT on the grossed up legacies, plus the IHT on their shares of residue.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Whilst I agree with your summary of the position, I do not think this helps Claire on the facts of her case.
Here we seem to have chargeable legacies of £800K, exempt legacies of £750K and residue passing to “further charities”, so the only tax payable is calculated on the grossed-up taxable element of the chargeable legacies. That tax is payable out of the residuary estate, in other words is payable before distributable residue is determined, which is why the residuary beneficiaries cannot claim charitable exemption.
The failed PET simply reduces the amount of Nil Rate Band(s) available, but otherwise does not affect the calculation.
You may wish to consider how this will appear in your final Estate Accounts. Depending on your style of course, but if IHT is shown as a deduction in Estate or Capital accounts it may be necessary to add the tax back in the Distribution account and then allocate it between beneficiaries [perhaps more relevant to the general situation referenced by Paul].
The PET has no direct bearing the calculation.
The residue is only ascertainable once the IHT on the estate has been calculated.
IHT is calculated on the legacies to the non-exempt beneficiaries which, on the wording of the will, require “grossing-up”. The effects is that the residue bears the IHT so calculated. Which, means that the residuary beneficiaries receive less than perhaps anticipated.
Thanks so much for your help Kevin.