IHT and charity exemption

Trusts Discussion
1

Hi, we have the following scenario and wonder if anyone has come across this…

In brief, client leaves a will as follows:-

5 pecuniary legacies of £10,000 to 5 charities

1 pecuniary legacy of £10,000 to a friend

Specific gift of her house to her nieces.

Residue to great nephews and nieces.

The Dec’d had made £272,130 worth of gifts (to her nieces) in the seven years prior to her death, which were pulled back in to calculate the IHT.

The chargeable estate is £273,964, this figure would be adjusted by a £50,000 exemption due to five gifts to charities, of £10,000.

This leaves a total chargeable estate of £546,094 and tax payable of £88,437.60.

However, due to the specific gift of the property to named beneficiaries, the cash assets total £93,899 only. This means that once the tax is paid, there would only be a couple of thousand pounds remaining. Not enough to settle the charitable legatees and in reality the balance will be soaked up in the legal fees…

In these circumstances how would the revenue treat the matter for tax purposes? If we cannot make the pecuniary gifts then we believe we cannot claim the exemptions which would in turn increase the tax due to be paid to the revenue. Is this the correct way of dealing with it?

Any help appreciated

Natalie Sheldon
Keebles LLP

2

My first thought was that the house doesn’t necessarily have to be transferred in specie: it could be sold and the net proceeds given to the nieces as they only have a chose in action rather than an interest in the property. Of course, this could well depend on the exact wording of the will and the beneficiaries’ wishes, but selling the property could give you a ‘fighting fund’ of liquid assets to pay the IHT and pecuniary legacies. As I understand it, though, abatement may be necessary depending on the circumstances.

Eddie Bell
McMillan Williams

3

Bear in mind that IHT is charged on the estate, not the gifts. Also, that the executor is responsible for paying both the IHT and the administration expenses and so would be most unwise to part with the cash before these are fully discharged.

It looks like the statutory order of abatement will apply. The administration expenses are deductible before abatement. Depending on the wording of the specific legacy of real estate, it looks like the gift of residue abates 100% and there is precious little (if any) cash left for the pecuniary legacies, which would abate rateably.

D Holliday

4

Charity relief will only apply on the amount actually received by the charity, so if the legacies are abated, charity relief will be reduced (thus requiring a further abatement to deal with the extra tax resulting). I expect that a grossing-up calculation will be required to calculate the amount which can be paid to the legatees, leaving enough to pay the resulting tax.

Tobias Gleed-Owen
Hewitsons LLP

5

I think you need to consider the will in detail, and perhaps check the will instructions [if available, I appreciate it may not have been your firm].

In particular, are there any references to gifts being “free of tax” etc? The specific wording can change the amount of tax due.

The revenue sites offer calculators, but you do need to understand which is applicable to your case, [eg lifetime gifts (presumably after all available reductions) exempt legacies, non-exempt legacies, split of residue between exempt/non-exempt] in order for them to calculate the tax payable.

You then need to calculate the liability, ie which of the beneficiaries has to suffer the tax payment.

Good luck Natalie

Kevin Mullen

6

Forgive me for not having worked out the figures in detail, but I wonder if there is scope for bringing into play any of the following:-

  1. A deed of variation by the beneficiaries who are due to inherit the property which makes their gift subject to tax (if it is already expressed to be free of tax)
  2. The instalment option re the property. Paying the IHT on the property over 10 years and making the property subject to tax will release cashflow pressure and make the cash available to the charities.
  3. The fact that the residuary beneficiaries are (presumably) the children of the beneficiaries who inherit the property.

Taking a simplistic view, and assuming the property is worth around £180k, then the available nil rate band would be around £53k. Is the instament option were taken, then we would be looking at the NRB being apportioned as to around 2/3 to the property and 1/3 to the rest of the estate (without taking into account the charitable legacies -if those are brought into play then the apportionment may be even more in favour of the property). The availability of the charity exemption would bring the tax in the estate down to around £68k and you may have a situation then where the first instalment on the property is in the region of £5,000 to £6,000 and the tax on the cash element being around £10,000 to £12,000 ( a bit of guesswork on my part I confess).

That would mean say £50k due to Charities, £10k to friend and perhaps £15k or so in IHt - so perhaps £75k cash requirement leaving £18k to cover estate admin expenses and perhaps give the residuary beneficiaries a small amount.

This does of course rely on the property beneficiaries being prepared to honour the testator’s wishes to see the charities benefit (if the property gift is expressed to be free of tax).It may indirectly in the long term benefit their heirs to the tune of £20k, the tax saved.

Michael McCabe
Heath Square Private Client.