Issue of R185 to charity beneficiary

I haven’t come across this particular issue before and would be glad to have some views. S666 (2) ITTOIA sets out how the residuary income of an estate is arrived at. Do the allowable estate deductions also apply when preparing an R185 for a charity beneficiary as we have been told by a particular charity that no deductions should be made, thus enabling it to obtain a refund of all tax paid on interest received. I notice that in s665, s667 and s668 reference is made to “person” being the beneficiary and wonder, therefore, whether the deductions only apply when preparing vouchers for individuals.

Patrick Moroney
BWL solicitors

I was not aware that there was a different manner of ascertaining the residuary income of an estate depending upon the nature of the beneficiary involved. Where there is a gift of residue to a mixed group of charities and individuals, it would mean different calculations for each type of beneficiary.

My understanding is that, in legislation, “person” refers to an individual or body that has legal personality, whereas “individual” refers only to a living being. This is underlined by the change to s.37(1)© Trustee Act 1925 by TLATA 1996, replacing “individuals” with “persons”, and the analysis by the English court of the original wording in Jasmine Trustees Ltd v Wells & Hind (A Firm) [2007] EWHC 38.

I would be inclined to ask the charity to share with you the advice they have received on this point as it appears to conflict with the general interpretation of those provisions.

If most of us have not been getting it right, it would be good to understand where we have gone wrong.

Paul Saunders

The following quote from BWPAS may be relevant:

“Administration expenses chargeable against income

The Personal Representatives can deduct administration expenses chargeable against income and pay the net balance to the beneficiaries entitled to the income of the estate, usually the residuary beneficiaries.

Where under the terms of a will the Personal Representatives have discretion as to whether they may deduct administration expenses from the income or capital of the estate, they should consider whether it is in the interest of the residuary beneficiary to deduct it from income or capital. If the residuary beneficiary is a higher rate taxpayer, it will generally be beneficial to deduct the administration expenses from income, whereas if the income of the residuary beneficiary is less than their available personal allowance, it may be advantageous to pay the expenses out of capital to enable the beneficiary to claim a refund of income tax.”

You may therefore need to consider whether the executors in your case have that discretion.

Diana Smart
Gordons LLP

I note what Diana says. S666 ITTOIA 2005 does not refer to deducting administration expenses from the aggregate income to arrive at the figure for residuary income but instead refers to allowable estate deductions. As we know the term administration expenses has a much wider meaning and includes solicitors’ costs. Are BWPAS including allowable estate deductions when referring to the PRs having discretion to pay administration expenses? In the absence of a specific provision in the Will giving the PRs discretion to pay such expenses out of capital or income, would the inclusion of the STEP Standard Provisions 1st or 2nd Edition in the Will give them discretion?

Patrick Moroney
BWL solicitors

It seems such a long time ago that I raised this question. I have come up against it again. This time there are eight charities sharing residue. There has been a substantial amount of income received since the date of death comprising gross interest and dividends, some of each from ISAs. There have been various outgoings post death which I am including in the income statement in the estate accounts.

The Question is, first of all how should the deductions be applied in order to arrive at the figures to go in the R185? As we know the ISA income is not to be vouched. However should the outgoings be deducted from the ISA income in the first instance and any surplus deducted from the gross interest with any balance from the dividends or is there some other way to apply the outgoings?

There is still the matter which Diana raised and which I responded as regards the step provisions and whether these enable the executors to treat all outgoings as coming out of capital thus enabling them to vouch the whole of the income to the charities.

Perhaps not surprisingly I can find no guidance on HMRC‘s website.

Apologies if this has been discussed further since my original posting.

Patrick Moroney

I assume that the residuary beneficiaries have absolute interests in residue.

Funeral, testamentary and admin expenses are not deductible in calculating the PRs liability to income tax on income arising during the admin period. However, they are deductible in arriving at the net sum available for distribution to the beneficiaries. There is no provision in the legislation which sets out how such expenses are to be deducted.

Pre 6 April 2016, the most beneficial approach was to deduct the expenses against dividend income prior to income subject to basic rate tax; post this date, this may not necessarily be optimal.

When each category of residuary income is divided amongst the residuary beneficiaries (according to their respective capital entitlements; ITTOIA 2005. s 667) distribution is made from residuary income which has borne basic rate before income subject to the dividend ordinary rate (ITTOIA 2005. ss 656/679).

If the will allows for discretion as to whether admin expenses may be deducted from income or capital it may make sense, for example re a charity beneficiary, for any allocated expenses to be deducted from capital (thus enhancing the ability for any tax reclaims to be lodged by the charity).

Chapter 6 ITTOIA 2005 concerns “beneficiaries” with interests in estates; not only “individuals” may be beneficiaries and hence use of the term “person”. Unless otherwise provided “person” is defined in the IA 1978 Sch 1: “Person” includes a body of persons corporate or unincorporate”.

ITA 2007 s989 defines “body of persons” means any body politic, corporate or collegiate and any company, fraternity, fellowship or society of persons whether corporate or not corporate" for purposes of Income Tax Acts.

Malcolm Finney

A belated thank you for your comments Malcolm. The Will does not give the trustees a discretion to use capital to pay outgoings which would be of a income nature. The STEP provisions, but not the Special Provisions, are Authorised by the Will. I have looked through these to see if personal representatives are able to use such a discretion but I cannot see that this is specifically referred to. Paragraph 4.4 refers to income being set aside and invested to answer any liabilities et cetera. Paragraph 4.7 relates to the application of trust capital but it’s not clear as it being used to pay Liabilities of an income nature. What do you or indeed any other contributors, think?

Patrick Moroney

Presumably, in the absence of a specific power to allow the trustees a discretion as to the discharge of expenses etc out of capital or income it become necessary to resort to case law.

Malcolm Finney