I am dealing with a probate whereby the first spouse died in 2004. The surviving spouse executed an IOV creating a NRBDT. Due to limited liquid assets, an equitable charge was placed on the deceased’s share of the property. The debt was then linked to RPI and index linked and repayable on demand. This debt is now repayable following the death of the second spouse. The estate is potentially liable to IHT. My question is, if the charge was £243K in 2004, which was linked to RPI and index linked and now the debt to the estate is £393K using the Bank Of England Calculator - can the full amount of £393K be treated as a debt of the estate to reduce the IHT liability or, is the debt fixed at the 243K. Are there any other tax implications on the interest i.e income tax?
If the debt is linked to RPI then the amount outstanding at the the date of death is the amount including the RPI. To get the deduction or IHT the debt has to be paid but at the point the RPI element is received into the trust the question arises as to what is it? HMRC view it as interest and in a disc trust it will be taxed at 45% i.e. higher than the IHT it saves. This can be reduced by appointing life interests before receipt but with the amount of “interest” payable the beneficiaries may well still end up paying at 40% on some of it. Likewise if the trust remains disc and the income is paid out to beneficiaries they may be able to reclaim some of the tax deducted.
It is simpler for the trustees to consider whether they can waive the interest and that is not just a tax decision. Are the beneficiaries of the trust the same as the estate? One would expect it to be but they may not be.
If they can waive the interest the amount to be deducted will be the amount paid ie the original debt
I totally agree Nigel. I had a case several years ago where the beneficiaries of the estate and the trust were different. I tried to get HMRC to agree that the indexed amount was not taxable but failed and paid the tax.