I am dealing with an estate where a cash legacy of £250K has been left to the deceased’s stepchildren and the residue passes into a DT. As a way around the loss of the RNRB I initially thought that the stepchildren could disclaim the legacies (I preferred the idea of a disclaimer as we want to reduce the value of the legacy to them to zero) with the DT then appointing out of residue an amount to the stepchildren up to the value of the RNRB. Initially I thought this would work, but I then wondered if there is a problem in the step-children giving up the legacy to receive a share of the residue (i.e. it is not an effective disclaimer to swap one gift for another). Has anyone any thoughts or experience on this and whether it would work?
The way you describe it, the disclaimer would be for consideration and thus void for IHT purposes, at least.
To the extent that an appointment was made out of the residuary trust fund to the step-children, my understanding is that only a proportion of the RNRB would be allowed I the estate, equivalent to that proportion of residue “closely inherited” as a result of the appointment.
I suggest the ways that the full RNRB might be available might be either for the entire residuary state to be appointed so that it was “closely inherited” or for the property to be appointed out in such a way that it is closely inherited”.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I’m not sure I agree with Paul’s comment re the RNRB.
If say the residue is worth £900,000 and includes a residence worth £330,000 and the residue is left to the testator’s son, daughter and sister equally then son and daughter each take a residential interest of £110,000, in total £220,000. The RNRB will be £175,000.
Malcolm Finney
Thanks Paul and Malcolm for your comments. At present the deceased step-children only receive £250K as a pecuniary legacy - meaning no RNRB for the estate. They are the only beneficiaries in the Will who would qualify for the RNRB. Ideally we would like to swap the pecuniary legacy to them for a share of the residue, increasing the amount they receive to enable the estate to claim the RNRB. However, we do not want to give them more than we have to. They could be given a share of the residue from the DT, but if we were to do this then we would want to reduce the pecuniary legacy to zero (hence the disclaimer) thus allowing the full claim for the RNRB. I cannot see how the pecuniary legacies can be reduced to zero without a disclaimer. Paul - you mention the disclaimer would be for consideration. My view is that all we are doing is rearranging the death estate (i.e. - there is no consideration brought in from outside the estate) and therefore it should be okay?
Would a variation work instead? The pecuniary legacy varied for a share in the property that has been/will be appointed to other inheritors. I can’t see there being any obvious consideration for this?
I’m not sure that for IHTA 1984 s142(3) to apply that “external” consideration is required. The subsection merely “authorises” in effect an exchange of DoVs as acceptable ie such an exchange will not be treated as consideration. In Lau v Executors [2009] there was no external consideration; X disclaimed his inheritance which fell into residue which was left to Mrs Y (X’s step-mother). Mrs Y then gifted a sum of money back to X.
The court found that there was a direct causal link between Mrs Y’s gift to X and X’s disclaimer which fell foul of s142(3).
In the current post presumably there would be no disclaimer by either step-child unless they new the trustees of the DT would make appropriate appointments out to them (of presumably a residential interest for RNRB purposes).
It may be noted that in Vaughan-Jones v HMRC [2015] one of counsel suggested that:
" Finally, Mr Oughton addressed me on the additional point raised by HMRC as to the potential application of section 142(3) of the Inheritance Tax Act. Mr Oughton has submitted that the case cited of Lau v Revenue & Customs Commissioners is a decision on its own particular facts, which establishes no general proposition of law beyond the fact that the onus of proof on the issue of consideration rests with the taxpayer. Mr Oughton has taken me in detail through the decision, citing paragraphs 21, 35 to 36, and 46 to 47. He submits that the expression ““any consideration in money or money’'s worth”” is a technical expression which requires a bargain which is sufficiently definite. He submits that it does not include a generalised intention to give sums of an indefinite amount at an indefinite time in the future, which gives rise to no legally enforceable obligation, and where the widow could, without adverse consequences to herself, change her mind at any time".
Malcolm Finney