Good afternoon all.
Am I correct in thinking that a Will leaving a large pecuniary legacy to the deceased’s son with residue to surviving spouse will NOT attract RNRB, even if (1) the legacy exceeds £325,000 and (2) the bulk of the estate comprises the deceased’s house?
I was speaking to a speaker at a course about this the other day and she felt it would be worthwhile attempting to persuade HMRC the RNRB should apply to the extent the only asset out of which the legacy could be satisfied was the house.
Perhaps the correct approach would be to apply the liquid assets in the calculation against the legacy and treat the balance as a share of the house.
This issue was discussed on March 25: Residence Nil Rate Band
Many areas of grey may be worthwhile arguing with HMRC but I’m not convinced (as per my 25 March response) that in the above situation the RNRB will apply.
This point needs an answer from HMRC. So, as general editor of Foster’s Inheritance Tax, I am writing to them with a couple of examples and I will let the Forum know what the response is in due course.
M B Gunn & Co Ltd
I am starting to be nervous about where this string, and the previous one to which Malcolm Finney referred, might be taking us.
If, say, HMRC take the view that the residence nil rate will apply even where the proceeds of sale of a property are to be applied to satisfy a legacy to otherwise “qualifying” beneficiaries, where residue is left to non-qualifying beneficiaries, can there be any certainty the courts will adopt a similar view? HMRC insists it does not give legal advice but, by expressing the view as to the availability of the residence nil rate in the situations discussed, it is also giving guidance as to the value of legacies that are defined by reference to the amount that can be transferred without the payment of IHT.
To my mind, this creates a potential trap for those administering wills including such a gift, as such interpretation should apply to all such gifts. Whilst it might be seen as “right” in some cases, it will be manifestly “wrong” in others. A wonderful example of this is the first instance decision in RSPCA v. Sharp (reversed by the Court of Appeal) in which Peter Smith, J. appears to have interpreted the NRB clause on the basis the residuary legatee – the RSPCA – should be more that satisfied with what it received, overlooking the fact that his judgment would apply equally to an estate where residue passed to, say, a widow as it did where a charity was involved.
If an executor administers an estate in ignorance of any HMRC guidance, or decides such guidance creates a manifestly “wrong” situation, they could be at risk of a legal challenge by those who believe they have been disadvantaged. If the executors follow the guidance, despite believing it to be manifestly “wrong” in their case, this could result in an I(PFD)A claim (which might result in judicial guidance on the point).
I am not suggesting that Malcolm Gunn should not discuss this with HMRC - my concern is that we could open a far bigger can of worms than currently exists.
I think all of us who know anything about RNRB know that it is a “can of worms”. The sooner it is simplified the better.
In many cases the situation which Lucy describes can be made clear beyond doubt if the parties sign a s142 variation. Of course there will be cases where this is not possible, because one of the parties is under some kind of disability or simply refuses to engage with the proposal. If there is a significant tax saving (and often there will be) it may be possible to offer a party who refuses to engage a “sweetener” from the proceeds (always taking care that this does not offend s142 by providing consideration from outside the estate). There is usually a court application available on behalf of anyone with a disability, if the IHT saving will benefit that party.
I am afraid that I have no sympathy for executors who do not take professional advice when their estate has any inheritance tax implications. I suspect that, at present, many unadvised PRs are missing the full benefit of RNRB, because they think they are not entitled, or are not aware that things like a s142 variation could save an entitlement. If professional advisers are failing to advise properly, they should be either be upskilling themselves or admitting that they are not competent to advise in this area.
Like so many of our tax allowances, and like so many payments available through the benefit system, a lot will remain unclaimed.
Irwin Mitchell Private Wealth