I have an estate where the beneficiaries of various pecuniary legacies which have not been paid within the executor’s year do not wish for statutory interest to be applied to their legacies. If the executors agree with the beneficiaries for statutory interest not to be added, are there any unwanted tax implications? Or is it just a case of pay the legacy and that’s that? We are having a debate as to whether or not the interest has to be “claimed” or not.
You cannot waive interest retrospectively. It needs to be done before it becomes due and payable and by deed. You can disclaim it expressly for IHT in writing but the general rules for a disclaimer require no benefit received, so not after payment but probably even if after due and payable. For income tax once entitlement to it has crystallised it is taxable/
Jack Harper
Hi Jack,
I’ve just had some conflicting advice to the effect that if they disclaim it they aren’t assessable to income tax on it as a result of the decision in Dewar v IRC [1935], as the PRs effectively don’t pay it in the first place and thus it doesn’t formally arise for the purpose of income tax. Same principle as used for trustees not insisting on payment of interest / index linking on NRBDT loans? This seems to tally with the HMRC guidance on when interest is taxable, i.e. if it is credited to an account on which the account holder is free to draw. Does that sounds about right or do you think it’s been overruled?
A disclaimer is possible provided the beneficiary has received no benefit. Where the entitlement is to a sum of money this is easier to demonstrate: as long as no payment of capital or interest has already been made. A valid disclaimer operates as if the gift was never made so interest on it cannot be taxable even if otherwise it would have already become due and payable.
I cannot see how you can disclaim the interest without disclaiming the capital. A partial disclaimer is not possible unless the will or trust provides. Arguably income and capital are separate rights unless income is rolled-up and there is a bullet repayment. Surely you must disclaim the interest before receiving the capital. HMRC in TSEM1840 say, in context, that in their view one can disclaim income or capital or both. IHTM35161 is no help nor SAIM. The Dewar case was not one concerning a disclaimer at all but whether income was taxable if it was swallowed up by trust expenses so there was no net income. Given HMRC’s argument that index-linking of capital can sometimes be taxable as interest can it it be disclaimed or would that be a partial disclaimer? That illustrates the weakness of their argument if genuine interest could be disclaimed in their opinion. Mr Kessler in his book argues that the index-linked element can be waived.
s93 IHTA makes a disclaimer possible for IHT but only as regards an interest settled property under s43. There is nothing for interest like ss14 and 15. As far as I know it is a moot point whether interest can be disclaimed after it has become due and payable, both before and after actually receiving the capital. I suggest a deed is desirable despite s142 IHTA only requiring writing, to bind third parties who might object. PRs/trustees must have the power for them to disclaim which will usually be expressly conferred.
Jack Harper
I don’t think Jack’s recollection of Dewar [Dewar v CIR C/A 1935] is correct. Dewar is in fact a case concerning payment of a legacy and when and if interest in relation thereto was taxable on the beneficiary or not.
The C/A held that as the beneficiary had neither received nor elected to claim the interest (despite an entitlement) and thus as no interest had been received no tax charge arose.
Malcolm Finney
On the basis that interest is subject to income tax on receipt [ie “receivability without receipt is a nothing” Parkside Leasing Ltd v Smith ChD 1984] then a disclaimer would, prima facie, seem to be valid even if it was executed after the date any interest was due and payable (assuming of course no benefit had been received).
I tend to go along with comments made by lawrburk in her second post.
Malcolm Finney
I have to confess tht I was reading a case with the same name in 1931 and not that in 1935. I have also to accept that my research is now necessarily limited to case reports in the public domain on the internet.
I am able to find numerous commentary references to Dewar 1935 as authority for the proposition that receivability without receipt of interest creates no tax liability, quoting Lord Hanworth M.R. I have read SAIM2400 and 2440. I approach this with deep scepticism as regards the continuing validity of case law precedents decided under different legislation and, like me, old. Here nearly 90 years old.
1 Most of the cases are about whether interest has been “received” on the particular facts.
2 As far as I am aware there is no specific authority on a taxpayer purporting to waive/disclaim interest that has become contractually due and payable but not received. It seems likely that in nearly all cases that interest will be promptly paid under prior arrangements to taxpayers who are content even insistent on receiving it.
3 HMRC are probably content from a materiality viewpoint not to disturb the “principle” that Dewar is supposed to enunciate. They have secured much anti-avoidance legislation designed to prevent interest being “received” without being received e.g. deep discount securities and the loan relationship rules. I wonder what their view is about an insolvent non-corporate debtor who owes interest already due and payable which he can’t pay. Presumably they take their own Dewar medicine because they do not want to challenge its general efficacy.
4 s371 ITTIOA says that the person liable to tax is the person “receiving or entitled to the interest”. s370(1) charges interest income “arising”. So the Rewrite chose not to clarify that arising means received per a case then 85 years old based on ITA 1918 (not obtainable by me). s371 should surely say, if Parliament meant it (laughter off) “receiving or, if someone else has received it on their behalf, entitled to the interest”. Someone to whom interest is contractually due and payable is entitled to it in any ordinary sense of that word, absent a definition.
5 I have looked at ITA 1952 which is obtainable and which I suspect was the same in 1918 in two respects.
First, there is no equivalent to s371. Secondly, tax on interest was collected by deduction and it is impossible to deduct tax from a non-payment/non-receipt.
6 I have seen one commentary which states that in Dewar the taxpayer was not taxable because he “did not claim” the interest. I can’t verify that by reading the case but I find it hard to believe as a ratio.
7 Like a number of tax “rules” HMRC’s attitude depends often on how the issue presents itself. As I say in 3 above they do along with what Dewar is proposed to have held, despite its antiquity and basis in a former Act. Will they be so sanguine if a payer gets a deduction on an accruals basis but the recipient is not taxable because it is not paid. Asymmetry, they often say, is not anathema in the tax system unless they are on the wrong end of it.
Jack Harper
I believe as late as 1985 the judgement in Parkside Leasing Ltd quoted Dewar with approval.
Malcolm Finney
There is another quirk which might adversely affect the ability to disclaim/waive the interest, and that is if any part of the legacy has been paid after the end of the executor’s year, but before the purported disclaimer/waiver.
The reason for this is that, under trust law any payment on account of the legacy is applied first in satisfaction of the interest accrued to that date, with the excess reducing the balance of the legacy outstanding (re Morley’s Estate, Hollenden v. Morley [1937] 3 All E R 204). Having said that, I appreciate that knowledge of such “peculiarities” of trust law seems to be getting rather thin on the ground.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I came across Re Morley’s Estate sometime ago and my recollection was not quite in line with Paul’s comment. I haven’t investigated further but thought the case was only relevant if there were insufficient funds in the estate to pay the legacies. In such cases (assuming nothing mentioned in the will) then the legatee may (but not required to do so) appropriate any payment received to interest before capital.
Assuming no such appropriation then this would not affect a possible disclaimer.
Malcolm Finney
If my recollection is correct (which it probably isn’t !)
The right of a debtor to appropriate a payment, and of the creditor if he fails to do so, is a feature of contract law i.e. common law See for example Khandanpour v Chambers [2019] EWCA Civ 570 at paras 15-17. I think it would certainly need a case to extend the principle to a relationship in equity.
Jack Harper
Thanks Both. In this instance the legacies have not yet been paid, as they are tied up in the capital of a property which forms the main asset of the estate. There are three legacies due, of equal amounts, but two are due to the remaindermen of a life interest trust of the residue which has been terminated by accelerating the remaindermen’s interests. The third legacy is due to the former life tenant. None of them wish to receive the interest on the legacies, particularly the remaindermen given that they wish to retain the house and are therefore paying the life tenant out so it makes no sense for them to claim any interest only to then pay tax on it.
Williams Mortimer & Sunnocks cites Re Morley as the support for the following:
“where payment in full of legacies is postponed because it is impossible to realise the testator’s estate, the rule of administration, subject to any directions to the contrary by the testator, is that each payment made to legatees on account of principal and intertest must be appropriated first to intertest and then to the principal.”
I have understood that the principle applies not just to when payment of legacies is delayed due to difficulties in realising the assets if an estate but also, generally, where for whatever reason the payment of legacies is delayed.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals