A will was made, leaving all to charity.
After the death the will was challenged. I was not involved in the litigation of the matter and do not know the details except to say that the challenge was NOT under the I(PFD)A 1975. More than two years have passed since the death.
The terms of the agreed settlement are:
a. the Will is to be admitted to probate,
b. the charities are to receive half of the estate,
c. the individuals who challenged the will are to receive half of the estate.
I have been asked what the inheritance tax consequences of the above are.
My immediate thought is that since none of the provisions of ss142-147 IHTA 1984 apply with the effect of reading-back the terms of this settlement into the will, then the estate must be wholly charity-exempt under the terms of the original will.
However this conclusion very-much fails the “common-sense test”. Surely assets passing to individuals cannot obtain a charity exemption.
So assuming my original analysis is wrong - as it surely is - can any forum members suggest to me what the proper analysis should be, and why?
While I can understand your concern, I think your conclusion is the right one. Essentially they have agreed that the will stands (and the estate passes to the charities) but the charities have (separately) agreed that they will pay a sum to the individuals in return for the individuals not pursuing (or dropping) a claim against them.
There hasn’t been any Court declaration that the will is invalid so it stands. I think this probably remains the case even with a consent order provided the consent order does not make a declaration of invalidity.
I would expect HMRC to take the view that s 29A IHTA 1984 applies to treat a half share of the estate as non - exempt. It could be argued that the section does not apply because the charity is not settling the claim out of property not derived from the transfer as referred to in the section.
In my initial question I left out a further complication which is that there were two competing wills, only one of which left the assets to charity. Having now reached their settlement the parties are in disagreement about which ought properly to be admitted to probate but might be influenced by the tax consequences of admitting one over the other. I’m uncomfortable about the idea that the parties could in effect choose based upon the tax consequence. (If Malcolm’s point is correct, of course, then it becomes academic.) Do you have any further thoughts?
My understanding is that S29A results in the will effectively being amended under which the challengers are treated as receiving 50% of the estate with the charity receiving the balance of the estate. IHT thus arises on the 50% left to the individuals.
For s29A to apply does however require that the charity settles the amount involved from other assets (ie not assets from the deceased). Where this is not the case then s29A is inapplicable and prima facie no IHT arises on the death estate even though the charity does not inherit 100%.
Do you mean that the parties reached this agreement between themselves? Or that the Court made an Order that this Will be admitted to probate? I had taken it that you meant that this was agreed between the parties and then they ceased the litigation without the intervention of the Court.
That being the case, it seems to me that the parties cannot agree between themselves which of the two Wills should be proved. Surely it is a matter of law as to which is the testator’s last valid Will? The executors, in their statement of truth, will effectively be declaring that the Will has not been revoked (eg by a later Will) and that there is no later Will which supersedes the Will that they are proving.
If B (who inherits under that last valid (and proved) Will) agreed with some third party (C ) that C can have a share of B’s inheritance, that is B’s business. It may be that a Deed of Variation might have been useful. However, a DofV might not have been possible if C was giving consideration (eg a promise not to make a claim against the estate?).
Even if C’s potential claim was that the final Will was invalid because of lack of capacity (or some other proper reason), the final Will will stand until such time as the Court orders otherwise if, on the face of it, it appears valid. If C does not make such a claim or if, for any reason, the Court does not make that order, then the final Will stands, even if the claim might have been successful (although one can never be sure of such an outcome).
So, I would say that the executors of what appears to be the final Will of the deceased should prove that Will and the IHT consequences will follow the terms of that Will. If the executors of the older (revoked) Will endeavour to prove that Will because that means there is less IHT to pay, is that not a fraud against HMRC?
If the later Will is proved and B has made some separate agreement to pay £x to C, then that is up to B and does not change the IHT treatment of the estate unless (as you have pointed out) ss142-147 IHTA or some other relevant rule applies.
I wonder if Chancery counsel advised in the dispute. If so, they might be in the best position to advise on the IHT point, being intimately aware of all the circumstances.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
