I am administering a Will which contains the following legacies:
I give free of tax the following pecuniary legacies:
3.1 to beneficiary A the sum of £20,000
3.2 to beneficiary B the sum of £2,000
3.3 I give the Nil Rate Sum as defined in sub-clause 5 of this clause to such of my nephews and nieces (7 in total) who survive me and if more than one in equal shares absolutely.
3.4 Survivorship provision for 3.3
3.5 In sub-clause 3 of this clause “the Nil Rate Sum” means the largest sum of cash which could be given by that sub-clause without any inheritance tax becoming due in respect of the transfer of the value of my estate which I am deemed to make immediately before my death and for the avoidance of doubt I direct my Trustees to claim any transferable unused inheritance tax nil rate band which may be available to reduce the inheritance tax payable on my estate.
Clauses 3.3 and 3.5 are where I require assistance. The estate will be eligible for IHT relief of £650,000, as the deceased had no direct descendants. The residue is left to two charities.
The gross estate is valued at £1,021,105. After deducting the Nil rate bands and BPR of £127,508, the taxable estate is £243,595.
I need to work out how much the nieces/nephews and the residue available for the charities. Assistance is much appreciated.
Further reading let me to this note in Williams on Wills:
100 per cent relief property and ‘formula’ nil-rate band gifts. Where the testator has a significant amount of property entitled to 100 per cent business or agricultural relief, and it is decided for one or more of the reasons discussed in para [[200.154] to include in his will a nil-rate band legacy given to non-exempt beneficiaries (or a discretionary trust) by reference to a formula such as ‘the maximum sum I can give without any IHT being payable on my death’, such a gift could operate to pass too much to the non-exempt beneficiaries. If after deduction of the relief the total transfer of value on death was less than the amount of the nil-rate band at death, the whole estate might pass under the nil-rate band gift leaving the surviving spouse or civil partner with nothing except a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
Consider this example: T dies in the tax year 2021–22 leaving business property, to which 100 per cent relief applies, and of which the market value is £500,000, and other assets worth £325,000. He had made no lifetime chargeable transfers. His will gives a legacy to the children of the maximum sum he can give without any IHT being payable on his death, with residue going to his spouse. The transfer of value on his death after business relief is £325,000. However, the legacy determined by the formula is £800,000, not £325,000. He can give a legacy of this amount without IHT being payable because if his will gave a legacy of £800,000 it would be treated as abated to £325,000 for the purposes of IHT on his death by virtue of [IHTA 1984, s 37(2)]
My view is that the nephews and nieces will receive the balance of the available nil-rate band (£628,000) PLUS the value of assets qualifying for BPR (£127,508), the residuary balance left to charities.
I agree with the first part of your second post. However your calculations are awry - since the BPR assets are not specifically allocated to the nil rate band, I believe ‘interaction’ applies.
By my calculations, 12.48726645% of the estate is exempt and grossing up the sum of £650,000 by this proportion means that the non-exempt beneficiaries receive £742,749 in total (=£650,000 after IHT)
After deducting the specific legacies of £22,000 the NRB trust receives £720,749.
Thank you for this Paul. I am trying to follow and reach your conclusion, but afraid to admit that I am struggling. Are you able to show your workings?