IHT, abatement and charitable legacies.

nom_de_plume

I'm hoping to mainly clarify my understanding of HMRC's treatment of IHT in the case of an estate where there is insufficient monies to pay out all the legacies in full.

Using made up figures we have an estate comprising of a house worth £335,000 and cash totaling £150,000. There is no spousal nil rate band to carry over so just the one allowance. There is a charitable legacy in the will of £20,000.The total estate is £485,000. IHT due is on £485,000 - £325,000 (IHT nil rate band) -£20,000 (tax fee charitable legacy) x 40% =£56,000 leaving £429,000. The house is left to one person specifically who will receive it in full and will be unaffected by IHT. This leaves £94,000 cash.

Now to where it gets complicated. Let's assume there are 8 family members, all of whom have been left £10,000 apiece plus the £20,000 to go to charity. This totals £100,000, however there is only £94,000 available.

This is where abatement comes in and my understanding is that, in this example, each of the pecuniary beneficiaries would receive 94% of their bequest.

All (sort of) straight forward so far except the charity would only get £18,800 but IHT has been calculated on the assumption that the charity would receive £20,000. This is the point I get lost!

I assume that the IHT needs recalculating on the basis that only £18,800 would be classed as tax free and not £20,000 meaning tax was underpaid by £480 ((£20,000 - £18,000) x 40%).

It gets even more complicated now as the estate is further reduced by the additional £480 tax liability meaning there is even less money for the pecuniary legacies meaning the tax calculation in the above paragraph needs repeating again and then again, ad infinitum!

Have I got this right or am I totally misinterpreting the whole situation?

lavalamp

I have no idea what the legal answer is, but as the £20k to charity is not subject to the IHT in the first place, perhaps they receive the full amount and the other beneficiaries take the hit?

lavalamp

Was intrigued by this and found the following: http://www.rememberacharity.org.uk/pages/when-leaving-residue-to-iht-liable-and-iht-exempt-beneficiaries-.html - I have no idea what the will you have says, so it may not apply, but interesting nonetheless.

madbadrob

Unfortunately you have to ignore the legacies. All debts have to be paid first and if those debts are more than the cash available then the house must be sold. Whatever is left is then distributed as per the will pro rata and if the house is sold the whole residue after debts would go to the beneficiary of the house. It is that straightforward

Rob

nom_de_plume

In the example above, which is not too dissimilar to the actual estate I am dealing with, there are sufficient funds and assets in the estate to both enable the debts to be paid and the specific legacy (the house) to be dealt with in full. The area in question is solely the cash bequests.

For those unaware, where there is insufficient funds to pay all the legacies in full, there is a specific 'pecking order' for abating the legacies and, in my example, the house would be passed on in full with the abatement being applied to the pecuniary legacies. This link to HMRC will explain

I am just struggling, and have found no help in any HMRC pages nor elsewhere on the internet, on how to calculate the changes to IHT based on the reduced sum that will now go to the charitable bequest.

nom_de_plume

awpvicki wrote: »

I have no idea what the legal answer is, but as the £20k to charity is not subject to the IHT in the first place, perhaps they receive the full amount and the other beneficiaries take the hit?

According to the legal advice I paid for recently, all the cash legacies have to be abated (reduced) proportionally. In the actual estate I'm dealing with, they all get reduced to about half the stated value within the will so the effect of paying the charitable bequests, in full, would severely further reduce them.

nom_de_plume

awpvicki wrote: »

Was intrigued by this and found the following: http://www.rememberacharity.org.uk/pages/when-leaving-residue-to-iht-liable-and-iht-exempt-beneficiaries-.html - I have no idea what the will you have says, so it may not apply, but interesting nonetheless.

Interesting, but that applies to the residue. There is no residue in my case. The bequests were all precise sums of money that would fall under the general category of the will.

Not quite the same, but similar worked example here 'As the legacies are all in the same class of legacy, they will abate rateably'

nom_de_plume

Possibly this page is heading in the right lines as this paragraph seems to sum up my position:

'What is circular grossing?

This occurs when the amount of exemption depends upon the amount of IHT due on the estate, but the amount of IHT due on the estate depends on the amount of the exemption.'



The rest of the page appears to be written in some kind of foreign language....

nom_de_plume

Also, for the record, I've written to HMRC twice, explaining the situation and asking them to calculate the tax. They seem to be ignoring it despite my suggestion that they are probably owed some more IHT. Maybe as much as £3,000. Last time I wrote was alongside a corrective account and they've promptly refunded me over £1,000 for that!

I am of the opinion to distribute the bulk of the estate by way of interim payments and hold back enough to deal with anything that may come out of the woodwork in the future. I reckon asking them twice, in writing, would be considered a reasonable effort on my part!?

John_Pierpoint

Don't miss out on this bit in the 1925 act

The rules of abatement will not apply if a contrary intention is shown in the Will

This translates into "stick with the instructions of the will as far as you possibly can".
In my case problems in that some bequests created additional costs. These that had to fall on the residuary beneficiaries even though the residuary had no interest in the particular bequest.(If you see what I mean).
In the example of the above will, does the will make it clear who pays the legal charges involved in transferring the ownership of the house? Probably not so the residuary pays.

John_Pierpoint

nom_de_plume wrote: »

Possibly this page is heading in the right lines as this paragraph seems to sum up my position:

'What is circular grossing?

This occurs when the amount of exemption depends upon the amount of IHT due on the estate, but the amount of IHT due on the estate depends on the amount of the exemption.'



The rest of the page appears to be written in some kind of foreign language....

It is one of those statistical relationships that tails off into infinity like a credit card debt could, where there could be interest on interest on interest and the punter could never catch up..

HMRC is happy with a limited iteration that gets the answer 99% (say) correct without excessive calculations.

There can be a sting in the tail, in that there might be a massive asset such as a house that is left to be shared by (say) 4 children so the executor could say "I have done all the legal work and now have this house that I must be holding as your bare trustee; what do you want me to do with it?" The 4 kids reply "Sell it for the probate value plus £50k and send each of us a cheque for a quarter each" Given the costs of selling it that is probably exactly what will happen.

However you could have the situation where the executor writes to the 4 kids and says "Everything is now settled but I have got an IHT tax debt outstanding, so I am forced to sell the house".
then 6 months later
"I have sold the house and good news I got £50k more than the probate value for it, so as soon as I have paid the IHT, the CGT and any other outstanding debts, I will be able to send you each a quarter of what is left"