IHT, abatement and charitable legacies.

nom_de_plume

John_Pierpoint wrote: »

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.

The will was straight forward enough and I have confirmed it with and have a letter from a solicitor stating that all the pecuniary legacies must be abated to meet the shortfall, including the charitable one.

There is no mention of how the legal costs (minimal) relating to the transfer of the property are to be met and, as there will be no residual, I can only assume this will further affect the abated legacies.

nom_de_plume

John_Pierpoint wrote: »

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.

Exactly, it goes round and round in circles. I guess they will be ever decreasing and eventually I could arrive at a very close figure. I just wonder now, having asked HMRC twice to help me, if I should bother trying...

nom_de_plume

Just by way of an update. After reading many pages of IHT advice on HMRC's website I have managed to (I think) get my head around it all.

After some complicated maths I arrived at a reduced figure for the charitable legacies and taking this figure from the full value originally used on IHT 400 and multiplying that by 40%, arrived at the extra IHT due.

The next even more complicate calculation was to work out the percentages that each beneficiary is to receive. This had to take into account the tax exemption status of the charitable legacies giving them a higher percentage per pound than the non exempt legacies as per Re Ratcliffe in lavalamp's link. All the cash legacies were precise sums of monies and 'free of tax' in the will which I interpreted as them each having to bear their own tax burden due to a lack of residual to take car of the tax element.
I know that O-level maths would come in handy one day!

I still may have the final tax bill adjusted due to the going round in ever decreasing circles effect of abatement v's IHT as mentioned upthread.

John_Pierpoint

So far so good for the capital account.
How is the income account?
Have you got significant amounts of income, that is accrued income that you had to report and have taxed as the top slice of IHT at 40%?
Plus subsequent income gross or with tax at source of 10%, 20%?
Do you have beneficiaries who pay additional rate tax (at 40 - 45%)?
The standard rate tax payers just have to take it on the chin that a bit of their income has paid 20% income tax and 40% IHT, but there is some relief available to the higher rate tax payers, presumably a lot more likely these days as the "squeezed middle" face falling starting income levels for additional rate tax.

Fortunately, though the estate I had to sort out had quite a lot of income earned at (say) 5%, as a carry over from the banks trying to avoid bankruptcy, it had only one 40% beneficiary.
This beneficiary decided it was not worth the hassle and probable ongoing interest from the tax man , to try to reclaim about £150. She was happy to accept a standard R185.
So I have no practical experience of dealing with reclaims for zero rate or additional rate tax payers.

http://webarchive.nationalarchives.gov.uk/20090211085128/http://www.hmrc.gov.uk/pdfs/r185_ei.pdf

nom_de_plume

There's very minimal additional income, thanks to current low interest rates. What there is has been taxed at source. We're probably only talking a 2 figure sum.

nom_de_plume

nom_de_plume wrote: »

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!

So I wrote to HMRC a third time and this time they seem to have taken this on board. 4 weeks after writing I've had a letter acknowledging receipt and apologising for the delay in replying due to the tax calculations on abatement being complex! I could have told them that :-) In fact I think I did which is why I asked them to do the calculation (and maybe why they ignored my last 2 requests!)
Anyway, we're getting there!

ValHaller

Naively, being fairly good at arithmetic, but not on top of tax, I would do this:

• Pass on the house and calculate the IHT due on that
• Deduct the IHT on the house from the remaining estate
• Calculate shares to the pecuniary inheritors including the charity on the %age principle
• Pass on the share for the charity
• Re-aggregate the shares of the remaining pecuniary inheritors and calculate the further IHT on this money
• Deduct the further IHT from the re-aggregated shares
• Recalculate shares to the remaining pecuniary inheritors on the %age principle

This will at least ensure that the right IHT is paid. I can forsee the charity cutting up rough about this, but I think that it is fair that they take the hit of IHT on the portion of the estate which is of higher precedence than their own share. And they get their share without paying IHT on it.

nom_de_plume

I've managed to arrive at some fairly accurate figures (IMO) for the division with percentages that equate to include IHT for the individuals and without IHT for the charity.

The problem I have is calculating the exact amount of IHT due. It's hard to put into words but, if there was enough money in the estate the full charitable legacy would get paid and that sum of money would be IHT free which was the figure I included in my original IHT calculations. Because there's not enough to give the full bequest to the charity the IHT free element is reduced. The sum this is reduced by then becomes liable to IHT. This additional sum of IHT further reduces the pot which consequently reduces the share to all including the charity. This further reduction to the charity means yet again more money subject to IHT which yet again reduces the pot in an ever decreasing circle and way beyond my O level maths.

Given that HMRC admit to this being a complicated calculation, I'm going to leave it to them. I've made interim payments to all the beneficiaries in the mean time.

getmore4less

I think you need to stop iterating and do the calculation from scratch

I will try an example I might have missed something this is just a guess.

I don't have the details of your numbers but an example with 2 legacies one charitable with equal % abatement.

say £600k to give out but the legacies were charity £100k other £600k



C = what the charity gets
O = what the others gets
N = nill rate band(325 or whatever you have)
T = tax

T = ( £600k - N - C ) * 0.4
O + C + T = £600k

sub the 600k

T = ( O + C + T -N -C ) * 0.4

take T to the left

T * 0.6 = (O - N) * 0.4

sub T back in the first equation

(O - N ) = (£600k - N - C ) * 0.6

O = N * 0.4 + 600 * 0.6 - C * 0.6

O + C * 0.6 = £325k * 0.4 + £600k * 0.6 = 490.

C * 6 = O ( from the original 100 600)

C * 6.6 = 490k

C = £74.24k
O = £445.45
T = £80.30k



This was just a first stab, I have not double checked but the numbers look about right.

see if it works for your combination.

if you need more detailed working I can full in the gaps( I jumped a few steps)

nom_de_plume

I came to a much quicker and simpler solution to your example and with completely different results thus:

Total legacies 700,000
Estate 600,000
Therefore 6/7ths available

So charity =100,000 * 6/7 = 85,714 (No tax to pay on this)
Other = (600,000 * 6/7 - 325,000) * 0.6 + 325,000 = 438,571

IHT = (600,000 * 6/7) * 0.4 = 75,714