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IHT, abatement and charitable legacies.

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  • You could be right, particularly as these are pecuniary legacies and not from the residual where there are specific rules for the treatment of IHT and charities as linked to earlier in the thread. http://www.rememberacharity.org.uk/pages/when-leaving-residue-to-iht-liable-and-iht-exempt-beneficiaries-.html
    I'll see how HMRC calculate the final tax bill which will hopefully give an indication. If the tax is to be shared equally, the tax bill should, I guess, be higher than if the charity gets theirs tax exempt and thus a larger share.
    If that doesn't answer it, I'll maybe 'invest' another £100 in some legal advice.
  • John_Pierpoint
    John_Pierpoint Posts: 8,401 Forumite
    Part of the Furniture 1,000 Posts
    edited 10 December 2013 at 6:29AM
    Isn't the problem that the residuary has already been wiped out by the IHT? S so now we are scrabbling about in a two iteration process where the pecuniary legacies have to pay but it is not obvious how big each legacy is going to be until the IHT has been settled and the IHT cannot be settled until we are sure how big the legacies will be; complicated by the fact that one legacy does not pay IHT.

    Just like the song "there is a hole in my bucket.........".

    This morning I thought I would take a closer look at "Cowie’s Trustees Petitioners"
    ( a case defining the position of a charity if it finds itself getting part of the residuary) I discovered it was a 1980s case brought in Scotland but the details were hidden behind a pay-wall.
    I also found a review/criticism of a Scottish new century will instruction book containing examples of model Scottish wills:

    Another difficult situation would be where the residue is left to an exempt beneficiary such as a widow, widower or charity, but there is a tax-free legacy of the house to a child and the house has substantial value in excess of the inheritance tax nil rate band limit. The legacy would not just be of the house, but of the grossed-up value of the house, which when taxed would require the house to go to the legatee and an appropriate sum of money to be found by the executors to pay the tax, on the combined total of the value of the house and the tax on it[69]. This could substantially reduce the amount of residue available for the surviving spouse. The current effective rate of tax on the value above the nil rate band of inheritance tax is two-thirds of the amount above the limit.
    [Out of date IHT rate this is now the rate: The rate of Inheritance Tax is 40% on anything above the threshold. The rate may be reduced to 36% if more than 10% of the estate is left to charity (from 06apr12)].
    http://en.wikibooks.org/wiki/Taxation_in_the_United_Kingdom/Inheritance_tax

    It should also be remembered that grossing up may be required at a very complex level even in apparently simple wills. This applies where there are tax-free legacies to non-exempt persons, combined with another type of legacy to a non-exempt person (such as a specific legacy bearing its own tax, or a share of residue). A simple example would be a legacy free of tax to a son (perhaps of a specific asset), with the residue to be shared between a daughter and the surviving spouse. If the estate is of a sufficient size, the process of 'double grossing-up' is required[70]. The process becomes yet more complex where assets qualifying for business property relief or agricultural property relief are involved[71].
    Care is required when one is dealing with directions that exempt and non-exempt beneficiaries are to receive "equal" shares – is the equality to come about before or after tax has been deducted from the shares in question? This can lead to complexities[72], but the starting point is to be clear as to the testator's intentions.
    If one wishes to advise on such complex calculations, whether at the time of drafting a will or when administering an estate, reference to the specialist texts on inheritance tax will be required. Despite the enthusiasm of one (and one only) of the authors of this book, no examples are offered here!

    http://uk.practicallaw.com/books/9781845920401/chapter03#ftn.d186705e1383
  • getmore4less
    getmore4less Posts: 46,882 Forumite
    Part of the Furniture 10,000 Posts Name Dropper I've helped Parliament
    Isn't the problem that the residuary has already been wiped out by the IHT? S so now we are scrabbling about in a two iteration process where the pecuniary legacies have to pay but it is not obvious how big each legacy is going to be until the IHT has been settled and the IHT cannot be settled until we are sure how big the legacies will be; complicated by the fact that one legacy does not pay IHT.

    I think this is not the case if the rules are know there will be an equation that does not require iteration.
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