The Lemon Fool

Apologies if this has been asked here a hundred times before but I've done a search and can't find it.

I think I understand that Inheritance Tax is payable at 40% on the balance of an estate over £325,000, and that generally any pecuniary gifts are paid from the estate before tax, and that when the distribution of any balance is made to the residuary beneficiaries, they will effectively pay the tax on the whole taxable part of the estate.

So two questions really:

1. Is this correct? An imaginary estate has a total value after expenses of £750,000, and pecuniary gifts of £250,000 are made to various beneficiaries, meaning that there is £500,000 for the residuary beneficiaries to share? The taxable value of the estate is £425,000 (£750,000 minus £325,000) and 40% of £425,000 is £170,000. Therefore there is £330,000 for the residuary beneficiaries to share after tax (£500,000 minus £170,000)? Have I calculated this correctly?

2. The Grant of Probate gives the gross value of the state as £760,000 and the net value (presumably after solicitors fees etc.) as £750,000. Are these figures before or after tax has been calculated?

Many thanks,

Gostevie

Gostevie wrote:[... and that generally any pecuniary gifts are paid from the estate before tax, and that when the distribution of any balance is made to the residuary beneficiaries, they will effectively pay the tax on the whole taxable part of the estate.

Generally, pecuniary legacies in the Will would have something along the following lines (from an old Will):

I GIVE the following pecuniary legacies absolutely and free from all death duties and tax payable thereon: ...

1. Is this correct? An imaginary estate has a total value after expenses of £750,000, and pecuniary gifts of £250,000 are made to various beneficiaries, meaning that there is £500,000 for the residuary beneficiaries to share? The taxable value of the estate is £425,000 (£750,000 minus £325,000) and 40% of £425,000 is £170,000. Therefore there is £330,000 for the residuary beneficiaries to share after tax (£500,000 minus £170,000)? Have I calculated this correctly?

Mathematically correct, as one would have expected!

We hold insufficient information on the £325,000 you've used. Such as to whether or not the estate includes/included anything that would enable it to claim the enhanced residence nil rate band https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band nor whether there was a "first" death of a spouse etc, which may enable a full/partial claim to an additional £325,000, as discussed in more detail in this recent and lengthy thread over at Taxes here:

viewtopic.php?p=278202#p278202

2. The Grant of Probate gives the gross value of the state as £760,000 and the net value (presumably after solicitors fees etc.) as £750,000. Are these figures before or after tax has been calculated?

Before IHT.

The net value is gross assets less liabilities, such as household expenditure, care fees, loans, costs of burial etc.

Those figures would not necessarily reflect the amount upon which IHT is calculated (before the applicable nil rate band(s)).

See for example https://www.gov.uk/government/publications/inheritance-tax-probate-summary-iht421 which includes on page 2:

SUMMARY

This is a summary for probate purposes only and will not necessarily include all the assets you’ve listed on the form IHT400 for Inheritance Tax purposes. It will not include:

• lifetime gifts
• foreign assets
• assets held in trust
• nominated assets
• gifts with reservation and pre–owned assets

E&OE

Hi PinkDalek,

Thank you so much for such a prompt and helpful reply. Really appreciated.

Gostevie

Good fortune. I think I saw something you wrote recently at Stockopedia relating to the subject matter.

PinkDalek wrote:Good fortune. I think I saw something you wrote recently at Stockopedia relating to the subject matter.

I was asking on behalf of somebody who doesn't do bulletin boards. My comments on Stockopedia almost always relate to small AIM companies that have a habit of issuing profit warnings shortly after I've bought them.

Thanks again for such a helpful response to my question.

I am very puzzled by the OP's question. It suggests that a Will can carve out tax-free gifts to beneficiaries which are paid regardless of the sums actually left in an estate and any tax that might be demanded by way of IHT. I have never heard of any such legitimate arrangement (and I dealt with IHT and probate on my father's estate). The broad position is that IHT is calculated on what is taxable (after taking into account the various IHT allowances) and must be paid first, before probate is granted, and before the assets are liquidated to distribute among beneficiaries. Neither executors nor beneficiaries can rock up, point to a Will and say " look, it gives me the sum of X tax free, I'll have that first thank you very much". The law does not allow such a scam which would, if allowable, drain every estate before any tax was levied. And a Will does not need to specify that a sum is to be inherited tax free. Once IHT is applied then the sum is automatically tax free to the beneficiary. There is no other tax for them to consider. You don't even need to tell HMRC about it. So what am I missing here?

Avantegarde wrote:So what am I missing here?

Well if there's enough in the estate to pay the tax and all the specific bequests, then the result is the same i.e. the tax does effectively get paid by the residuary beneficiaries.

Different way of doing the sum, same result.

I don't think anyone's suggesting some kind of scam.

Scott.

You what? Why should IHT be paid by "residuary beneficiaries" as you call them? IHT is levied on an estate and is paid, in practice, by the executors before the remaining estate is divided up. Are you seriously saying a Will can specify that some people get paid their inheritance in full first, leaving any others to pick up the IHT bill? Unless I am seriously misinformed (always possible) I do not think that is the way things work! Setting out a pecking order for inheritors in a Will is one thing, but demanding some of them pay an IHT bill on behalf of the estate is quite another. What would happen if the estate did not in fact have sufficient funds to pay both the IHT bill and pay all the stipulated inheritors?

Avantegarde wrote:What would happen if the estate did not in fact have sufficient funds to pay both the IHT bill and pay all the stipulated inheritors?

To be honest I'm not sure, but my assumption in my post was that there was enough.

If you're still having problems seeing it the other way, do a worked example.

Scott.

I am not interested in a worked example. I am interested in the two (seemingly erroneous) conceptions in the original post suggesting that a) some inheritors can get all their money from an estate "tax free" while b) others have to pay the IFT bill on behalf of the whole estate. I am happy to be proved wrong but, as I explained before, I don't think either conception matches the way that IHT is levied and probate actually works. I shall let others comment.

Avantegarde wrote:You what? Why should IHT be paid by "residuary beneficiaries" as you call them? IHT is levied on an estate and is paid, in practice, by the executors before the remaining estate is divided up. Are you seriously saying a Will can specify that some people get paid their inheritance in full first, leaving any others to pick up the IHT bill? Unless I am seriously misinformed (always possible) I do not think that is the way things work! Setting out a pecking order for inheritors in a Will is one thing, but demanding some of them pay an IHT bill on behalf of the estate is quite another. What would happen if the estate did not in fact have sufficient funds to pay both the IHT bill and pay all the stipulated inheritors?

Of course the tax is paid by the residual legatee effectively. Typically a will will list bequests to various people and organisations or charities, and the remainder to be given to a person, or to be divided between nominated persons (or an organisation). These are the residual legatees. If no tax had to be paid, their legacy or legacies would have been higher by the amount of the tax paid.

TJH

Avantegarde wrote:I am not interested in a worked example. I am interested in the two (seemingly erroneous) conceptions in the original post suggesting that a) some inheritors can get all their money from an estate "tax free" while b) others have to pay the IFT bill on behalf of the whole estate. I am happy to be proved wrong but, as I explained before, I don't think either conception matches the way that IHT is levied and probate actually works. I shall let others comment.

I think It is merely order of carving the bird within the discussion that is wrong.

My understanding is that effectively the order is:

calculate estate,
calculate IHT,
pay IHT,
pay fixed legacies,
pay residual legacies

- the fun of course starts where there are various legal rights (do you have these in E & W) that can be claimed and not enough funds remaining post these, or just generally, tothen pay the fixed legacies.

The IHT is paid by the executor out of the assets of the estate. It is not paid by the beneficiaries. What's left after that is specific bequests, which are paid in the amounts specified in the Will, without being diminished by whatever share of the IHT bill someone thinks they should (unless the Will specifies otherwise). What's left after that is the 'Residue' and goes to the residuary beneficiaries.

The only exception I am aware of is where gifts have been made less than 7 years before death, in which case an amount might be recovered by the executor to contribute to the IHT bill. Not quite sure of whom the legal liability for that falls on in which order.

The amount of IHT may be affected by who gets what in the Will (eg charities or the spouse) but the IHT liability is still that of the estate and specific bequests have to be paid before establishing a residue.

eg
Net Estate
- IHT
- Admin costs
- Specific bequests
= Residue

Avantegarde wrote:I am very puzzled by the OP's question. ...

Others have answered but in your case were there any Pecuniary Legacies and what did the Will say about them regarding IHT or predecessor taxes?

Did you spot my first reply, which included a standard clause from a Will?

This page from HMRC might assist in some of the various terms:

Succession: Wills: Legacies and devises: classification of legacies and devises
These are the different types of legacies and devises that appear in a Will: ...

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm12082

Avantegarde wrote:[by "residuary beneficiaries" as you call them?

Not my words you were challenging but it is what they are called.

See, for example only, https://www.lawsociety.org.uk/support-services/help-for-solicitors/practice-advice-service/q-and-as/anticipated-costs-to-estate/

Avantegarde wrote:I am not interested in a worked example. I am interested in the two (seemingly erroneous) conceptions in the original post ...

More generally, why take such an aggressive stance?

Avantegarde wrote:I am happy to be proved wrong ...

Fair enough.

Avantegarde wrote:I am not interested in a worked example. I am interested in the two (seemingly erroneous) conceptions in the original post suggesting that a) some inheritors can get all their money from an estate "tax free" while b) others have to pay the IFT bill on behalf of the whole estate. I am happy to be proved wrong but, as I explained before, I don't think either conception matches the way that IHT is levied and probate actually works. I shall let others comment.

Unfortunately, this situation can and does quite easily arise.

It's not at all unusual to provide that a legacy should be "free of tax", but the problem arises when the estate is taxable but the residue has been left to an exempt beneficiary. As the legatee can't be made to pay the tax it has to come out of the residue, so that the exempt beneficiary effectively ends up paying the tax for the benefit of the legatee.

The situation involves the concept of "grossing up", which can result in horribly complex calculations.

There are some worked examples on page 4 of this article - http://legacymanagement.org.uk/wp-conte ... ce-Tax.pdf

Thank you.