Charities and IHT Planning

Wills, Probate, Tax & Trusts Solicitors, Liverpool & North West London

Many people rightly wish to benefit charities upon death. However, where Inheritance Tax is a potential issue, it is essential that a professional drafted Will is prepared to ensure that appropriate tax savings are made. In this context, it is common to still see the use of Nil Rate Band Gifts within Wills that also have Charities as Residuary beneficiaries.

The construction of such Wills, prepared by Solicitors for many years to mitigate Tax (avoidance of Tax through sensible organisation of one’s affairs being perfectly legal and not be to confused with Tax evasion), recently came under scrutiny and only upon appeal to the Court of Appeal did the Court restate the position understood to be the case to most Private Client Solicitors drafting tax-efficient Wills upon a daily basis.

The background to the case of RSPCA v Sharpe was as follows: The Deceased left an Estate worth £1m. His Will named the RSPCA as the Residuary Beneficiary, subject to a legacy of the Nil Rate band (NRB) and a tax-free legacy of the deceased’s home. The NRB gift was drafted in the standard terms of “I give the amount which at my death equals the maximum which I can give…without IHT becoming payable”. At the time of death the NRB threshold was £300K. A Charity is an exempt beneficiary for Tax purposes.

The question arose as to whether the NRB gift was of the full statutory amount of £300K, without allowing for the second gift of the home, or whether it was a gift of the NRB remaining after allowing for the home – i.e. the value of the home would be deducted from the NRB amount. The Executors interpreted the Will upon the first construction and treated the tax free gift of the home as additional to the £300K NRB. This resulted in additional IHT and effectively reduced the Charity’s gift by £280K.

At GAD, we were highly critical of the lower courts approval of the Executors reasoning. Our stance has been vindicated and justified following the Court of Appeals over-ruling in December. The gift of the house should have been taken into account when calculating the NRB legacy. The Court of Appeal rightly noted:

The main issue turned upon whether the deceased intended to make a tax efficient will. It was wrong to accept the Executors submission that a professional drafted will that disclosed upon it’s face an understanding of IHT legislation, NRB gifts and the status of exempt beneficiaries (a Charity) could be deemed to have been written by someone with an imperfect understanding of the complex tax issues
Extrinsic evidence is not admissible as to what the deceased had contemplated. Only the language of the Will could be used and nothing else. Assumptions could not be advanced that the deceased would not have wanted the gift of the house to possiblly “exhaust” the NRB gift.
The wording of the NRB gift (“..the maximum amount…”) contemplated the NRB gift being calculated by reference to all transfers of value made ”by this my Will”. These were not accidental words inserted by the draftsman (the Solicitor), but rather a correct acknowledgement of how IHT worked.
Furthermore, no merit would be placed on a sequential reading of the Will. It mattered not in this case that the NRB gift was listed before the gift of the house. Wills should be read as “a whole” unless there are clear words in the Will to demonstrate a clear intention for one gift to take in priority to another. One clause cannot be construed as being subordinate to another, merely because it appears later in a Will. In fact in this case, the declaration that the payment of debts and testamentary expenses appeared much later in the Will (a common feature of most Wills) even though in Law this liability would take precedence before any gifts – it’s position in the Will therefore being irrelevant!

In constructing the Will as drafted it will be noted that:

The beneficiaries of the NRB gift would only receive their entitlement in whole / part if the value of the house was below £300K. In this case, the difference between the house value and £300K would be the balance payable under the NRB gift (e.g. if house valued at £250K, the NRB would be the balance of £50K) and the whole of the balance of the Residue would pass to the Charity Tax free.
If the house was worth £300K it would pass without Tax and the whole balance of Residue would pass to the Charity Tax free. No NRB gift would take effect.
If the house was worth more than £300K, the technical “grossing up” calculation occurs with the gift of he house being deemed to be such sum that when tax is deducted from the “higher figure” the house is inherited tax free by the beneficiary. The Charity receives the “balance” of the Residue Tax free (though this amount is actually less than 1 or 2 above as tax has been paid in respect of the non exempt taxable gift of the house). No NRB gift would take effect.
If on death the only asset of the Estate was the house, as a specific devise and legacy, it would rank in the order of priority within insolvent estates and would be paid to the beneficiary with any resulting tax liability (if valued at greater than £300K). There would be no additional funds for the NRB that would fail and the gift of Residue would similarly fail.

This is a fundamental aspect of Will drafting often overlooked by un-trained Will Writers. It is essential to distinguish the legal priority of payment when there are insufficient funds within an Estate to meet all the gifts. It is also necessary to determine whether gifts of a NRB nature are there primarily to provide for a beneficiary come what may, or only if a tax efficient gift can be affected. This is a question of priority for the deceased person. Because extrinsic evidence of the deceased’s intentions could not be admitted to Court in evidence, the will draftsman should ascertain at the outset whether the deceased wished to gift £300K to beneficiaries “come what may”, it being accepted that this could severely reduce the amount available to the charity (i.e the Charity only takes once everyone else has been benefited) or whether the primary beneficiary under the Will was the Charity, who should not see their entitlement reduced save for a “capped” gift of the house / NRB (i.e whilst the house is given priority, the NRB is not to be an additional gift that would financial impinge upon the gift of Residue).

The lesson is to ensure that these various permutations are discussed with our Private Client Department to ensure that the distribution you seek is indeed achieved and that from a tax perspective, the “tail is not allowed to wag the dog”. As with all good drafting, it is essential, that in addition to understanding the technical aspects of the words used themselves, the Client’s actual intention and instructions must also be clearly understood and enacted upon to achieve the required distribution.

As the value of many individuals Estates have increased dramatically over the past 10 years with property prices rising, it is essential that those people with pre-existing NRB Will Trusts reflect upon the distributions set out and the identities of the beneficiaries named to ensure that the correct balance is struck and that those whom you wish to benefit do so.

Reviewing your current Will is an essential part of your financial planning strategy. Beware of “self-diagnosing” the existing effectiveness of your will in the present day climate of Tax Legislation. The Judge within the lower Court got it wrong. Perhaps you may do so yourself? Contact Ian Sturgess within our Private Client Department to discuss any concerns you may have.

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Charities and IHT Planning

Wills, Probate, Tax & Trusts Solicitors, Liverpool & North West London

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