It is usual for a will to provide that legacies should be made 'free of tax', meaning that the recipient receives the amount gifted in the will, without a deduction for inheritance tax (IHT). The burden of IHT then falls on the residue of the deceased's estate.
Complexities arise where only part of the residuary estate is exempt from IHT because it passes to a spouse/civil partner or a charity with the remainder passing to a non-exempt beneficiary. In such circumstances special calculations are required to calculate the amount of IHT on any non-exempt ‘tax-free’ legacies and non-exempt residue to ensure the burden of tax falls only on that part of the estate passing to non-exempt beneficiaries. These calculations are known as grossing up.
In certain cases, grossing up can result in a higher IHT liability arising on gifts intended to be made free of tax than would otherwise be payable if the gift had been made subject to tax in the testator's will. The additional complexities created by the need to make these calculations can result in higher legal fees, thereby reducing the residuary estate even further.
It is important for a testator to understand the tax implications of gifts made in their will. Specific gifts in a will should bear their own tax, and grossing up should be avoided where possible. Testators may also consider increasing the value of a specific gift, taking the IHT liability into account.
We can provide expert tax advice on how to write your will so as to avoid these pitfalls and avoid the need for grossing-up calculations. We also have experts on the probate process and fully understand the difficulties that executors can face in such a situation.
For further information contact Sarah Albury and Nicole Balthazar.