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March 5, 2014

Do Nil Rate Band Legacies include the Transferable Nil Rate Band? Loring v Woodland Trust

Loring v Woodland Trust [2013] EWHC 4400 Ch highlights the care that must be taken when interpreting (and drafting) nil rate band legacies in wills and undertaking inheritance tax planning.

Charities are often named as residuary beneficiaries of wills/trusts and it is becoming increasingly common for charities to protect their interests by challenging the personal representatives interpretation of the will and actions taken by trustees.

In this case, the Court concluded that the nil rate band legacy included the full amount of the nil rate band available to the deceased's estate of £650,000 (i.e. including the transferable nil rate band).

The effect of this was a reduced residue available to the charity of £30,385 (as opposed to £325,000 plus £30,805).

Case Summary

The deceased left a will providing a legacy "equal to such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax" (emphasis added).

The residue of the estate was left to the Woodland Trust charity.

The deceased's husband had died some years previously and a transferable nil rate band was available to the estate.

The question therefore arose as to whether the nil rate band legacy should take account of:

a) The deceased's nil rate band only (i.e. £325,000), in which case the amount of the residue due to the charity was £355,805 or

b) The total nil rate band available on death being the deceased's nil rate band plus the transferable nil rate band from her husband's estate (i.e. £650,000), in which case the amount of residue due to the charity was reduced to £30,805.

There was little evidence of the testator's intentions regarding the amount of the legacy, therefore the Court looked at the construction of the sentence in which the gift was made.

The Court felt that the use of the word 'my' was significant because it indicated the amount should be calculated in relation to the testator's nil rate band, which was treated as increased by the amount of the transferable nil rate band for inheritance tax purposes under the Inheritance Tax Act (IHTA) 1984 s. 8A(3).

It is unclear from the judgment whether the Court considered the fact that the nil rate band is not increased automatically under IHTA 1984 s.8A but that a claim must be made and the testator would have no control over whether or not a claim is made.

HMRC Guidance

Both the claimant and the defendant in the case referred to HMRC's guidance at IHTM43065 which considers the impact different wording can have on the amount transferred into a nil rate band trust.

Whilst HMRC's guidance is concerned with the exit charge that may arise where property is distributed from a nil rate band trust where the initial settlement included a transferable nil rate band, it does provide some useful examples of different wording that may be found in practice.

The following examples are taken as extracts from HMRC's guidance.

Examples where Legacy includes the Transferable Nil Rate Band with HMRC Comments

1. where the Will of the surviving spouse or civil partner leaves a sum ‘that is equal to an amount that will not give rise to an IHT charge’ on relevant property trusts, -  that amount will include nil rate band that has been transferred.

2. ‘I give free of tax to my trustees such sum as at my death equals the maximum amount which could be given to them by this Will without inheritance tax becoming payable in respect of my estate’ - will allow the uprated nil rate band to be transferred.

Examples where Legacy includes only the Deceased's Nil Rate Band with HMRC Comments

3. ‘To my trustees such sum as I could leave immediately before my death without IHT becoming payable’ - will only transfer the single nil rate band available on the deceased’s death, because any nil rate band that may transferred is not available immediately before death.

4. ‘I give free of tax to my trustees an amount equal to the upper limit of the nil per cent rate band in the table of rates in Schedule 1’ - will only transfer a single nil rate band.

5. ‘To my trustees an amount equal to the nil rate band in force at my death’ - again will only transfer a single nil rate band.

The charity has argued that the wording in case was similar to that in example 5 above, however the Court felt that the construction of the sentence most closely resembled example 2 above.

See our Spring 2014 Tax Update for more recent cases.


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