Should Re Benham or Re Ratcliffe apply to gifts of residue in your will.
Gifts from our residuary estate to charities are generally free from Inheritance Tax. But, where a share of the residuary estate is gifted to both charity (who are exempt from IHT), AND a share passes to ‘chargeable beneficiaries’ too, you should decide how you want IHT to be calculated. And, your will should be clear on what you decide.
Here, we explain the choices, and what then to include in your will.
Does grossing up always apply if I make a gift to a Charity?
No. It (by definition) only applies if an actual IHT charge arises. So for example:
“Let’s say a single person dies with a net estate of £425,000 (ie £100k over the nil rate band). Their will states that £325,00 passes to friends (against which IHT would be potentially charged), and £100,000 passes to charities. BUT, even though the total chargeable estate is on the face of it chargeable, the £100k of charitable gifts are exempt, and the amount payable to friends is under the nil rate band. So, not tax payable, no grossing up to be done”
When might Grossing up apply?
Grossing up will only apply when a share of your residuary estate is payable to charities (or indeed other exempt beneficiaries eg a spouse) AND a share also passes to beneficiaries to whom IHT is attracted (a chargeable beneficiary), AND your net residuary estate does give rise to an IHT charge. Put another way, the share of your estate payable to chargeable beneficiaries exceeds the nil rate band (or other exemptions and reliefs) at the time of your death.
In this scenario, you must be sure that your will makes it clear how IHT is to be calculated. There are two choices:
- Re Benham – grossing up is required, and a larger IHT will result. All beneficiaries then get equal cash amounts
- Re Ratcliffe – there is a reduced tax bill, and the exempt beneficiaries receive their share free of tax
Each of the above are milestone tax cases which have clarified the law on this subject.
What is Re Benham?
Re Benham’s Will Trusts (1995) STC 210 related to a trust in the will of Jane Benham.
In simple terms, this creates a larger overall IHT payment, but one which is then spread amongst all beneficiaries meaning they all get the same in cash terms. This benefits the chargeable beneficiary. It requires a complicated ‘grossing up’ calculation to be applied so that the net gift(s) to the chargeable beneficiaries are equivalent to (and taxed as) gross.
If a share of your residuary estate passes to charity, your will should be clear on how IHT is to be calculated.
What is Re Ratcliffe?
Again, another tax case – Re Ratcliffe (deceased) (1999) STC 262.
In this case, it was decided that Mrs Ratcliffe’s intention was simply that the estate would be divided equally, and that the IHT would be paid from residue just like any other liability. It was NOT the case that she wanted the chargeable beneficiaries to benefit from the exempt beneficiaries IHT status.
Re Ratcliffe will create a lower overall IHT payment, all of which is carried by the chargeable beneficiaries. So, 20% (in the will) to a chargeable beneficiary will be different to 20% to an exempt beneficiary (charity or spouse).
How is Benham v Ratcliffe calculated?
Let’s take an example. David is single. He dies with a net estate of £2mil. He leaves it in equal shares to:-
- Paul – his friend (chargeable beneficiary)
- Simon – his friend (chargeable beneficiary)
- Amanda – his cousin (chargeable beneficiary)
- MacMillan Cancer Relief – a registered charity and exempt beneficiary
- The Stroke Association – a registered charity and exempt beneficiary
The shares are one-fifth each or 20%. NB – because the distribution to charity is more than 10% of the estate, a reduced rate of IHT applies of 36% (down from the standard 40%).
|£2mil net estate
NB – This example is intended to give a very simple overview of the principle of grossing up. HMRC will calculate the grossing up for your particular circumstances when it comes to it. And, for example, there are other things that may come into play.
How do I clarify what I want in my Will?
If the will is ‘silent’ on this point, it is generally assumed that Ratcliffe will apply – ie those beneficiaries that enjoy an IHT free status get to enjoy that, and those that don’t, don’t! It creates a lower IHT bill, and is considered ‘the norm’.
And so, if you want a Re Benham outcome, your will should specify this. This will probably look something like:-
“I DECLARE that gifts to chargeable beneficiaries will be grossed up so that the amounts received by chargeable beneficiaries are the same as those received by exempt beneficiaries”
Expert Estate Planning Solicitors
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