When planning for succession it is always important to remember how the burden of inheritance tax will fall. However this may not be as one might expect as our fictitious case study reveals. Mr Bennett has an Estate of £3m and three daughters.
Conveniently his assets break down into a portfolio of quoted stocks and shares, Netherfield Hall and Park and his Villa in Ruritania. All of these are worth about £1m each. Mr Bennett’s eldest daughter Jane is actively involved with him in the management of Netherfield Hall and Park. Elizabeth lives in Ruritania where she has a demanding job in the British Embassy and Lydia is married to an unsuitable ex army officer and is in need of funds.
Mr Bennett would like Jane to receive Netherfield Hall and Park, Elizabeth to receive the property in Ruritania and for the residue to be placed in trust so that Lydia can receive an income while the capital is protected. Mr Bennett accordingly makes a homemade Will leaving Netherfield Hall and land to Jane. The property in Ruritania to Elizabeth and the residue to be held upon trust for Lydia and her family. Mr Bennett makes no reference to inheritance tax and assumes that as he has three beneficiaries and has given them roughly assets of equal value they will, after the payment of inheritance tax, receive assets of equal value.
Unfortunately for Lydia the burden of inheritance tax will not fall in this way. As a specific gift of UK property Netherfield Hall will pass free of inheritance tax to Jane the tax falling on the residue. The property in Ruritania as a specific gift of a non-UK asset will pass subject to its own share of UK inheritance tax and the residue will have deducted from it not only the tax on its own value but the tax on Netherfield Hall.
For various reasons none of the assets qualify for any inheritance tax relief and the total tax in the estate is £1,070,000. Jane accordingly receives an asset worth £1m. Elizabeth receives £643,333 as the share of the tax payable by the Ruritania property is £356,666 and poor old Lydia only receives £286,666 having paid tax on Netherfield Hall and the residuary estate.
Lydia’s plight underlines the importance of having proper advice when planning for succession. Unfortunately there is a further nasty sting in the tail for Elizabeth. Although he has no connection with Ruritania other than having purchased the Villa, English law will apply Ruritanian law to the devolution of property in that country as it follows the law of the country where land is held. Ruritanian law applies an obscure form of forced heirship which means that the Villa passes to Mr Bennett’s despised cousin Mr Collins... but then that is another story!