The Gazette 1979

APRIL 1979

GAZETTE

7. One of several joint legatees cannot disclaim although he can release to the others. Only a disclaimer by all can be effective although the required result can be achieved by means of a severance of the joint interest followed by a disclaimer. 8. "Freedom from Tax" is deemed to be a separate legacy. These points are very much generalisations and must not be taken as definitive in the context of C.A.T. legisla- tion and indeed more particularly having regard to the Law of Succession. Further, it is important to draw attention to a variation between the disclaimer provisions of the C.A.T. Act and the somewhat similar provisions of Section 14(6) of the Capital Gains Tax Act which permits exemption from C.G.T. in the event of bequests being varied under a Will in accordance with the provisions of a Deed of Family Arrangement. Such an arrangement is not possible in the context of Capital Acquisition Tax legislation. This is undoubtedly an area of confusion which is understandable when one looks at the two Sections of the different Acts referred to which do, of course, relate to two different Taxes. Nevertheless, the provisions of the Capital Gains Tax legislation do permit relief from that Tax in the event of disclaimers being exercised but the relevance of C.G.T. may currently be of little consequence except where there is considerable delay in making distributions. To illustrate the points referred to in relation to the dis- claimer provisions, a factual case is as follows:- 'D' bequeathed his Estate, value £360,000 to his widow absolutely. Consequently the C.A.T. liability would be £69,500. In that instance, the widow renounced her interest under the Will and her Legal Right under the Succession Act on which basis an Intestacy arose and the widow became absolutely entitled to two-thirds of the Estate, i.e. £240,000 on which a C.A.T. liability of £24,500 arose and each of the deceased's three children became entitled to the remaining one-third or a sum of £40,000 in each case which did not attract a C.A.T. liability as it was well below the exemption threshold. Consequently, a saving of £45,000 in Tax arose. In that particular case the widow had the option of taking her Legal Right which would have given her one- third of the Estate i.e. £120,000 leaving the remaining two thirds to devolve on a partial Intestacy. It is suggested that because of the provisions of Section 115 of the Succession Act, the widow may be excluded from further benefit in which would be payable. If, however, the widow was not excluded, in accordance with the provisions of the C.A.T. Act, she could disclaim her further benefit on the Intestacy. However, there is a danger that either the provisions of Section 115 or a disclaimer could give rise to "bona vacantia". In relation to post death action, one can appropriate assets to avail of certain exemptions and reliefs relative to the Tax. It may also be possible where certain discretions as distinct from powers of appropriation are given to Executors and Trustees to defer distributions with a view to deferring the Tax without interest charge which particularly in times of inflation can constitute a real saving, though care must be taken to ensure that assets do not become inflated in value thus increasing the Tax 51

amount of the legacy but also on the freedom from Tax bequest thus giving the "grossing up" effect. A factual example of a specific situation was precisely as follows:- 'C' left a legacy of £60,000 to Ms. Jones absolutely free of all Taxes. There were no previous bequests and consequently on the basis of Table IV of Part II of the Second Schedule of the Act, a Tax liability of £15,600 arose. The total of legacy and Tax, therefore, was £75,600. In the circumstances, the Tax liability was payable out of the Estate thus giving rise to a further liability to Tax on the Tax, on the Tax and so on with the result that the actual cost of the legacy and Tax to the Estate amounted in all to £91,222. (The Tax charge in relation to a Tax free legacy of £100,000 in such an instance would be £90,370). DISCLAIMER This is probably an appropriate point to move on to post death action in the matter of Tax saving since the example just given begs the question - is there anything that can be done in such a situation to mitigate the Tax liability? The brief answer is 'yes' - subject to the co- operation of the Legatee and/or the other beneficiaries particularly the Residuary Legatees. At the risk of repeating some points already made, it will be noted that in the example in question there are two separate legacies - (a) the sum of £60,000 and (b) the "freedom" from Tax. It will be noted that Section 13 of the Act effectively permits a beneficiary to disclaim a benefit under a Will or Intestacy and further sub section 3 of that Section facilitates the substitution of consideration in money or money's worth received in lieu of the bequest disclaimed. Consequently, the beneficiary in the case stated could accept her cash bequest of £60,000 and agree with the Executor to accept a specified amount in lieu of the "freedom" from Tax legacy. The amount in question might be to the order of £20,000/£25,000 on which Tax would have to be borne by the Legatee thus leaving the net value of the two legacies under £60,000 which would appear to be inequitable having regard to the Testator's wishes that the lady should have effectively £60,000 free of Tax. This difference might be made up in a number of ways for example by funding the Tax where possible by surrendering at par Government Stock standing at a discount. The main area of achieving Tax saving in a post death situation as already stated is by the judicious use of the "disclaimer" provisions of the Act. However, care must be taken to ensure that the desired results ensue and the following comments are relevant in any considerations of this nature:- 1. In disclaiming a benefit, one cannot determine to whom the benefit subsequently accrues. 2. In effect a legacy or bequest disclaimed falls into the residue of the Estate. 3. If the Residuary Legatees, or any one of them, dis- claim benefit, then that property falls to be divided in accordance with the rules on intestacy. 4. Once accepted a benefit cannot be subsequently dis- claimed. 5. An interest in the Residuary Estate cannot be partially disclaimed. 6. One legacy can be disclaimed while a second legacy is accepted.