Re Ratcliffe [1999] settled the interrelationship between standard residuary bequests and the incidence of inheritance tax following the aberration of Benham's Will Trusts [1995].
Changizi v Changizi [2025] appears to be the first case since then to review the same question.
Background
In 2009, Mr Changizi transferred £300,000 to Sharas, one of his four children.
He died in 2010. Under the terms of his 1985 Will, Mr Changizi divided his estate three ways, two parts to his four children equally between them, and the third part to their mother.
On 17 July 2012, Sharas' siblings executed a Deed of Variation so that their shares passed to Mrs Changizi absolutely (and, as surviving spouse, free of inheritance tax). Sharas was thus entitled to one sixth of the estate and his mother to five sixths.
Probate issued to Mrs Changizi and Robert Mayes in July 2014. They paid tax and interest on the £300,000 on the basis of Sharas' assertion that the payment was a gift (although subsequently, after having taken advice, he asserted that the payment was in fact payment of a debt).
The judgment records that 'there have been numerous disputes between [Sharas] on the one hand and his mother ... and his three siblings on the other including a failed attempt to challenge the validity of the will resulting in significant costs orders against Sharas.
In 2023, Sharas issued a claim for disclosure of documents and information.
The executors applied to stay that claim until he paid the outstanding costs orders. Their estate accounts showed a deficit meaning Sharas owed the estate money in excess of his one sixth share. Master Marsh granted that application.
Sharas appealed arguing that he did not owe the estate money because, he said, the estate accounts wrongly deducted inheritance tax from his share rather than the estate.
Sharas was given permission to appeal on the basis of his calculations.
Appeal
The Judge, Jarman J, dismissed Sharas' attempt to avoid liability for inheritance tax on the potentially exempt transfer. His argument that the payment was consideration for a debt was inconsistent with earlier claims Sharas had asserted against his father's estate.
In relation to Sharas' argument that inheritance tax should fall on the estate as a whole rather than his share, the Judge reviewed s.41 of the Inheritance Tax Act 1984 which says:
'41 Burden of tax.
Notwithstanding the terms of any disposition -
...
(b) none of the tax attributable to the value of the property comprised in residue shall fall on any gift of a share of residue if or to the extent that the transfer is exempt with respect to the gift.'
What is clear from s.41(b) is that it is contrary to statute to pay inheritance tax arising on non-exempt shares of residue out of exempt shares of residue.
In order to determine what that means, the Judge then referred to the seminal decision, for charities, of Re Ratcliffe in which Blackburne J said:
'In my view, therefore, the gross division approach is correct. An equal division of disposable residue between the [non-charity beneficiaries] and ... charities inevitably means that the inheritance tax attributable to the [non-charity beneficiaries'] half share must be borne by that share: to subject the charities' half share to any part of that burden is prohibited by section 41(b).'
In other words, although the gross value of non-exempt shares may equal that of the exempt shares, the attributable inheritance tax is then netted off the former.
Sharas sought to rely on the earlier decision of Re Benham in which the Deputy Judge had determined that the non-charitable beneficiaries were entitled to have their respective share 'grossed up' so that the net result was equality between charitable and non-charitable beneficiaries (with HMRC gaining by virtue of additional inheritance tax). Blackburne J had criticised Re Benham as laying down no principle.
Jarman J agreed and said that he should follow Re Ratcliffe on the basis that the wording of s.41 is clear:
'The statutory provision means that none of the tax attributable to the value of the residue shall fall on the exempt share of the Appellant's mother.'
He then quoted with approval the editors of Williams, Mortimer and Sunnucks Executors, Administrators and Probate 22nd Ed at 41-44:
'In a standard case, therefore, grossing up will not apply. Re Benham was a special case on its facts. There is, however, no reason why the testator cannot include an express Benham clause, to the effect that the shares of the beneficiaries not qualifying for exemption are deemed to be of an amount which after payment of tax is equal to that of the shares of beneficiaries qualifying for exemption ...'
However, Mr Changizi did not do this. He had simply directed his executors and trustees to hold the net proceeds of sale and, after paying his debts and funeral expenses, to divide the estate into three equal shares (which were then varied as set out above).
Conclusion
Changizi is helpful in restating what has been clearly understood as the law for many years. Mistakes still happen on a regular basis with executors paying inheritance tax where non-exempt shares give rise to an inheritance tax charge, but then distributing net residue equally rather than giving the exempt beneficiaries (spouses or charities) their shares in full.
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