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JGM
JGM, Solicitor
Category: Scots Law
Satisfied Customers: 11553
Experience:  30 years as a practising solicitor.
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If assets forming part of the Legal Rights fund sell, 2.5 years

Customer Question

If assets forming part of the Legal Rights fund sell, 2.5 years later, for considerably more than what they were valued at the date of death will the excess in value be added to the legal rights fund or will it only form part of the free estate?
Submitted: 2 years ago.
Category: Scots Law
Expert:  JGM replied 2 years ago.
Thank you for your question.
It's added to the legal rights fund.
I hope this helps. Please leave a positive response so that I am credited for my time.
Customer: replied 2 years ago.

Legal rights (IHTM12221) are entitlements to fixed fractions of the moveable estate of the deceased at the date of their death. The value used is therefore normally based upon the respective values of the assets and liabilities making up the estate at the date of death, as returned for IHT purposes. However, where the estate is wound up within a reasonable time, the value actually realised, if different from the IHT value, will be used in calculating the amounts payable in legal rights.

would 2.5 years be a reasonable time ?

Expert:  JGM replied 2 years ago.
In practice the net realisable value is used to calculate legal right. 2.5 years is not an unreasonable time to complete a large or fairly complex estate.
Customer: replied 2 years ago.

if the net moveable estate on death is £1m and legal rights = £500k (to be divided amongst legitim) would a £500k increase in the net moveable estate 2.5 years later be added to the £500k resulting in the legal rights funds now being worth £1m or would 50% i.e. £250k be added to the £500k making it £750k?

Expert:  JGM replied 2 years ago.
No, that would be excessive. What the executors should do is pay interest on the legal rights claim as at the date of death to the date of payment.
Customer: replied 2 years ago.

thanks, ***** ***** aware of interest being applicable to legal rights but thought that interest and an increase in the value of the net moveable estate as described in my previous post would be treated separately i.e interest would be added to legal rights fund in addition to any increase in value of the moveable estate

Expert:  JGM replied 2 years ago.
An additional £250,000 added to the legal rights fund would be deemed excessive, in my opinion that the executors should add any increase in value from the date of death to the date of the grant of confirmation. In addition to that interest should run from the date of death at, probably, a rate of 3% given the current financial markets.
Customer: replied 2 years ago.

Thank you for that.

With regards ***** ***** would you agree with the quote below in that only interest at a lower rate should accrue from date of death if the executor had no funds with which to satisfy legal rights with?


Quote



(c) Legal rights in a deceased's estate. The general rule under Scots law has been that legal rights carry interest from the date of death. However, the question of entitlement to interest must be distinguished from the question of the appropriate rate of interest. Where there has been delay in payment which is not attributable to any fault on the part of the executors, it has been held that interest should not run at a rate higher than that which the funds have in fact earned.32 On the other hand, where a claim has been made, or where there is no doubt that legal rights will be claimed because the claimant has been disinherited, the courts have awarded interest at the "legal rate" (ie 5 per cent), apparently on the basis of wrongful withholding.



Unquote

You mention 3%, in the above they mention 5% and from HMRC quote below they talk about "below commercial rate" and up to 7%!

Would you say that the legitim could force the executor to pay out 7%?

Quote

The rate of interest payable on legal rights (IHTM12221) has been a matter of uncertainty in the past and can still cause problems. There is no fixed rate, although the Scottish Law Commission have recommended that the rate of interest payable on legal rights should be fixed, in line with the arrangements in place regarding the prior rights financial provision which does carry a fixed rate of interest. It is accepted that the rate of interest payable is somewhat below commercial rates.

Payment of the same rate appropriate the prior rights cash provisions is considered to be acceptable which is 7% or something close to that. If a significantly higher figure is suggested as being appropriate, and the matter is material, you should refer the case to Technical.

unquote

Is TAX due on this interest?

Expert:  JGM replied 2 years ago.
Tax is possibly due on interest accrued on capital but that's different from the estate paying out interest so, no.
The legal rate of interest is actually 8% in Scotland. I think the point is arguable but I think the HMRC guidance notes are probably not realistic in the current climate. The correct rate, and I believe there us authority for this, is a rate that would be achieved were the funds to be "prudently invested".
Customer: replied 2 years ago.

Would you agree that interest at the higher rate shoud start acruing once funds are available to satisfy legal rights and not before?

"prudently invested"

Would you consider investing in Funds prudent? or would

Savings and notice accounts (30, 60 day notice) be more prudent?

If the latter then interest rates range from 0.01 - 1.91% GROSS per year.

Far removed from the legal rate of 8% which i believe was recently upheld in a commercial debt case.

Expert:  JGM replied 2 years ago.
Interest accrues from the date of the grant of confirmation usually.
Prudent investment would include bonds which would attract a higher rate of interest even for so called safe investments.
It is for the executor to use discretion and to be seen to be acting reasonably.
Customer: replied 2 years ago.

Thanks

Would you say that investing in for eg. UK 10 year Government bonds would be viewed as prudent investment with a yeld over the last 3 years ranging from 1.7-3.1% ?

Would investing in equity funds vs bond funds be viewed as prudent?

Expert:  JGM replied 2 years ago.
I have no idea. I'm afraid we're starting from the subject matter of your original question. The issues you now raise would have to be discussed with a financial adviser.
JGM and other Scots Law Specialists are ready to help you
Customer: replied 2 years ago.

I took your advice and asked the question in your finance section.

I thought i would share the response as it was unexpected.

"If we speak from neutral angle, the executor is expected to beat atleast the capital and money market / mutual funds returns significantly. He is expected to surpass them. Taking a benchmark, it is expected that while balancing the risk and return, returns of anywhere above 14% per annum is safe and prudent as well."

As you can see 14% is what prudent investment could achieve. Considerably higher than the 3% you sugested or even the legal rate of 8%.

Is anything above 8% a rate that a court could impose on the executor?

Expert:  JGM replied 2 years ago.
That surprises me and frankly it doesn't sound right to me. I deal in many estates and that rate of return just isn't realistic. Was that expert from Scotland?
Customer: replied 2 years ago.

I would think so but not sure as it does not state on the profile. Just says "Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years"

I would imagine that an investment returning 14% would not guarantee the capital which in my opinion must be safeguarded above all.

I mentioned the rates for bonds, savings and notice accounts averaging 3% a year and the legal rate being 8%

The anser was "I am aware of this. But from my point of view, if one does not significantly surpass these average rates, there is no point in managing the money. One is better off investing in a mutual fund with mix of debt and equity with more tilt on equity.

However, having said this, if one targets 14% and achieves somewhat 12% of so, even then it is excellent in all perspective."

Is anything above 8% a rate that a court could impose on the executor?

Expert:  JGM replied 2 years ago.
The court has a discretion but my own view is that a rate of 8% would be very high as no executor could achieve this with short term investments with access to the funds at the conclusion of the estate. I wholeheartedly disagree with what I think ay be a US expert and is certainly not a Scottish one.
Expert:  JGM replied 2 years ago.
PS no credible lawyer if the UK would describe him or herself as an "attorney".
You need to speak about investment rates with a Scottish financial adviser and that probably means not on this site as I dont think there are any on Just Answer.