IHT charge on a failed PET or LCT

A gifts unquoted shares by a PET in year 1 and dies in year 3. BPR at 100% would have applied in year 1, but by year 3 the rate of relief has been reduced to 50%. Does the 50% rate apply to the charge on death?

The same facts above but A gifts the shares to a relevant property trust. Is it the 50% rate that applies to the additional charge on death? If so, does this mean there was no advantage in gifting the shares and receiving 100% relief at the time?

Simon Northcott

IHTA 1984 s113A.

It does not follow that on death the BPR relief available at the time of the gift automatically applies.

Broadly, conditions need to be satisfied if such relief is to continue to apply. In particular, (a) the transferee must have continued to own the property (or replacement property) throughout the period from date of gift to date of transferor’s death and (b) immediately before the transferor’s death the original property (or replacement property) is relevant business property on the part of the transferee.

However, with respect to shares unquoted at the date of transfer, (b) above does not need to be satisfied as it is only then necessary for the shares to simply still be unquoted at the transferor’s death.

The above applies whether the lifetime gift is a PET or CLT.

Malcolm Finney

It’s all in s.113A and s.113B IHTA.

More facts would be helpful (is it the same property / how has it changed category) but the likelihood is that the transfer remains 100% relieved provided the asset is still relevant business property on the donor’s death.

Andrew Goodman
Osborne Clarke LLP

I should clarify that I am assuming the conditions for relief are all met, the only change is a reduction in BPR from 100% to 50% by the time of death, as may happen as a way to raise more money from taxes. Is there any advantage in lifetime gifting to take advantage of the current 100% rate, if the donor dies within 7 years at a time when the rate has been reduced, or even scrapped?

Simon Northcott

There is presumably a prophetic element to this query as the situation envisaged has not previously arisen as far as I am aware.

There were rate increases in 1992 and at the time it was confirmed that the new rates would apply to any charges on deaths after the change in rate in respect of transfers made prior to it. But that was allowing additional relief, rather than a reducing it.

There does not seem to be any specific legislation other than that at s113A IHTA 1984 which does no more than withdraw relief previously given where certain conditions are not satisfied. It has no mechanism for changing the rate of relief already given (such as where unquoted shares were given and they become a quoted controlling holding). Sched 2 IHTA does not cover it either. Perhaps any legislation reducing the rate of relief would have to set out some rules. This happened in 1986 ( FA 1986 Sched 19) and also in 1987 when a relief for shares on the USM was withdrawn but preserved for earlier gifts where the donor died after the change in treatment.

Under current legislation a gift into trust is preferable. HMRC accept that if relief is withdrawn on death in the case of a chargeable transfer there is no change to the donor’s cumulative total on death, so the 100% relief originally given remains in place to that extent. This is not is not the case with a PET.

By the way I share the ominous thinking which I suspect is behind the query. Given the catastrophe which our Govt finances are facing, any tax reliefs which look to be on the generous side could be on a danger list. There are plenty of them.

Malcolm Gunn

M B Gunn & Co Ltd


Thank you Malcolm. I too could not find anything to help in the current legislation beyond what you have said.

You say " HMRC accept that if relief is withdrawn on death in the case of a chargeable transfer there is no change to the donor’s cumulative total on death, so the 100% relief originally given remains in place to that extent. This is not is not the case with a PET."

I too found this, but although It assists the remainder of the estate, so the full NRB would appear to be available to the death estate, the additional charge to IHT on the lifetime chargeable transfer itself will not under current legislation have the benefit of the 100% relief if it is reduced or withdrawn by the time of death within 7 years-the additional charge at 40% would appear to apply to the full unrelieved value, if the relief has been scrapped. Do you agree?

Presumably in these circumstances the NRB would be available against the lifetime gift, but oddly if the cumulative total is not affected so far as the death estate is concerned, there would seem to be a second NRB allowed on death. Very odd.

As you say, perhaps any amending legislation would allow the full benefit of previous reliefs on a death within 7 years, but in view of other retrospective tax legislation in the past, I am not totally confident.

Simon Northcott

Although we are going to a new era in terms of national finances, when it seems that a lot of money will have to be raised sooner or later, it would be very harsh to change or withdraw BPR retrospectively on a lifetime gift made some years previously. The donor would have made the gift in the knowledge that it qualified for the relief at that time and may well not done if there was no relief, or less than 100% relief. Of course there already the provisions in s113A by which relief can be withdrawn but generally the gift will have been made in the expectation that the conditions of s113A will be satisfied.

But I agree that old conventions against retrospective changes are not necessarily followed now. Instead they are described as retroactive and we are supposed to believe that the change of description makes all the difference.

The subtle distinction between s113A (1) (PETs) and 113A(2) (chargeable transfers) gives rise to the differing treatment on death. My understanding is that 113A(2) does allow a second nil band on the death because there is no cumulative total brought forward from the lifetime chargeable transfer if it had 100% relief at the time it was made. Only the calculation of the tax is changed on death within 7 years.

Malcolm Gunn

M B Gunn & Co Ltd

Simon Northcott

Yes. It seems logical that if between the date of the lifetime gift and death BPR is withdrawn that in calculating any additional IHT charge that the 40% rate would apply to the unrelieved amount of the lifetime gift. Despite the possibility of retrospective legislation I would have thought that some form of transitional provisions would be introduced to alleviate the adverse IHT consequences. A total withdrawal of 100% relief would seem very severe if at the time of death the conditions for 100% BPR would have otherwise been satisfied and 100% BPR obtained; but, eh, who knows??

The NRB would be available against the unrelieved lifetime gift in calculating any additional IHT charge (as applies now if the conditions for BPR are not satisfied at date of death). I agree that it is only the calculation of this additional tax that is affected, the cumulative total of transfers remaining unaffected.This would not be the case were the lifetime transfer to be a PET ie the cumulative total would be affected.

Malcolm Finney

So, if a client makes a gift now of 100% relievable property to a discretionary trust, holding over a large capital gain, and there is a “retroactive” change to the rate to say 50%, the only iht advantage if he dies within 7 years is the extra NRB, which,
while a goodly sum, could still result in a very substantial bill on say a ÂŁ20m shareholding.

The client would also have the problem of extracting the shares from the trust at an iht cost (which could well be greater than the benefit of the extra nrb) and will have lost the cgt free uplift on death.

So, a difficult balancing act, although insurance could help if circumstances allow.

Simon Northcott

The House of Commons Library publishes from time to time a Briefing Paper on “Retrospective Taxation” by Antony Sealy, SN04369. The latest edition is 8 April 2020. https://commonslibrary.parliament.uk/research-briefings/sn04369/

This charts HMG’s historic attitude to the subject. Broadly HMG considers that it can do whatever it likes but regards itself as voluntarily restrained within stated parameters (a “self-denying ordinance” but note that in 1645 such a measure did not extend to “good chaps” such as Cromwell). So far the judiciary has not discovered a case in which the latitude accorded to HMG in tyrannising individual taxpayers retrospectively by the HRA 1998 has been juridically exceeded. Theoretically a failure to observe its own self-imposed restraints might possibly be amenable to JR especially after Miller No 2.

The particular issue raised here would certainly appear to be on the side of the angels. There is no nasty contrivance or artificial scheme. There could be no question of restoring the “original” view of the legislation (i.e. that which HMRC holds, at least now if not earlier). There has been no official warning against the specific behaviour nor can it be fairly said that advisers and other sages have created an undeniable impression in taxpayers’ minds that it could well be clobbered. These have all been proffered by HMG as past justifications.

A crystal ball has long been an essential piece of kit for tax advisers (plus a disclaimer!) and they now need peerless metaphysical divination as to what conduct conforms with the the understanding of pristine fiscal purity vouchsafed from the mountain by the PRCT and SRA.

Even so it will be a dilemma advising whether the present lack of warning will likely save someone who embarks now upon this type of (allegedly) hitherto Government-sponsored tax mitigation/planning (surely not “avoidance”, cherubs) and for how long that situation might prevail. Fortune may favour the brave. Those who have already acted may well be secure. Like “deprivation of assets” under the CRAG, acting early may defuse in due course even the robust judgment of hindsight from the great and good.

In the final analysis HMG is only motivated by political expediency. Some sorts of public opinion may prompt or restrain action or induce U turns. Wealthy taxpayers and their advisers do not have a great track record as influencers of fiscal policy even when 150% of GDP is not the current deficit.

The main thing these days is that taxpayers should be totally realistic about the probability and cost of the downside of planning and enured to the philosophy that, in the modern fiscal fashion industry, nothing lasts forever (e.g Entrepreneurs’ Relief). The glass may not be even half empty.

Jack Harper