Client downsizes and gifts the surplus cash from the sale of their property, say £500k, to their children.
Six months later the client dies leaving a Will that passes everything to their spouse so is exempt from IHT.
The failed PETs exceed the NRB so will be subject to IHT. However, is it possible for the children to reject the gifts and return them to the estate??
I can’t find any relevant authority for this scenario but if we were talking about a gift from a Will clearly there would be a 2 year window for them to vary/disclaim their interest.
At common law [Re Joel, Rogersoon v Joel [1943]] a disclaimer is possible assuming that the beneficiary(ies) (assuming full capacity) has not done anything to denote acceptance.
Although perhaps typically unlikely the will may contain explicit provisions should a beneficiary disclaim. If no such explicit provision is made the other terms of the will (or possibly the intestacy rules) will then apply.
I am cynical about things so my assumption of what might happen is:
Children disclaim £500,000
Children withdraw £500,000 from savings accounts and pay it to executors’ bank account
Spouse receives an extra £500,000 from executors as residuary
Spouse chooses to gift £500,000 to children and hopefully will survive seven years.
If my cynical side is right then there is an IHT saving because the failed PET is no longer a failed PET and the children benefit from that IHT saving (and get their £500,000 back).
So I guess the question is whether the disclaimer means that (i) the original PET never happened and can be ignored for IHT purposes, or (ii) the original PET is unaffected (so still a failed PET) and the disclaimer is a transfer of value. If the later, there is then the question of whether the disclaimer would be a PET (because it is really a gift to the spouse) or CLT (because the estate is not an individual) by the children.
A transfer of value can happen when a disposition is made and HMRC believe that it includes the release or relinquishment of any right (IHTM04023) and so, they may say, a disclaimer would be apt to be a disposition.
The two year window mentioned is presumably from s142 IHTA and that applies where “dispositions … of property comprised in his estate immediately before his death are varied”. That cannot apply here as it is the property in the estate that is being varied (increased by a disclaimer) rather than the disposition (the estate still goes to the spouse).
I don’t know enough about the common law status of a disclaimer but my assumption is that HMRC would object to attempting to undo the original PET through a disclaimer since it would defeat the purpose of the PET rules. Couple could make gifts of cash and if one or both survive seven years great, otherwise disclaim the gift, let the surviving spouse have a second go and gift it again.
I skimmed Re Joel, Rogerson v Joel [1943] but couldn’t really see that it is helpful here (other than suggesting that a child must disclaim all or nothing).
My cynicism may have led me astray in all of this though.
Disclaimer must be possible provided the children have not touched the large sum of cash that arrived in their bank accounts.
But equally, HMRC could theoretically challenge a 6 month delay and look for any sign of acceptance such as:
providing their bank details to their father so they could receive the money
using any of the money
generating interest
a “thank you” letter/email/txt - assuming they are well behaved children
acquiescence for six months after becoming aware of receipt of the funds - acquiescence isn’t really covered by the cases but that may be because it hasn’t really arisen on the facts of prior cases.
If the gifts were made by cheque, I suggest it would be difficult for the children to argue that they had not accepted the gift if they had paid the cheques into their accounts. However, if the cheques are still sitting on the mantlepiece (unpaid), as the deceased’s mandate over his account will have lapsed on death the gifts have not been completed and no disclaimer would be required.
Mindful it is suggested that the widow might make gifts to the children once they have disclaimed the lifetime gifts from the deceased, I would be very wary of any suggestion that the disclaimers were made on such an understanding as the intention to compensate them would be consideration, resulting in the disclaimers being ineffective. Whilst the “but who would know” defence might be put forward, if a professional is aware of the intention they will perhaps be supporting the facilitation of tax avoidance which, I believe, may carry criminal sanctions.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
None of the comments (subject to those made by Tigs; see below) following my posting appear to challenge the principle that under the common law a disclaimer is perfectly feasible. Of course, the potential recipients must not have done anything which may indicate an acceptance on their part; this is basically just mechanics.
The disclaimer is not a disposition/transfer of value; it is simply non-acceptance on the part of the potential beneficiary; a refusal to accept the gift. There is therefore no “undoing” of the PET as suggested by Tigs.
Unlike the s142 disclaimer there is no time period within which the disclaimer must be made.
I think this is a case where all the replies to the original posting are ‘correct’ (imho). The practical question is perhaps therefore not, “can you disclaim the gift”, but in the present instance are the gifts really being disclaimed?
A £500,000 gift sitting in an account, (or spread across several children, still likely to be over £100,000 each) for over six months?
Practically I share Tigs cynicism, and cannot see how they could not already have been accepted.
I agree with Haroon. It is difficult to comprehend that none of the children were not made aware of the gift at the time. To be talking about disclaiming 6 months later just seems ridiculous!