Son 1 should be liable for the IHT on the failed PETS, with the estate (and therefore Son 2) being liable for the IHT on the value of the estate.
There is the catch that if Son 1 does not pay the IHT within 12 months of the end of the month in which death occurred (s.204(8) IHTA 1984), HMRC may assess the liability upon the estate. There is no obligation upon HMRC to try to obtain payment from the beneficiary of the failed PET (in this case Son 1) before requiring payment from the PRs. Arguably, the estate will have a right of recovery from Son 1 for the IHT paid on the failed PET. This is a particular situation that I have felt uncomfortable about for many years.
I suggest that when submitting the IHT400, HMRC is asked to assess Son 1 directly for the IHT liability on the failed PET.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals