I have what appears to be a tricky problem but I’m hoping I’m overthinking it.
A settles £1000 onto pre-2006 IIP trusts for himself, which is then converted to an IIP for his children before the 2008 cut-off. A is excluded from benefit.
Ten years later, the trustees wrongly pay £100 to A, creating a debt owed by A to the Trustees.
If A then dies, this appears to be a GROB, and the debt does not appear to be deductible from A’s estate as per s.103 FA 1986 (the s.103(4) exception does not appear to apply).
At first sight, the estate appears to contain both the £100 cash and the benefit of the debt under GROB, also worth £100, creating a double counting. The estate can’t deduct the debt due to s.103.
Is it possible to just ignore the GROB in this situation? or do you really have a transfer of value on death of £200.
For bonus points, if A’s free estate reduces to zero at death (due to other debts), so the debt to the trust cannot be repaid, can the value of the trustee’s chose in action be valued at 0 at death so no IHT is payable by anybody in relation to the £100.
I agree that there is a technical possibility of multiple charges here but there are arguments that might assist. They are likely to be capable of being advanced in extremis and after the event. I do not think HMRC will engage before then.
Immediate or near-term remediation may not be possible. The repayment of a s.103 debt is a disembodied PET plus a tail of 7 years’ survival upon the consequent termination of the GROB. That seems to found a definite claim for double charges relief. I would not accept that a disembodied PET under s.103(5) or s.102(4) is ineligible, a PET is a PET, and in this case it would add corresponding value to the settlement (as well as reducing the future free estate of the payer), making any distinction from an actual transfer of value mere sophistry(so not beyond HMRC to argue).
As things currently stand there is a potential double charge but not one attracting relief; the GROB cannot be linked with the (presumed) original QIIP termination (expired PET) nor can that be linked to the disallowable liability. The GROB (presumably under s.102ZA) does not seem to fall within reg 6 of SI1987/1130 which links such liability only to a prior transfer of value, now expired. Apparently a casus omissus.
Reimbursement may anyway be simply a non-starter as no funds are on hand.
My arguments would be:
S.103 refers to a “debt”. This is anti-avoidance legislation so must surely be interpreted strictly. A debt arises where money is advanced under a contract with a view to its being repaid, if only on demand. This may not be exactly what happened. If so, no “debt”.
As you hint, it may be that no contractual debt arose but the trustees have a right of action in restitution to recover the money paid. This is not a debt. Not only that but such a claim may not be legally enforceable: there are in principle defences of A such as change of position and limitation, so a detailed evaluation of the validity of the trustees’ claim might be in order. Of course, no liability will then be deductible but also no value will be chargeable in the trust. But nor will there be a PET as no “repayment”. Does the GROB persist? It may be necessary to pinpoint when it ceased e.g when the trustees’ claim expired. This is awkward for the trustees as they may be in breach of trust for not taking prompt action.
Was there ever a GROB? What was the benefit of an advance of money that had to be repaid or was recoverable. There is however no proportionality between the value of the benefit and of the GROB property, other than the “virtually” get out. What is the property not enjoyed? Can it be said that A benefited from money he was to repay or from the trustees’ corresponding receivable? Possibly on a worst view even if he paid off debts with it.
Under s.102 he must enjoy the gifted property or its Sch 20 substitute. While this on a worst view might treat the receivable as representing the former cash or asset proceeds advanced, where a debt arises, what benefit is there in obtaining something that must be returned to its rightful owner in specie or by following or tracing? In that case if there is an initial GROB how can A retain a benefit in the trustees’ claim once it has expired so it must surely then end, if it ever existed.
If A was not an eligible beneficiary whatever benefit may have been conferred on him by the trustees’ advance of the funds must have constituted a fraud on a power (“excessive execution”) and so was not even voidable within s.150 IHTA but void: so a total non-event for all IHT purposes. Again an awkward repercussion for the trustees so the background facts will matter.
Finally, as regards the trust fund, the valuation of the debt or claim in restitution must depend on the prospects of recovery at the time of the relevant future chargeable event. HMRC may have the sauce to argue that the trustees’ omission to get the money back constituted an deliberate omission within s.3(3) as of the last time they could have done so and so a partial termination of a QIIP or a depreciatory act in an RPT. The latter would have been reportable and the former too if a CLT.