“it would seem to constitute a tax free gift which itself may need to be grossed-up”.
I am not clear what the consequences are in law or for inheritance tax of a living transferor agreeing to pay a tax liability that is not due until he dies (and is contingent initially as he may survive 7 years) and which, apart from his agreement, is imposed by law not on him but on his estate under s199 (1)(a) with (2) or on the donee under (1)(b).
Legally, can he extinguish the statutory liability and substitute his own by his agreement and if not does his estate end up with two liabilities? After his death any liability of his not paid in his lifetime can only be discharged by his PRs out of his estate. My view is he cannot vary the statute by an agreement inter vivos and the potential outcome of double liability is absurd. I can make an argument for it, the one being contractual and the other statutory, but it can only be discharged once and by the PRs or the donee. And the contractual liability, if separate, would not be deductible for IHT!
The agreement might well be interpreted as being like a guarantee or indemnity which on its being given only reduces the giver’s estate contingently; and not at all, or vestigially, if the debtor is prospectively good for the money. Actual payment of the debt might be a gift if the arrangement did not come within s10(1) but not if made after death; and would only be deductible as a liability in the estate if the agreement was made for consideration of real value.
The debt is not owed by the donor but to the Crown under statute by the donor’s PRs or by the donee . If the PRs could not pay, the Crown has a statutory right of recovery against the donee; what enforceable value does the agreement have to the donee since it is with the donor? If the PRs pay, the agreement is a dead letter. As stated below, their actual ultimate liability to pay is to some extent a function of HMRC’s right to collect from the donee.
Assuming the agreement has some form of legal validity is it a transfer of value? It seems clearly outside s10. What is the value transferred? Is it a PET: does it increase the estate of the other party to the agreement? If not, what will go on the IHT 100a?The value transferred is fixed at the date of the disposition whether it is a PET or not. Unless at that date there is a prospect of non-payment by anyone within s199 the value transferred is apparently nil.
This all sounds rather like one of A P Herbert’s misleading cases, perhaps Haddock v HMRC.
I suspect a judge would strive to scrutinise the agreement so as to avoid its being a separate gift, if at all possible.
Despite that the agreement, if legally binding, might nonetheless have a salutary legal consequence in some circumstances. Section 204 (8) limits the PRs’ liability under s199 (2) where the transferee can be made liable under s 199 (1)(b). If they do not pay and he does, he might have a right to recover from them under the agreement (a right not given to him by the statute because technically under s205 he would be paying his own liability). IHTM 30043 indicates that HMRC in practice interpret these provisions as allowing (if not requiring) them to pursue the transferee first (and they do), only resorting to the PRs if he does not pay in full. The PRs can be made to pay up regardless if the debt remains unpaid 12 months after the end of the month in which death occurs. Their limitation of liability is only to all the assets in the estate and these will not include the gifted cash nor do they have a statutory right of recovery against the donee because of s205.
So the donee who is made to pay up might have an enforceable right under the agreement to recover from the PRs but their payment would not appear to be itself deductible for tax as a liability unless the agreement was made for value and to the extent value was received (IHTM 28382). It apparently was not and so legal enforceability of the agreement might also be in doubt unless consideration within the law of contract (including £1 or a chocolate wrapper) was given or a deed was used.
The donee could alternatively be given a specific gift in the will of an amount equal to the tax on the gift but that could be grossed up under s38 and an extra share of residue might be better.
Where the gift is not a PET an enforceable agreement by the donor to pay the tax does cause grossing up.
Ideally one would have sight of the agreement and know about the background but an agreement under hand is perhaps the most commonly encountered.