This is indeed a most unfortunate situation. The law is horribly clear. S.199(1) and (2) IHTA set out a list of persons liable to pay tax due on a CLT or failed PET but without prescribing any priority among them. The sting here is that s.204(8) limits the liability of PRs where a person is liable under s.199(1)(b) and that donee’s estate was increased by the transfer; but in any event that liability would be further limited i.e. to £0 if the gifted asset never vested in them (unless that was through their own neglect or default, self-evidently not the case).
HMRC’s published practice is at IHTM30043-4. They will regard it as their sacred duty to recover the tax from someone, unless no one has any recoverable assets, so the purchased property is a sitting duck. We are not told whether it is mortgaged or the donee has other assets or can raise the funds by borrowing.
The good news is that:
- A PET attracts any available NRB (but not TRNRB) in priority to the estate;
- It is instalment option property: s227.
- The tax is not grossed up (as it would have been if the donor had clearly accepted liability to pay).
The bad news is that:
4. Interest is payable at a rate double that available on commercial first mortgages and on the entire outstanding balance: ss.233-4
5. If the property is sold any such balance becomes due and payable.
6. The liability apparently would not be accepted as deductible in the estate if the PRs paid it, presumably a quid pro quo for accepting no grossing up. This is the PRs’ own problem but a negative in seeking a compromise with them.
In principle promissory estoppel is a possibility if the key ingredients are present. It seems likely that the donee acted to his detriment in purchasing the particular house only because of having the gifted funds. So there is likely to be clear reliance.
An oral promise suffices but unambiguous evidence of the repeated assurances will be crucial, or else it will rest on the donee’s own testimony. Potential living witnesses of fact may stand to lose so could be hostile. There may be other cogent evidence of the promise which would emerge on disclosure or the threat of it.
There are 2 obvious steps to be taken. HMRC need to be approached, ideally viva voce. The client’s predicament is something they will have encountered before and their approach may not be extant in IHTM; policy on recovery of tax is frequently noted as withheld under a FOI exception in other Manuals. There is no guarantee of sympathy but they are unlikely to be as hard-hearted as the erstwhile incumbents of Prinz-Albrecht-Strasse 8, Berlin in the 30s. A risk of unfavourable publicity in these social media days may figure. At any rate brownie points will be earned by the positivity of the initiated move to discuss.
As PE is a discretionary equitable remedy HMRC are unlikely to just agree to its valency. They will normally insist on a Court decision. In cases of equitable mistake they have said they wish to be informed of any pending action so they can choose whether to intervene; but the PE cases do not indicate that they will come off the fence.
The UT has shown it is prepared to allow a defence to liability based on the taxpayer’s mistake, in Lobler and Hymanson, but presumably the issue would arise in recovery proceedings and my litigation expertise does not extend to whether the PE argument would have traction. My expectation is that the Court might rule that the PRs would have to be pursued separately after judgment rather than joined in a counterclaim.
A moot point is whether they would accept as cover an Opinion from one of the Learned Ones, ideally someone they instruct themselves, which they can in turn take advice on if they wish. This kind of quasi-arbitration used to be feasible but I found them less co-operative in latter years and of course in these cases HMRC were prospectively a direct litigant so the strength of the taxpayer’s case was a cogent factor in settling or capitulation.
My only recent contact experience with IHT was receiving a notice of personal liability for IHT a former client had apparently “forgotten” to pay for 5 years. It proved a pain but eventually they accepted that they could not find a section in IHTA to clobber a technical adviser (idiots). This may show that chasing liabilities is not the remit of the conscientious or intelligent, but doing nothing is not a good option as in time the knuckledraggets will be your adversary.
I did many negotiated settlements for clients of my “very naughty boys and girls” practice and found HMRC scrupulous but pragmatic, though never quite as realistic as a commercial litigation opponent and, strangely, never re IHT. Empathy was in short supply although here the taxpayer would have been demonstrably “at it”, so undeserving even if genuinely contrite, whereas here the client is only culpable of not obtaining a written promise and, no doubt, failing to seek professional advice at the time.
Which to do first? HMRC first would be cheaper and would give some inkling of the percentages, particularly whether Counsel would influence them to settle out of Court. Also HMRC will appreciate pre-emptive engagement rather than the Ostrich Strategy.
Depending on HMRC’s reaction there may be advantage in litigating or settling with the PRs in which case Counsel will surely be needed to advise on the merits and liability for costs.
Jack Harper