I am dealing with the IHT400 and probate application in an estate where the deceased gifted 3 x £360,000 to her sons 7 years before they died. They have all been brought back into the estate and taper relief will apply as they were made between 4 and 5 years of death.
First, the residue clause says ‘…to pay out of my ready money and out of the proceeds of such sale my debts funeral and testamentary expenses and any inheritance tax…’ Do forum members agree that a contrary intention has not been shown in the will and that the recipients of the lifetime gifts bear their own tax, even though it says ‘any inheritance tax’?
Second, one of the donees is likely to be difficult and won’t want to pay the tax attributable on their lifetime gift (which will be circa £35k). I understand that if the tax is unpaid after 12 months then HMRC will look to the executors to settle the tax and then the executor will need to issue proceedings to recover that from the donee. Does anyone know of any case where an executor has been successful in recovering the tax from the donee? I looked on Lexis Nexis and couldn’t find one.
EDIT: ignore the question re taper relief. I can see on the updated IHT403 that taper relief does not go in that column and HMRC will work it out themselves…
If the inheritance tax on lifetime gifts is to be paid from the estate there would normally be an express provision to that effect. You haven’t stated the full wording from the will, but the fact you are unsure leads me to believe there is no contrary intention stated.
I don’t think the executors have the ability to pursue the lifetime recipient for the tax as such. There is nothing to this effect in the Inheritance Tax Act. If the tax is unpaid after 12 months the executors are jointly liable for it and HMRC are at liberty to pursue the executors. HMRC’s manuals state that they will pursue the donee if they can, and will not look to the executors merely because they are a soft option, but I think all the executors can do is encourage HMRC to pursue the donee and keep sufficient funds in reserve in case HMRC are ultimately unable to get the funds from the donee. That might happen if the donee is declared bankrupt, or lives outside the UK, etc.
With regard to Paul Davies’ response, I doubt HMRC is concerned with the position of the estate viz-a-viz the beneficiary of the lifetime gift, and so does not need to address it.
Counsel’s advice I have seen in the past on the position is that the beneficiary has a liability to HMRC and if HMRC decides to exercise its power to require payment from the estate after 12 months, it does not extinguish the beneficiary’s liability - it merely replaces HMRC as creditor with the estate. This parallels the situation with guarantees, where a call under the guarantee effectively novates the benefit of the debt to the guarantor.
If the beneficiary of the failed PET is also a beneficiary of the estate on death, it has been suggested that, without the beneficiary’s consent, the estate has no right to set off the IHT on the failed PET against the beneficiary’s entitlement from the estate. Having said that, I wonder how many beneficiaries would resist a personal representative’s proposal to deduct the IHT in such circumstances?
Curiously, it does not seem that HMRC treats a failure by the estate to claim against the non-paying beneficiary as giving rise to a transfer of value by those entitled to the estate (although that would merely add insult to injury).