I have an estate where the deceased made an extremely large amount of PETs in the seven years prior to his death. The nil rate band was completely used up, and after applying the annual exemptions etc, the remaining PETs attracted approximate IHT liability of £50k. Luckily, many of the donees to the PETs that attracted this IHT are legatees in the will, and so it will be quite straight forward to have the IHT apportioned to their PETs paid from their legacies. However:
It is possible in some cases the IHT will be more than the value of the legacies, and
Some of the donees live outside of the UK.
From my reading it appears that the PRs have liability if the IHT cannot be paid by the donees. I understand that the PRs can escape the liability if they have received tax clearance after 12 months from DOD and they were unaware of the PETs. However, the PRs here are aware, there have been no distributions and only minimal disbursements paid out when it wasn’t known about the large scale of the PETs.
Where then does this liability fall? Is it an expense on the residuary estate? Or does it fall on the PRs personally? My view is the latter as I cannot see anything to the contrary but I would really like some guidance here.
Also, please note that the residuary beneficiary is a charity. I would be thankful for further assistance here on how this could impact on the IHT on the estate, if the answer is that the residuary estate bears the costs of all the IHT (if the donees don’t pay up).
The PRs liability is as PR and is limited to the assets of the estate (s.204(8) IHTA 1984).
HMRC can only assess the PRs if the tax remains unpaid by the donee 12 months after the donor’s death, unless the PR offers payment.
Whilst some of the donees are also beneficiaries of the estate, I understand that they would need to consent to their inheritance being applied to satisfy their personal IHT liability. However, unless the beneficiary is able to provide evidence that they have paid the IHT due from them, I would retain their benefit until the IHT situation is resolved.
Where the PRs are assessed for IHT which should be paid by a donee, I believe the PRs retain the right to recover payment from the donee, which right could be assigned to the charity as it will be an asset of the estate.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Just to be clear, you state that “HMRC can only assess the PRs if the tax remains unpaid by the donee 12 months after the donor’s death, unless the PR offers payment”. By “assess the PRs”, does this mean that unpaid tax can or cannot be met by the residuary estate?
As stated in the opening paragraph of my response: The PRs liability is as PR and is limited to the assets of the estate (s.204(8) IHTA 1984).
Primary liability, therefore, is that of the residuary estate.
However, if the PRs have distributed then, to the extent that there is any shortfall in the estate remaining in their hands so that they are unable to pay any IHT assessed upon them in respect of tax otherwise payable by the donees, the PRs may be personally liable.
If a donee is also a beneficiary of the estate, the PRs might hold back satisfying their legacy until they either have authority to pay the tax out of the legacy, or the legatee provides evidence that the (additional) IHT has been paid.
If the donee is not a beneficiary of the estate, or their tax liability is greater than their legacy, the PRs should consider retaining sufficient from the estate to pay the IHT (plus any interest) until such time as they see evidence that the tax has been paid (or HMRC raises an assessment.
I would be reluctant to put my faith in the standard clearance letter that HMRC’s computer appears to churn out regardless of the circumstances of the estate in order to distribute the estate in full if I know there is the potential for the PR to be assessed for IHT unpaid by a lifetime donee. Whilst I suspect that formal clearance on form IHT30 should protect the PRs, have any contributors had the argument with MRC and, if so, what was the outcome?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals