Is it possible to reverse the usual liability for failed PETS from Donee to Donor through a letters of wishes or should it always be a clause in the Will itself?
A Letter of Wishes isn’t legally binding, so the executors may choose to disregard it and maintain the tax liability on the Donees. Letters of Wishes can also easily “go missing” or be unknowingly updated.
Therefore it would be better for the Donor to add the clause to their Will, and so the executors are legally bound to honour this wish.
My understanding is that the liability for IHT is generally established when the gift is made.
When a gift is made “net” of IHT, if it becomes a “failed PET” the value is grossed up to ascertain the IHT liability and that is payable by the donor.
If the gift is made “gross”, which will be the usual situation in the absence of any indication to the contrary, if it becomes a “failed PET” the value gifted is treated as the gross value of the gift for IHT and the tax calculated accordingly and payable by the donee (absent the donor including within their will any direction as to the payment of IHT on lifetime gifts).
I do not see that a letter of wishes can convert a “gross” gift to a “net” gift, nor change the terms of a will. However, if the will includes a discretionary trust and the done is a member of the class of objects, a letter of wishes would be one of the factors the trustees of that trust should look at when considering the exercise of their discretion.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I have assumed that the donor has died within 7 years of making a PET. As this is a PET no tax was payable at the date of transfer, but as the donor has died within 7 years the potential to be exempt has not been realised so the gift fails and becomes chargeable. The chargeable transfers sit in chronological order and if there is tax to pay on a “failed” PET that liability for IHT, rests with the person receiving the PET. (section 199(2) IHTA 1984).
The estate is only liable if the tax is unpaid 12 months after the end of the month in which the person died (sections 204(8), IHTA 1984).
If the donor has written something into their will regarding IHT liability of lifetime gifts this will be seen as another gift to the donee. Alternatively, during lifetime, the donee could cover this risk by a 7 year term plan (Gift inter vivos policies) on a life of another basis.
Hi Kim, so my question is really in relation to section 199(2). I’ve always considered that that section can only be reversed (ie estate responsible for failed PETs not donee) through will clauses, is that absolutely required or can it be done at the discretion of the PRs without the will clauses.
My opinion is that the PRs have no discretion to pay the IHT liability as this falls on the donee, there would need to be something written into the will
In order for PRs to use discretionary powers to pay the IHT on failed PETs they must, first of all, have been given the appropriate powers in the Will. If they choose to adopt such powers unilaterally they would be in breach of their duties to the residuary beneficiaries who would be losing out if such IHT was paid voluntarily. Of course, the RLs could authorise the PRs to do this.
Coles Miller Solicitors LLP
Include a gift in the Will to the done of the amount of iht paid. I believe that would avoid the grossing up issue.
Let’s not confuse liability with burden - the former cannot be shifted to the estate (at least, not by the taxpayer!).
However, as discussed, the executors can be instructed to pay IHT on all elements relating to the death (QIIPs, GRWs, PETs…). There are many standard clauses for this ‘pay all the IHT’ arrangement.
If they do so, it is deemed a legacy to the person liable. This dispositive power can only be guaranteed by WIll, and will be unenforceable otherwise.