Failed PETS to profligate kids can still be IHT-efficient!
2nd May 2025
Posted in Articles by Andrew Marr
Perhaps the most common inheritance tax (IHT) saving strategy is for a donor to make a gift to a donee and then hope to survive seven years. If the donor achieves this feat of survival then the plan will have worked and no IHT will be payable on the gift. Otherwise, there will be what is known as a ‘failed potentially exempt transfer (PET)’ and the value of the gift will be brought back into charge after taking account of the £325,000 nil rate band.
Example
Ged makes a gift of £2m to his son Tony on 30 April 2025 but leaves the rest of his estate (some £10m) to his wife Estelle. Unfortunately, Ged dies in January 2027 and so IHT of £670,000 (£2m less £325,000 at 40%) is due on the gift. By this time Tony has left the UK and has led a life of wine, women and song in Spain and was last seen busking in Barcelona and looking a bit worse for wear. As the gift recipient, the IHT liability on the gift technically rests with Tony but HMRC are likely to have a hard time recovering this money from him. By 31 January 2028 (12 months from the end of the month of Ged’s death) the IHT liability can fall on Ged’s estate, and this would have the commercial effect of reducing the value that will flow to Estelle. However, importantly this reduction would not be treated as a PET by Estelle and so even if she were to die soon after Ged, then there would be no IHT liability on this gift.
Forbes Dawson view
Although the above example is slightly frivolous, it does demonstrate an important point. In certain circumstances, it will be more tax-efficient for an estate to meet the IHT bill, rather than a donee. A small downside would be that six months of late payment interest would have accrued from the payment date (six months after the end of the month of death) to the date when the estate can take on the liability for the IHT (12 months after the end of the month of death) but this will often be outweighed by the potential IHT efficiencies. Although the example above concerns a profligate son, there could be many circumstances where the donee cannot easily meet the IHT bill. Consider a scenario where a gift was made for a house deposit and so the donee has no liquid funds. This planning has particular value in circumstances where the surviving spouse does not have a long life expectancy. This route is not to be confused with including a provision in the will for the estate to pay any IHT arising from failed lifetime gifts, which has a very different tax result.
HTM30044 – Liability on potentially exempt transfers (PETs): practice relating to personal representatives
The liability of the transferor’s personal representatives (IHTM05012) is a sensitive area of the legislation. You must alert the personal representatives at an early stage where recourse to them might occur. In cases where the transferee (IHTM30051) is not resident in the UK we are likely to be aware of that fact from the replies on the schedule IHT403, but nevertheless we should still warn the personal representatives of their potential liability, if the transferee and any other persons who may be liable under IHTA84/S199 (1) do not pay.
Similarly Shares and Assets Valuation (SAV) should be alert to any valuation in which it is evident that the value of the assets transferred is far less than the value transferred and where tax will be payable on the gift. SAV should give a warning to this effect as soon as possible to whoever issued the valuation request and it will then be their responsibility to decide what further action to take.
You must remember that the facility to have recourse to the transferor’s personal representatives is not to be regarded as a soft option. We are to make all the attempts at recovering from the persons liable under IHTA84/S199(1) that we would presently contemplate in a similar situation against any liable person. But having warned the personal representatives that we may look to them to discharge the tax liability, we must ensure firstly that they are kept fully in the picture and secondly that a decision actually to collect from them is not delayed for years.
The Law Societies of England and Scotland have expressed concern about the liability of personal representatives under IHTA84/S199 (2). In response HMRC have indicated that we ‘will not actually pursue for inheritance tax personal representatives who
• after making the fullest enquiries that are reasonably practicable in the circumstances to discover lifetime transfers, and so
• having done all in their power to make full disclosure of them to the Board of HMRC
have obtained a certificate of discharge and distributed the estate before a chargeable lifetime transfer comes to light.
This statement of the Board’s position is made without prejudice to the application in an appropriate case of IHTA84/S199 (2) Inheritance Tax Act 1984.’
The quotation is from letters sent to the two Law Societies on 6 February 1991. It was published in the Law Society’s Gazette dated 13 March 1991, page 17.
Note that tax collected from personal representatives of the transferor under IHTA84/S199 (2) was never a liability of the transferor. Accordingly IHTA84/S5 (4) cannot apply and
• the tax so collected is not deductible against the transferor’s taxable estate and
• there is no question of grossing up (IHTM14593) the lifetime transfer.
