Who Pays Inheritance Tax?
There are a number of situations where Inheritance Tax (IHT) is payable because of a death but the personal representatives (PRs) have not had the assets vested in them to which the tax applies. For example, a Potentially Exempt Transfer (PET) which fails; or a Gift with Reservation of Benefit (GROB); or a co-owner of property held as joint tenants which passes by survivorship.
Under s.199(2) IHTA 1984 the deceased’s PRs are liable for the tax on the value transferred by a lifetime chargeable transfer. S.200 IHTA sets out the provisions relevant to the payment of tax attributable to property subject to a GROB. S.200(1)(a) indicates that the deceased’s PRs are liable for the tax on the value transferred by a chargeable transfer on death. Under s.200 (1)(c) any person in whom the property is vested at any time after the death is also liable – making the surviving co-owner of joint property passing by survivorship also liable. By s.205 IHTA 1984 each person liable in respect of IHT is liable for the whole of it.
The liability for paying IHT must be distinguished from the burden of the tax. The PRs are responsible for delivering an account with details of all the appropriate property – s.216 IHTA 1984. HMRC’s Inheritance Tax Manual at IHTM10811 states
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”The general rule is that the personal representatives (IHTM05012) are accountable. They have to complete and return an IHT 400 for the deceased’s estate. The only exception to this rule is where the estate is an ‘excepted estate’ (IHTM06011).”
Section 216(3) IHTA 1984 says:
“Subject to subsection (3A) and (3B) below, where an account is to be delivered by PRs (…..), the appropriate property is:
All property which formed part of the deceased’s estate immediately before his death other than property which would not, apart from s.102(3) of Finance Act 1986, form part of his estate and
All property to which was attributable the value transferred by any chargeable transfers made by the deceased within seven years of his death.”
This means the PRs must include in the IHT 400 all chargeable transfers made within seven years of death, any property passing by survivorship and property subject to a GROB.
It is HMRC practice that they expect the PRs to provide the details of the failed PETs, the GROB and property passing by survivorship and pay all the IHT due even though the recipient is also liable for the whole amount of IHT in respect of the gift. This, of course, saves HMRC the bother of collecting IHT from a third party to the estate. They rely on the fact that the PRs are entitled to a statutory indemnity.
The statutory indemnity can be found in s.211(3) IHTA 1984 which provides that
“Where any amount of tax paid by PRs on the value transferred by a chargeable transfer made on death does not fall to be borne as part of the general testamentary and administration expenses of the estate, the amount shall, where occasion requires, be repaid to them by the person in whom the property to the value of which the tax is attributable is vested.”
Mind the gap
This leaves a gap – it does not cover tax paid by the PRs on a chargeable lifetime transfer. Whereas, the property the subject of a GROB is treated as forming part of the deceased’s estate and therefore as part of the chargeable transfer on death. Similarly, joint property passing by survivorship is part of the deceased’s appropriate property on death too.
As advisers, where we are made aware of lifetime gifts, particularly chargeable transfers, the client should be advised to ask the recipient to provide an indemnity in respect of any tax which may become payable as a result of the transferor’s death within seven years. HMRC have said that such an indemnity would not amount to a GROB.
PRs are in a vulnerable position. If the PRs only become aware of the existence of a failed PET or a GROB after they thought they had administered the estate, more tax will become payable for which the PRs will be liable. However, the PRs will not have any assets with which to meet the liability – and any clearance certificate obtained when the estate was thought to be concluded will probably not protect them either for failing to disclose the lifetime gift.
In practice, PRs can only take reasonable steps to uncover the deceased’s financial affairs. Should PRs find themselves in a position where there is a further IHT liability and no assets under their control with which to pay it, then the PRs will be forced to consider taking legal action against the residuary beneficiaries to recover the overpaid amount. If the beneficiaries can show they reasonably relied on the assurance provided when the distribution was made and have acted on that to their detriment the PRs may fail to secure a repayment.
Maybe the answer is to always caveat the final distribution in an estate with the premise that this is made in good faith on the basis of the extensive investigations made about the deceased’s finances. The PRs have no knowledge of anything which might increase the IHT bill but if such further liability arises the PRs will seek to recover the amount from the residuary beneficiaries. It would at least put the residuary beneficiaries on notice.
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