Potentially exempt transfers and death of the recipient

EnsFinch

Person A gave away three gifts each of £250,000 to their three children X, Y and Z in 2021.

I understand that given the total was (way) over £325,000 the recipients will be liable for inheritance tax on these gifts should A die before seven years have elapsed.  (Eventually subject to taper relief etc)

However, child Z died this year.  The administration of their estate is complete and no IHT was due.

Who is liable (if anyone) for the IHT potentially due on Z's gift should A die soon? 

Thanks for your help - I trawled various elements of the HMRC manuals and couldn't find anything on this subject.  Surely someone knows...

GrumpyDil

A's estate would be liable to settle any inheritance tax arising from the gifts.

Marcon

GrumpyDil said:

A's estate would be liable to settle any inheritance tax arising from the gifts.

If you give away more than £325,000 and die within 7 years, than the recipients of the gift(s) may be responsible for paying any IHT due on them if the estate doesn't have assets to do so.

EnsFinch said:

Person A gave away three gifts each of £250,000 to their three children X, Y and Z in 2021.

I understand that given the total was (way) over £325,000 the recipients will be liable for inheritance tax on these gifts should A die before seven years have elapsed.  (Eventually subject to taper relief etc)

However, child Z died this year.  The administration of their estate is complete and no IHT was due.

Who is liable (if anyone) for the IHT potentially due on Z's gift should A die soon? 

Thanks for your help - I trawled various elements of the HMRC manuals and couldn't find anything on this subject.  Surely someone knows...

Have you tried the IHT Helpline: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/probate-and-inheritance-tax-enquiries

Brie

Is A's actually going to have to pay IHT?  if so that's where the liability is.  Z's estate has nothing to do with A's IHT.  

Keep_pedalling

Are the residual beneficiaries of A’s estate the same people (or their children in the case of a) who were the recipients of the gifts? If they are then any IHT on the gifts can come from the residual estate. It is more problematic if the residual beneficiaries are different people because the recipients of the gifts (or their beneficiaries in the case of Z) should be paying the IHT.

So for example if Z left the rest of his estate to his wife, it is the children who are responsible for all the IHT as the widow’s inheritance is covered by spousal exemption. To complicate matters if the gifts were made on different dates the first gift would be exempt as it is within the NRB, the second gift only the first £75k would be covered by the NRB and the last gift would be entirely liable to IHT. 

HMRC don’t actually care where the IHT comes from only that it is paid, so if the outcome seems unfair and all beneficiaries agree then they can pay out of any share they wish, although if it came from a widow that would be classed as a gift and a new PET.

EnsFinch

Thanks for the various comments which overall seem to be as uncertain as I am.
The residual beneficiaries of A's estate are X and Y, the two surviving children.
Z's estate went entirely to their spouse, who is not a residual beneficiary of A's estate.
Z's spouse was also their executor and personal representative (Z died intestate and they had no children)

Is the beneficiary of Z's estate now liable for IHT on the gift that Z would have had to pay had Z still been alive?  That's quite a thing to happen - someone who died years ago acquires a new debt.

I am not sure how relevant 'full enquiries' are, it's a contingent liability that Z had not an actual debt.  I can't see that the executor was supposed to wait until the original 7 years are up before finalising the estate, were they?

What if Z's spouse also dies in the meantime and their estate goes entirely to charity?

(in practice I suspect if it comes to it that X, Y and Z's spouse will come to an agreement but I'd really like to know the legal position)

Keep_pedalling

I think A’s executors would have a hard time perusing Z’s beneficiary for any of the IHT and I think it would be rather cruel to pursue his widow for it. If Z had no children then presumably  X & Y are going gain from inheriting their siblings share which is going to off set any IHT that comes out of the residual estate. If Z had children on the other hand then they will get their deceased parent’s share so the IHT will be shared out equally. 

doodling

Hi,

Will A's estate have the money in it to pay the inheritance tax bill for the gifts when A dies?  If the answer is yes then that is the first port of call and the death of Z is irrelevant.

If A's estate doesn't have the money for the IHT on A's death then it is effectively insolvent and A's executors would probably be best served by not taking on the job (as by doing so they would be giving themselves the job of finding the IHT).

It would then fall to the creditors of A's estate to Admiister it and assuming that HMRC are interested then it would be down to them to try and extract the money from X, Y and the estate of Z. It is anyone's guess how they would go about that task (or even whether they would have the necessary awareness of the gifts to know that there is something to pursue).

doodling

Hi,

[Deleted User] said:

doodling said:

If A's estate doesn't have the money for the IHT on A's death then it is effectively insolvent and A's executors would probably be best served by not taking on the job (as by doing so they would be giving themselves the job of finding the IHT).

I think s204(8) means that the IHT liability of the executors is limited to the value of the estate (subject to negligence / default, or if a trust is involved).  So the IHT cannot make the estate insolvent. 

OK, fair enough.

That still doesn't make executing the estate an appealing prospect - a whole load of work, just to pay HMRC.