IHT - What happens if beneficiary doesn't pay up?

If the beneficiary of gift inter vivos doesn't pay up, what happens?

Didn't find your answer?

I am executor for an estate where the deceased made such substantial gifts within the 7 years before death, that there is likely to be a large IHT liability on the recipients of some of those gifts. The residual estate is not large enough to cover the whole liability from its easily-realisable assets. What is the liability situation if the beneficiaries don't pay HMRC? 

Replies (16)

Please login or register to join the discussion.

RLI
By lionofludesch
25th Apr 2024 13:05

If I remember correctly, it is the liability of the donee.

Thanks (0)
By ireallyshouldknowthisbut
25th Apr 2024 15:42

I’m not sure why they would pick up the IHT? Fundamentally if there is no insurance the estate picks it up so effectively the residual beneficiaries pay out of their proceeds. Do of course make sure you have treated the gifts correctly. I have seen a few of these done really naively and fail to take into account the various exemptions.

If I was executor I might look at if there was a more equitable settlement for the family as a whole if this leads to an odd distribution due to the pattern of gifts. This can get messy depending on how different beneficiaries see things. You may need a deed of variation to sort this out.

You are however hinting there are less easily realised assets. If the residual beneficiaries cant pay, then there will be interest rolling until those are sold. Presumably a house.

This stuff is complex, and if you are recently bereaved as most executors are you might want to consider using a professional. I should point out I don’t offer probate services so am not offering to help, but some accountants can do this now as well as solicitors.

Thanks (0)
Replying to ireallyshouldknowthisbut:
avatar
By FactChecker
25th Apr 2024 23:07

This --> "You are however hinting there are less easily realised assets".

Irrespective of individual sensitivities or what various people would 'like to happen' ... the starting point is that the debt is a liability of the Estate - and if the Estate has assets that can be sold (albeit slowly / at a loss / at great inconvenience to someone) then it needs to make those sales - and pay the tax (with penalties if takes too long).

The only, rather obvious, alternative might be for the beneficiaries to agree amongst themselves (and outwith the terms of the Will) to loan the necessary money for IHT to be paid by the Estate - presumably against the eventual realisation/distribution of assets (post Probate).
But that is definitely getting into the realms where lawyers will be needed - and probably quite expensive ones!

Thanks (2)
Replying to FactChecker:
avatar
By Tax Dragon
26th Apr 2024 08:21

"the starting point is that the debt is a liability of the Estate"

No, the starting point is that tax on a taxed PET is a liability of the recipient of the lifetime gift. If they don't pay, HMRC can collect from the estate, but I don't think that makes it a liability of the estate - the executors can seek reimbursement from the donees. It's probably unusual for the donees not also to be heirs.

Thanks (2)
Replying to Tax Dragon:
RLI
By lionofludesch
26th Apr 2024 09:34

Tax Dragon wrote:

"the starting point is that the debt is a liability of the Estate"

No, the starting point is that tax on a taxed PET is a liability of the recipient of the lifetime gift. If they don't pay, HMRC can collect from the estate, but I don't think that makes it a liability of the estate - the executors can seek reimbursement from the donees. It's probably unusual for the donees not also to be heirs.

Oh well, I was nearly right. I'm not convinced it's equitable to collect this money from the residuary legatees, though. Still, if them's the rules ...

I'd like to know if the lifetime gifts do exceed the NRB or whether the IHT liability truly falls on the estate.

Thanks (0)
Replying to Tax Dragon:
avatar
By FactChecker
26th Apr 2024 14:38

Thanks ... I keep forgetting (psychologists would no doubt suggest it's deliberate) that I was 'rolled' by my sister on this point.
As executor for parents I was appalled to discover how much she'd been extracting from them in their dotage - and even more so at the thought that adding back in for IHT the portions that hadn't hit the 7-year hurdle would deplete the residuary estate (to the detriment of my 50%), so suggested on a moral basis what you tell me is actually the law. But was immediately given a written advice letter (from a QC) that said I couldn't do that ... so caved in and 'lost' a substantial amount to the profligate sibling.
No wonder I keep 'blanking' the memory!

Thanks (2)
Replying to FactChecker:
RLI
By lionofludesch
26th Apr 2024 14:50

TD seems to supoort your right to recovery.

Thanks (0)
Replying to lionofludesch:
avatar
By FactChecker
26th Apr 2024 17:54

Indeed, as she informed me a few years back (hence my apology for memory lapse) ... but even then it was already more than 12 years in the past.

Maybe (despite some of the names I've been called on this site) I'm just an old softy at heart - life's too short and all that + curiously I never could get that excited by money (even when I had none), it's just the numbers that I like!

Thanks (3)
RLI
By lionofludesch
25th Apr 2024 16:01

Ah - well - is there tax on the gift or is the gift using up some of the exemption, leaving more of the estate on death chargeable to tax?

There's a difference.

Maybe the OP could clarify.

Thanks (0)
RLI
By lionofludesch
25th Apr 2024 16:28

Re-reading the question, if the OP is merely concerned with what happens if the donee fails to pay, I suppose HMRC will send the boys with the pickaxe handles to collect it.

But the first step is to decide who owes the money.

Thanks (0)
avatar
By More unearned luck
25th Apr 2024 19:17

The donee and the PRs are both liable for the tax but, broadly speaking, the PRs only become liable if the tax remains unpaid a year and a bit after the death. The PR's total liability cannot exceed the death estate*. If the donees don't pay up then in effect they are robbing the legatees. Don't make any distributions from the estate until you are sure that the donees have paid up. Wise donees insure the life of their benefactor for seven years in a sum equal to the tax they might have to pay.

There was a case a couple years ago where the executor gave the whole estate to the legatee on the understanding that the legatee would pay the remaining IHT. The legatee didn't and disappeared abroad never to be heard of again, leaving the executor to pay HMRC from his own resources.

*Net of any assets held on joint tenancies or can the PRs unilaterally sever the JTs?

Thanks (1)
RLI
By lionofludesch
25th Apr 2024 19:25

Interesting. But I'd still like to confirm that the donee owes the money.

Thanks (0)
avatar
By PPie
26th Apr 2024 17:21

Thanks very much to everyone for the useful questions and suggestions. At the very least I have learnt that this is likely to be beyond my competence to be confident of, as a 'lay' executor. So professional advice is in order, and I can ask some of the questions you have asked, and collect information to help answer questions a professional adviser will ask. Very grateful to you all for your responses.

To respond to some of the questions/assumptions:

I *think* that the gifts inter vivos are large enough that the recipient(s) of the gifts will owe at least some IHT, even taking into account various exemptions and thresholds. I believe that there is no insurance in place to cover this, although it's possible recipients may have organised this themselves and I don't know about it.

Since someone asked, the donees/recipients in question are not heirs/not mentioned in the will.

I imagined that HMRC sending boys with pickaxes might be an eventual outcome if the donees/recipients don't pay - I'm hoping to be reassured that they'll go to the donee/recipients' homes, not to mine or the legatees!

Thanks (0)
Replying to PPie:
RLI
By lionofludesch
26th Apr 2024 18:27

PPie wrote:

To respond to some of the questions/assumptions:

I *think* that the gifts inter vivos are large enough that the recipient(s) of the gifts will owe at least some IHT, even taking into account various exemptions and thresholds. I believe that there is no insurance in place to cover this, although it's possible recipients may have organised this themselves and I don't know about it.

Make a start on quantifying the gifts and dating them.

Don't forget taper relief.

Thanks (0)
Replying to PPie:
avatar
By More unearned luck
26th Apr 2024 20:30

What is interesting is that you know of these lifetime gifts. Clearly the deceased is not around to tell you about them. Perhaps the donees told you, but that would be a strange thing to do if they are bent on not paying the tax on the failed PETs or the additional tax if the gifts were a CLT. As you don't seem to be in possession of the amounts and dates , it seems unlikely that your discovery came from an examination of the deceased's papers. Just curious.

Thanks (1)
Replying to More unearned luck:
avatar
By FactChecker
27th Apr 2024 18:58

Good point ... which raises another general one (for anybody rather than just OP):

As little as 10 years ago, all the Estates that I 'processed' had two things in common - paper bank statements and (almost) all payments having been made either by cheque or credit-card (for which paper statements again were available).
If you were lucky, the deceased would if nothing else have fastidiously retained all their cheque-book stubs (and have entered min of payee & amount on each stub).
So very quickly you reached the point where you had two fairly short lists of 'unknowns' - payments on bk statements but not via cheque, and payments on credit card with unintelligible payee - and the 'fun' could start.

Oddly it was receipts that were often harder to track down (state benefits being particularly prone to using unhelpful refs and not acknowledging the dept let alone type of payment - and the worst being 'cheques/cash paid in' for which no-one seemed to ever retain the paying-in slip that covered multiple payers).

Anyway, the point of my wittering is that it was mostly a fairly straightforward process (although banks' habit of only retaining records for *6* years often reduced me to a mixed state of fury/tears). There simply weren't that many 'channels' for most people's transactions, and even when digital you could request a paper copy (including the ever useful back of cheques).

But now? So much is 'digital only' and quite a lot is held only on someone's Cloud (for which many providers will cancel all access once they hear of the death of the account holder).
If the deceased wasn't superbly organised, how do you even begin to get a handle on the scope of their assets/liabilities let alone the required details?

So to get back to your post ... "examination of the deceased's papers" - if only!

Thanks (3)