The Dangers of Failed IHT PETs - A Horror Story!

Dangers Of Making Huge Potentially Exempt Transfers In the Lead Up to Death - Fraud + Spendthrifts

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I will relate an imaginary situation which is not too far from the truth!

Lady Gaga and Lord Haha are aging mother and 55-year old son. Lady Gaga is well-minted and everyone thinks Lord Haha is too.

The very fit Lady Gaga is presently worth £10 million. One day, noticing all the wrinkles on her face in the mirror, she suddenly realises there is a slim chance she might not live for another 7 years. In a panic, she gets out her calculator, presses some buttons and quickly decides to give away £1 million in cash each year to her spendthrift nieces and nephews starting from that same day.

She concludes that by the end of 7 years, she will have £3 million left (being her mansion worth £2 million and cash of £1 million). She reckons that is a very safe strategy given that the £3 million remaining will be sufficient to pay any IHT on her death estate due to the effects of IHT taper relief on any gifts made in the 3 to 7 years before death.

Not being accustomed to such extravagance, immediately the nephews and nieces receive the cash they go out on a massive spending spree and quickly spend it all on lavish holidays, parties and designer clothing etc.

Unfortunately, Lord Haha is not the wealthy businessman everyone assumed. 6 years after Lady Gaga started giving away £1 million a year she went senile. From this point onwards it became very easy for Lord Haha to raid his mother's coffers. In the 6 months before she died, Lord Haha creamed off virtually all of the cash from his mother's bank account.

After death, Lord Haha used skill, cunning and fraud to dupe the solicitor and HMRC to sell his mother's house in a vain attempt to pay off his massive debts. After going through most of the remaining death estate money, Lord Haha "saw the writing on the wall". There was insufficient cash to pay off his debtors, the "vultures were circling" and very soon HMRC would "smell a rat". Lord Haha was last seen joining a cruise ship at Liverpool after which he duly vanished from the planet, never to be seen again!

Enter HMRC! On death of Lady Gaga there was a mansion in her estate still worth £2 million. There was also the £7 million worth of cash gifts (PETs) in the 6 1/2 years before death, which amazingly in the meantime had all been spent by the youngsters. But, and it's a huge but, there was virtually no cash remaining to pay the IHT due on the death estate and the failed PET lifetime gifts.

My question to all you kind readers is - what nasty IHT shocks will HMRC now unleash and on whom?


















Replies (5)

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By Kaylee100
17th Jan 2024 10:31


Not in practice so I'm going to use that as an excuse to not comment on whether the PET receivers will be chased. But, it never ceases to surprise me, how people landed with money, apparently on top of other life advantages, get into such unnecessary muddles and lose their moral compass .

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paddle steamer
17th Jan 2024 10:43

No sure who her executors are, but they need to try to recover the stolen funds , submit for probate and advise HMRC they cannot pay the IHT, which latter likely locks up anything still there (ie house selling will not happen quickly, no IHT paid/agreed to be paid I believe no title).

I think those receiving the lifetime gifts may be in frame re tax on their gifts, but maybe how paperwork re these gifts executed and what it says or does not say has a bearing,- think you need a STEP solicitor here and maybe also an insolvency practitioner.

Now if I was a professional executor think I might be body swerving my appointment here.

Edit-how was house sold post death, how could title be given with pregnant IHT to pay??? Solicitor needs to look at PII as does solicitor for purchaser of house.

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By Justin Bryant
17th Jan 2024 11:31

This is mostly HMRC's (and therefore us taxpayers') problem by the look of it.

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By Postingcomments
17th Jan 2024 14:59

If someone reckons they only have 7 years to live, they might want to make all their PETs in one go rather than bit by bit. Better shot at 7 years and better chance of taper relief if they don't.

Anyway, it's a complicated situation and I thought you were going to tell us something interesting - so I read it. Then I found out you are actually fishing for answers/trying to start an argument over a made up (and slightly silly - see above) scenario.

So thanks for wasting my time with that. Enjoy your comment farming exercise.

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By FactChecker
17th Jan 2024 15:41

Question is impossible to answer (due to the enormous gaps in information) - and I'm not prepared to try writing an essay on all the potential scenarios.

Amongst the unknowns:
- is Lady Gaga married to someone still alive?
- was the £7 million worth of cash gifts (PETs) in the 6 1/2 years before death really only paid out in £1m tranches once p.a.? (seems insane from a planning perspective and even more so if she was watching the 1st, and then next, recipient splurge it all)
- is there proof (of a criminal standard) that, when Lord Haha creamed off virtually all of the cash from his mother's bank account, this was theft/fraudulent?
- who sold the house and with what authority (if pre-probate)?

But, irrespective of the annoyance due to Lord Haha's disappearance, the issues all come back to - who are the executors? / were they involved in any of the 'dodgy' dealings? / and what have they filed with HMRC (previous years' SA returns + a draft IHT, or what)?

Who is (or may be deemed by HMRC to be) liable for any shortfall is not a simple question ... and should be resolved by the executors (with the help of appropriate solicitors).
Worth searching to start with ...

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