Potentially exempt transfer question
Discussion
Scenario: Person A makes a potentially exempt transfer (properly, expressly, without reservation etc) to person B. Person A's estate will still be over the nil rate band. Person B also has an estate which will be over the nil rate band, with or without the PET, all to be left tax-free to their spouse, person C.
What happens if person B dies before person A, and within a 7 year period from the PET being made to (A)? Is IHT payable by person A (even though they are still alive) at the rate applicable as if they had died at the time that the recipient (B) died, or is the PET deemed to have been made, by default to person C (since person B left it to them in their will?). If so, then if person A survives 7 years, presumably there would be no IHT liability on the PET.
This must happen sometimes. I'd be interested / grateful for thoughts.
What happens if person B dies before person A, and within a 7 year period from the PET being made to (A)? Is IHT payable by person A (even though they are still alive) at the rate applicable as if they had died at the time that the recipient (B) died, or is the PET deemed to have been made, by default to person C (since person B left it to them in their will?). If so, then if person A survives 7 years, presumably there would be no IHT liability on the PET.
This must happen sometimes. I'd be interested / grateful for thoughts.
PETs involve only the donor's survival, nobody else's.
If the gift is made from person A's nil rate band then there is never any question of IHT liability on person A or person B. The gift simply "counts towards" person A's nil rate band for 7 years.
If the gift is not made from person A's nil rate band then the PET can cause a tax liability at any time up to 7 years later. Person B is primarily liable to pay that tax. However, if person B can't, or won't, pay then HMRC can claim against person A's estate - in other words the executors.
If the gift is made from person A's nil rate band then there is never any question of IHT liability on person A or person B. The gift simply "counts towards" person A's nil rate band for 7 years.
If the gift is not made from person A's nil rate band then the PET can cause a tax liability at any time up to 7 years later. Person B is primarily liable to pay that tax. However, if person B can't, or won't, pay then HMRC can claim against person A's estate - in other words the executors.
Ozzie Osmond said:
PETs involve only the donor's survival, nobody else's.
If the gift is made from person A's nil rate band then there is never any question of IHT liability on person A or person B. The gift simply "counts towards" person A's nil rate band for 7 years.
If the gift is not made from person A's nil rate band then the PET can cause a tax liability at any time up to 7 years later. Person B is primarily liable to pay that tax. However, if person B can't, or won't, pay then HMRC can claim against person A's estate - in other words the executors.
Oops, I made an error in the first line of the second paragraph which may have confused. The letter in brackets should be (B), not A. If the gift is made from person A's nil rate band then there is never any question of IHT liability on person A or person B. The gift simply "counts towards" person A's nil rate band for 7 years.
If the gift is not made from person A's nil rate band then the PET can cause a tax liability at any time up to 7 years later. Person B is primarily liable to pay that tax. However, if person B can't, or won't, pay then HMRC can claim against person A's estate - in other words the executors.
However, I always understood that it is the estate of the donor which is liable for the IHT on PETs made by the donor, should they not survive 7 years (with a tapering liability the longer they survive).
I suppose that there could be a scenario in which they PET'd all their assets and then didn't live long enough to get IHT relief, in which case the Revenue would have to go after the recipient, or presumably the recipient's heir/s if the recipient was also dead, but that wouldn't be an issue in this case; person A's estate will have sufficient to pay any IHT due, whether on excess over the nil rate band in the estate at death or on that plus any PET/s made less than 7yrs prior to death.
The implication of the statement made by OO that a PET is a potential (albeit already specifically allocated to the PET) extension of the nil rate band (with full relief from IHT once 7 years is reached) is that it doesn't matter if the recipient dies during that time (in this case leaving the gift on to person C), so long as the donor lives?
Revisitph said:
I always understood that it is the estate of the donor which is liable for the IHT on PETs made by the donor, should they not survive 7 years (with a tapering liability the longer they survive).
No. Recipient of the gift is primarily liable. Hence it's not uncommon for the recipients of large gifts to take out 7 year life assurance on the donor's life. That life assurance can taper down with the potential tax liability. Revisitph said:
in this case; person A's estate will have sufficient to pay any IHT due, whether on excess over the nil rate band in the estate at death or on that plus any PET/s made less than 7yrs prior to death.
Person A needs to write a Will saying that person B is to get their IHT liability (if any) paid from the estate before any other beneficiaries get paid.Revisitph said:
The implication of the statement made by OO that a PET is a potential (albeit already specifically allocated to the PET) extension of the nil rate band (with full relief from IHT once 7 years is reached)
Yes, you could say that. If you give away all of your assets and survive 7 years there will be no relevant lifetime gifts, no estate and therefore no IHT.Revisitph said:
...it doesn't matter if the recipient dies during that time (in this case leaving the gift on to person C), so long as the donor lives?
Correct. But the recipient (I think B in your example) is subject to IHT on his own estate - which now includes the amount of the gift received from A.Note: These questions really need specific advice from a remunerated advisor who understands all of the surrounding circumstances. It would be unwise to make financial decisions based on what's said on an internet forum.
This link may be helpful http://www.ft.com/cms/s/2/800961c8-5713-11e0-9035-...
Thanks, interesting, I suppose that my assumption was based on limited experience, in which, since PETs had been made to those who were either ultimately the beneficiaries or the children of beneficiaries of the donor's will, the relatively small amount of IHT (because the donor lived nearly 7 years) was settled by the executors for that will on behalf of the recipients of the PETs. Now, with the passing of years, the cycle is repeating but there will be plenty in Person A's estate to settle any IHT on the PETs made in life (should they not survive 7 years), and since the ultimate beneficiaries of Person A are those to whom they made, and are making PETs as investments mature, the executors (persons B) of the estate will be justified in settling any IHT due on the PETs prior to distributing the rest, minus IHT on that remainder which exceeds the nil rate band, to the "persons B" or their heirs if they predecease person A..
Useful tip about life insurance. In this case I think that life insurance would not be worthwhile as person A is so old that the premiums would be likely to be very high. If persons B and C are to make PETs in turn to their children to help with property purchases then, given that B & C will still be relatively young, it might well be worthwhile.
Thanks; if anything complex is envisaged, specific advice will be taken (and paid for!).
Useful tip about life insurance. In this case I think that life insurance would not be worthwhile as person A is so old that the premiums would be likely to be very high. If persons B and C are to make PETs in turn to their children to help with property purchases then, given that B & C will still be relatively young, it might well be worthwhile.
Thanks; if anything complex is envisaged, specific advice will be taken (and paid for!).
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