ABOUT THE AUTHOR: Amanda Edwards TEP is an
Associate in the Private Client & Tax department at Boodle
Hatfield
Charlie Chapsticks, in his 80s, has recently made lifetime gifts
using up his available nil rate band for inheritance tax (IHT)
(GBP325,000 in 2011/12). He is determined that his estate should
not bear any IHT and has made a will leaving all his assets to the
local donkey sanctuary, a registered UK charity. He has, however,
decided that he should give his nieces and nephews a cash gift each
of GBP250. His accountant has told him that such gifts would fall
within an exemption in the IHT legislation for small
gifts. These will not be
potentially exempt transfers, so there will be no tax due even if
Charlie does not survive for seven years after the gifts.
So Charlie writes out cheques for GBP250 for each of his three
nieces and two nephews, Tilly, Milly, Jilly, Olly and Wally, a
couple of weeks before Easter. He sends four of the cheques in the
post, but keeps Jilly’s cheque as she is away on a gap year and
will visit him on her return in a month or so. Sadly, Charlie dies
suddenly on the Tuesday following Easter Monday. His bank is
informed of his death on the Friday.
After Charlie posts the cheques, the nieces and nephews take the
following actions:
- Tilly writes to thank Charlie and takes the cheque to her bank
immediately.
- Milly forgets about the cheque until a few days before Easter
then goes to her bank and pays it in.
- Olly puts the cheque in the post to his bank but the post is
rather slow and it only reaches Charlie’s bank after Easter.
- Wally forgets about the cheque, but as soon as he hears about
Charlie’s death he rushes to his bank and pays it in.
- Jilly does nothing as she is abroad and her cheque remains with
Charlie.
A cheque (in the absence of some additional specific undertaking
by the bank) is no more than an order to deliver money and an
authority to the bank, as the donor’s agent, to act upon it,
revocable by the donor until their death. This authority ceases on
the donor’s death.
The consequences of the various gifts differ, depending on
whether the cheques cleared Charlie’s bank account in his
lifetime:
- Tilly’s cheque clears before Easter and she uses it to pay for
her summer holiday.
- Milly’s cheque is paid in on the Thursday before Easter and
does not clear Charlie’s account until the following Wednesday, the
day after Charlie’s death. The executors are advised that the gift
was not completed as Charlie could have stopped the cheque from
clearing had he not died on the Tuesday. Milly’s GBP250 should
therefore be paid to the executors to hold for the donkey
sanctuary, as the residuary beneficiary.
- Olly’s cheque arrives in the slow post after Easter and clears
after Charlie’s death, like Milly’s, so his gift also fails. Olly
will have to send his GBP250 to the executors.
- Wally pays the cheque into his own bank after Easter but the
executors had informed Charlie’s bank of his death on the Friday
and Charlie’s bank rejects thecheque when it is presented. Wally’s
gift fails, like Milly’s and Olly’s gifts.
- Jilly’s cheque is found among Charlie’s papers after his death
and this gift also fails.
Strictly, a cheque written by the deceased that has not cleared
before death is not a valid debt of the deceased (as it is not for
consideration) and it cannot qualify as a gift in contemplation of
death (donatio mortis causa) as it does not constitute a
gift of property.
Even if the donkey sanctuary can be persuaded to honour the
gifts Charlie intended to make, HMRC will regard the value of the
four invalid gifts (GBP1,000) as part of Charlie’s estate at the
date of his death. In this case, there will be no IHT consequences
as the residue is wholly exempt. As far as Tilly’s valid gift is
concerned her GBP250 falls within the small gifts exemption and
therefore is not a potentially exempt transfer, as mentioned
above.
By contrast, a cheque for GBP300 that Charlie sent his gardener
for clearing the snow during the winter and trimming his hedges,
which clears the account after his death, does not have to be
repaid as this is not a gift that needed to be completed before
Charlie’s death but a valid debt of his estate.