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 gifts¹. 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 death².

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 property³.

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.