One of the most important tasks when administering the estate of someone who has died is dealing with inheritance tax (IHT). This is paid by the Executor using funds from the estate and, subject to any reliefs and exemptions, will be due if a person’s estate is worth more than £325,000 when they die.
However, in addition to the estate owned by the deceased at their death, any gifts made by the deceased while they were alive must also be considered.
Any gifts made less than seven years before death count towards the IHT threshold, so if the deceased gifted more than £325,000 of gifts in their final seven years, tax will be due on everything over this threshold. For gifts made between three and seven years before death, the amount of tax is reduced under what is known as taper relief.
While the rules as to which gifts are liable to IHT are not straightforward, a recent case has highlighted the importance of disclosing to the HMRC any gifts made by a deceased person.
It also shows the considerable financial consequences which can be faced if this is not done.
A case in point - Commissioners for HMRC v Hutchings
The deceased, a Mr Robert Hutchings, had gifted over £400,000 to one of his five children, Clayton Hutchings, in April 2009 by means of a transfer between each of their offshore bank accounts.
The deceased had subsequently signed a new Will leaving a cash legacy to two of his other children, and the residue of his estate to the same son, Clayton. The two other children were omitted from the Will.
Following his death in October 2009, Mr Robert Hutchings’s Will was contested by the two children who had not been left anything under its terms. The appointed Executors included a solicitor whose firm accordingly acted in the administration of the estate.
During the estate administration, the solicitors enquired about any gifts, highlighting the importance of accurately reporting gifts made in seven years prior to the death. In addition to discussing this with the family at an initial meeting, the solicitors sent letters to various family members enquiring about gifts and reiterating why they should be made aware of any gifts.
Only one child replied to advise that she was unaware of any gifts having been made. The recipient of the gift of April 2009, Clayton, failed to respond. The solicitors duly made no mention of the gift, of which they remained unaware.
Some time later, around July 2011, HMRC received anonymous information advising of the existence of Clayton’s offshore account, which he had additionally failed to mention in his own tax returns. HMRC duly started enquiries. On being questioned about the gift of over £400,000 made in April 2009, the solicitors who had acted in the executry claimed that they had made reasonable enquiries and had accordingly been misled.
HMRC assessed that over £100,000 of the gift was chargeable to IHT at 40%, having applied the nil rate band of £325,000 to the gift. Additionally a penalty was applied. The potential lost revenue was calculated as 40% of the whole gift, as although the nil rate band was applicable to this, the IHT liability of the deceased estate had wrongly been calculated as entitled to the nil rate band. A penalty of 65% of this lost revenue, later reduced to 50% due to prompted disclosure, was applied.
Despite his claims that the so called “gift letter” was unclear and that he had forgotten about the significant gift due to grief, Clayton’s attempts to appeal the decision were unsuccessful. His claims that the Executor solicitors were at fault were also in vain:
“We have found that this gift letter clearly conveyed the need for its recipients to tell the executors about gifts from their father. Mr C Hutchings also complained that the executors did not follow up the gift letter and insist that those children of the deceased who had not replied, did reply. We do not agree. The executors could not force people to reply. Mr Hutchings had been asked at least twice and failed to reply: he cannot blame the executors for this.”
Clayton was therefore left to foot the sizeable bill…
Dealing with IHT returns – the details
IHT is paid by the Executor of a deceased estate using funds from the estate and, subject to any reliefs and exemptions, will be due if a person’s estate is worth more than £325,000 when they die – the “inheritance tax threshold” or “nil rate band”. Usually IHT must be paid by the end of the sixth month after the person died. In addition to the estate owned by the deceased at their death, any gifts made by the deceased while they were alive must be considered when assessing the IHT position. Any gifts made less than seven years before death count towards the IHT threshold (£325,000). If the deceased gifted more than £325,000 of gifts in their final seven years, tax will be due on everything over this threshold. For gifts made between three and seven years before death, the amount of tax is reduced under what is known as taper relief.
The rules as to which gifts are liable to IHT are not straightforward. There is an annual exemption of £3000, meaning that no IHT will be due on up to £3000 worth of gifts given each year. Moreover this can be carried over from one tax year to the next, but only for one year. Moreover, certain gifts will not count towards this annual exemption, such as wedding gifts or gifts worth £250 or less.
It is therefore advisable that any gifts which may have been made in the seven years before someone’s death are highlighted to those dealing with the estate. Indeed normally the Executor or solicitor acting for the Executor will ask the deceased’s family and friends, any beneficiaries of the estate and even financial advisors and accountants whether they are aware of any gifts which may have been made.
An IHT return – known as an IHT400 – will need to be completed and submitted to HMRC for all estates on which IHT is due before Confirmation (the Scottish equivalent of probate) can be obtained. Most estates will require Confirmation for assets to be ingathered and distributed. When dealing with any IHT400 which has been submitted, HMRC will often request additional information to check that the return accurately reflects the IHT position. If a gift is discovered which has not been properly declared and results in additional IHT being due, there may be a penalty and interest to be paid.
It is the obligation of the personal representative, or Executor, to submit an accurate IHT return. However, there is also an obligation on recipients of gifts to report the gifts and HMRC’s position is that a failure of a recipient to tell a personal representative about a gift which is liable to IHT, resulting in a failure to report the gift to HMRC, is to be considered as deliberate. The minimum resulting penalty will be 50% of the tax undeclared and could be up to 100% of the tax undeclared. In this scenario, this would be payable by the recipient of the gift in question.
Get in touch
Harper Macleod’s Private Client department can assist with all matters regarding the administration of a deceased person’s estate, and has dedicated tax specialists who are well versed in IHT and the relevant legislation.
To find out more about our practical tailored advice please get in touch with our team.