After someone dies, it is part of the job of their executors to ensure that the correct amount of inheritance tax is paid. As a part of this process, executors need to find out whether the deceased made any gifts in the 7 years before he or she died, because these gifts may be chargeable to tax. H M Revenue and Customs has recently issued a reminder to executors that it is their responsibility to ensure that all gifts are reported correctly. Where they are not, HMRC will impose financial penalties of at least 50% of any additional tax due. Moreover, HMRC will charge these penalties to the recipients of the gifts if they have deliberately failed to tell the executors about gifts received from the deceased in his or her lifetime.
The recent case of Hutchings v HMRC shows how this works in practice. Mr Hutchings died in 2009 and as part of the administration process his executors wrote to each member of the family asking if they had received any gifts from him in the previous 7 years. Only one daughter replied saying that she was not aware of anything. The executors filed the inheritance tax account on that basis and arranged for the inheritance tax to be paid. Nearly two years later, HMRC received a tip-off that one of the sons had received a substantial cash gift from Mr Hutchings. HMRC wrote to the son demanding disclosure of the gift. It turned out that the gift amounted to some £450,000. HMRC claimed an additional £47,000 of tax from the son personally, and, in addition, claimed a penalty from him of £87,000. The son paid the tax but appealed against the penalty. Amongst other things he claimed that his father's executors had not made it clear to him that he should declare the gift and that they should, consequently, be liable to pay the tax themselves. The Court found against the son, saying that he had deliberately withheld information about the gift from his father's executors.
The case – believed to be the first of its kind – serves as a reminder to executors of their obligation to make the fullest enquiries possible about their estate before submitting an inheritance tax account. Although the Court found in this case that the executors were not at fault, had they been, they might have had to pay the penalty personally. The case also brings to the fore the fact that recipients of lifetime gifts will be primarily liable to pay inheritance tax on the value of their gift if the donor dies within 7 years and, as such, have a responsibility to ensure that the gift is disclosed to the Revenue after the donor's death. Further, they risk being charged significant penalties in addition if they fail to disclose the gift to the executors or to HMRC without very good reason.
If you would like more information on Inheritance Tax or find out how the team can assist you, please contact Ben Lowe on 01603 693582 or email firstname.lastname@example.org
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