The recent case of Hutchings v HMRC  UKFTT 0009 (TC) will be of interest to anyone acting as executor/administrator of an estate and anyone who is a beneficiary. Like the sword of Damocles, HMRC was dangling a tax penalty of £87,000 over the heads of both the executors and one of the beneficiaries – but which one of them would take the rap? The Tax Tribunal’s reasoning for their decision is fascinating stuff.
Administering the late Mr Hutchings’ estate was never going to be straightforward. He cut two of his five children out of his last will and they were suing his estate. However, the case before the First Tier Tribunal concerned unpaid Inheritance Tax (IHT) only. Mr Hutchings had an undeclared Swiss bank account, for about £443,000, which he transferred to one of his five children, Clayton, in the year of his death. Although Clayton initially claimed that the transfer was not a gift, the judge found that it was a gift which, as it had taken place within seven years of Mr Hutching’s death, had to be brought back into account for IHT purposes.
Personal representatives, be they executors or administrators, are under a duty to HMRC to take reasonable steps to ascertain the value of an estate so that the correct IHT can be paid. Clayton attended a meeting with the executors’ solicitor two weeks after his father’s death, at which the solicitor asked about lifetime gifts. This was followed up by a letter requesting details of any gifts. Clayton said nothing about the transfer. Accordingly, the executors submitted form IHT400 in which they claimed the full IHT nil rate band against the estate’s assets and there was no mention of the transfer. The matter only came to light because of an anonymous tip-off to HMRC two years later, informing them of the existence of the account – Clayton had not declared the interest from it on his tax return.
The case upheld HMRC’s decision to assess Clayton personally on £47,995 IHT in respect of the failed gift (which, incidentally, to the prejudice of the other beneficiaries of the will, attracted the benefit of Mr Hutchings’ full IHT nil rate band). In addition, an £87,533 penalty for failure to disclose was also levied (50% of the ‘potential lost revenue’). It was no defence that Clayton allegedly thought that overseas accounts were ‘tax free’!
This case is an interesting example of how and when HMRC will apply its penalty powers. It is the first case since the introduction of new legislation in April 2009 in which a beneficiary has been found liable for a penalty, not because the beneficiary submitted an inaccurate IHT return to HMRC but because the beneficiary deliberately withheld information with the intention that that would cause the executors to submit an inaccurate IHT400. The executors would have been liable for a penalty if they had submitted an inaccurate IHT400 due to carelessness.
Personal Representatives (PRs) and their advisers should take note also. Failure to evidence that the right questions have been asked could lead to tax penalties which PRs may have to pay from their own assets. Another reason to be circumspect about taking on the role of PR if you get nothing from the estate! It should be made clear that gifts of any amount and of any type of asset should be disclosed. The judge very helpfully confirmed that “executors are not (at least in normal circumstances) expected to search a house for every document but are entitled to rely on information provided by the deceased’s family and advisers” and the executors were not obliged to “force people to reply” to any request for details of gifts. The act of asking was sufficient.