An essential part of any executor’s job is to work out the assets and liabilities of the estate that they are administering. An executor also owes a statutory duty to HMRC to correctly report the value of the estate to it so that, if any Inheritance Tax is due on the estate, the right amount is paid.
The job of the executor is made more difficult because the Inheritance Tax rules require gifts made in the seven years prior to death to be brought back into account. However it’s not uncommon for an executor to know next to nothing about the deceased’s personal finances, let alone what gifts the deceased has been making and to whom. This can be a real problem for executors because if the executor reports to HMRC that there have been no gifts but HMRC is able to produce evidence of gifts having been made, the executor may receive a tax geared penalty, calculated with reference to the potential tax forgone if the gift had remained undiscovered, which the executor is personally liable for. So how much detective work does an executor have to do to avoid any risk of getting a penalty for undeclared gifts?
A recent newsletter from HMRC gives HMRC’s view on the rather onerous steps that an executor has to take:
Normally, we would expect the personal representative to ask family members, friends, associates, those named in any will and the deceased’s solicitors, accountants or financial advisors whether they have received or whether they have any knowledge of any such gifts in this period. Additionally, the online Inheritance Tax Toolkit strongly recommends that executors check seven years bank and building society statements to identify potential gift transactions. Such gifts can significantly impact on the amount of Inheritance Tax payable.
In the majority of cases, these gifts are reported correctly. But we do sometimes ask further questions about the returns upon which these gifts should be declared. If a gift has not been properly declared and there is additional Inheritance Tax payable, then there may also be interest and a penalty to pay. (HMRC December 2015 Trusts and Estates newsletter)
The problem with this level of thoroughness is that it comes at a cost; both in the time it takes to check the records and the expense of doing so if account statements over the last seven years are not to hand and have to be ordered. These costs will seem out of proportion for more modest estates. In addition, family member executors can find it very awkward to have to quiz other family members, whom they may not know well or be on good terms with, about gifts received. Yet, if an executor wants to discount any risk associated with failing to report any gifts then the advice has to be to follow HMRC’s guidance to the letter in order to avoid criticism.