When grieving the loss of a loved one things can easily slip our minds, but beneficiaries need to be careful not to overlook important issues that arise when a deceased’s estate is being wound up. This was thrown into light earlier this year, when HMRC penalised a beneficiary for failing to disclose that he had been given a cash gift by his father before his father’s death, which the executors needed to know in order to assess and pay the inheritance tax due on his father’s estate. The beneficiary unsuccessfully challenged the penalty in the courts, the case serving as a useful reminder of the consequences of failing to disclose information and submitting an inaccurate inheritance tax return as a result.
At Wilson & Fish, our expert executry solicitors regularly assist both beneficiaries and executors deal with winding up a deceased’s estate, including the assessment of inheritance tax liability. In this post, we take a look at this notable case, highlighting the importance of executors making sure their enquiries are thorough and properly documented and the need for beneficiaries to openly and honestly respond to those enquiries as quickly as possible.
Hutchings v HMRC
Several months before his father’s death, Hutchings had received a gift of approximately £450,000 from his father in the form of an offshore bank account transfer. The executors of the estate were unaware of these offshore bank accounts, as well as the gift itself, when they completed and submitted the inheritance tax return. Although they had both spoken and written to the surviving family members requesting information about any gifts they had received, the only response they received was from Hutchings’s sister stating she was unaware of any gifts being made by her father. The result was that the inheritance tax paid on the deceased’s estate was incorrectly assessed and the amount paid was three times lower than what it should have been had the gift had been taken into account.
Nearly two years later, HMRC received an anonymous tip-off that Hutchings held an offshore bank account, leading to an investigation into his personal tax returns. HMRC wrote to the executors informing them of the offshore account. The executors replied that they had no previous knowledge of the account nor Hutchings’s father’s gift, taking the view that they ‘were seriously misled’ about the matter. HMRC therefore decided to hold the beneficiary personally liable for the additional inheritance tax that was due, as well as imposing a large financial penalty (50% of the potential lost revenue) for failing to promptly disclose information to the executors for the purposes of accessing inheritance tax liability.
Hutchings appealed the penalty imposed by HMRC on the basis that the executors not only failed to make it clear what information he was required disclose but also because he considered it to be the executors’ responsibility to discover the offshore bank account. In its decision (available here), the First-Tier Tribunal disagreed and dismissed the appeal.
The role of the executors
The Tribunal held that the executors had acted appropriately and the omission of the gift was not their fault:
- The letter from the executors requesting the family of the deceased to disclose if they had received any gifts from their late father in the last seven years, for the purpose of paying inheritance tax, was very clear. The executors could not be blamed if they didn’t receive replies.
- Executors are entitled to rely on information provided by the deceased’s family and advisers. They are not (unless there are specific indications that something was hidden) expected to search a house for every document nor write to every bank in the world on the off-chance a deceased person might have had an account with them.
- The executors had followed good practice by completing and submitting the inheritance tax return as early as possible. As tax is due six months after the death and a grant of probate (known as confirmation in Scotland) cannot be obtained until the inheritance tax return is submitted, it is good practice for executors to submit early where they believe they are in a position to make an accurate return.
The beneficiary’s liability
The Tribunal upheld the penalty because the inaccuracy on the inheritance tax return form was attributable to Hutchings. A refusal or failure to answer whether a gift was received has the same effect as answering falsely – the inaccuracy would have been prevented if Hutchings had simply told the executors the bare fact of the gift, even without precise figures.
Hutchings was seemingly the first person to be held liable to a penalty for inaccuracy under Paragraph 1A of Schedule 24 to the Finance Act 2007, which came into force on 1 April 2009. Importantly, the Tribunal emphasised that a beneficiary doesn’t owe a duty to either the executors or HMRC to disclose information under that Paragraph. Whether or not a beneficiary will be liable to a penalty is whether the fact that the inheritance tax return is wrong is attributable to the beneficiary deliberately withholding information. This includes a beneficiary failing to answer questions on which they possess relevant information, and requires the beneficiary to have so acted deliberately – not merely because of inadvertence or oversight – and intentionally.
In the present case, the Tribunal rejected Hutchings explanation of simply overlooking the account because he had his mind on other matters. They found that he had lied and concluded that he chose not to tell the executors about the account because he wanted to evade paying tax.
This decision is an important one for both beneficiaries and executors. Beneficiaries must be careful to promptly and honestly reply to requests from executors; while executors must be careful to clearly communicate their requests to beneficiaries and the deceased’s advisers. A failure to do so will be taken seriously by both HMRC and the courts, and can result in individual’s being held personally liable for their failings.
Wilson & Fish – Specialist Executry Solicitors Glasgow
Whether you’re a beneficiary, an executor or both, our specialist solicitors are ready to assist you. We have a deep understanding of the law and procedures involved in administering a deceased’s estate and can guide you through the entire process. For more information, please get in touch.