A recent case, Hutchings v HMRC, provides a salutary warning to beneficiaries of estates who have received lifetime gifts from the deceased. In this case the beneficiary received an £87,000 penalty from HM Revenue & Customs (HMRC) for failing to tell the executors of his father’s estate about a cash gift he had received the year before his father’s death. The executors of the Will were two professionals who had both written to the family beneficiaries, and met with them to ask if any of them had received any gifts from their late father in the preceding seven years. No disclosures were made and the executors submitted the Inheritance Tax account to HMRC on this basis.
Nearly two years later, HMRC received an anonymous tip off regarding a significant gift made to Mr Hutchings by his father. This led to additional Inheritance Tax (IHT) being claimed by HMRC from Mr Hutchings personally as the lifetime gift to him had exceeded the available tax free allowance. In addition, HMRC also charged him a penalty based on the potential loss of IHT linked to the gift.
Mr Hutchings paid the additional IHT bill but appealed against the penalty on the basis he had not deliberately withheld information. As the gifts to him had been to an overseas bank account, he had thought it would not be subject to UK tax and therefore did not need declare this. He also said his father’s executors had not made it sufficiently clear to him that he must declare all lifetime gifts and he had not understood their letter sent to him. He further suggested the executors had not thoroughly searched his father’s home for relevant documents which might have disclosed the gift.
The Tribunal however disagreed and ruled that executors are not normally expected to search a house for every document but are entitled to rely on information provided by the deceased’s family and advisers. They found Mr Hutchings had deliberately withheld the information and therefore imposed the penalty. The executors were not subject to a penalty for filing an inaccurate Return because they were able to show that the question of lifetime gifts had been appropriately raised both in person and in formal correspondence.
This case serves as a warning to beneficiaries that they must take care to respond honestly and openly to executors’ enquiries. It also reminds executors of the importance of making appropriate enquiries as to lifetime gifts before completing the IHT Return. HMRC’s guidance notes in respect of completing the IHT account advises executors that if they take reasonable care to get it right, they will not be charged a penalty if they make a mistake. HMRC normally accept reasonable care has been taken if the executors:-
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