The case of Timothy Clayton Hutchings v HMRC  UKFTT 0009, decided on 12 January 2015, is the first decided case on the provisions of Finance Act 2007 Schedule 24, Paragraph 1A (‘Error in taxpayer’s document attributable to another person’), which came into effect on 1 April 2009. The case concerned an estate’s inheritance tax return and the First-tier Tribunal found that Mr Hutchings, the son of the deceased and a beneficiary of the estate, was liable to a penalty for errors attributable to him.
The facts of the case were as follows:
- Shortly before his death the deceased gifted an offshore bank account to Mr Hutchings …
- … to prepare the inheritance tax return the Executors asked the family if any of them had received gifts from the deceased but …
- … Mr Hutchings did not disclose his gift though …
- … he later disclosed the gift following an anonymous tip-off received by HMRC …
- … the consequence of which was additional tax payable by both Mr Hutchings (on the gift) and the Executors (given their reduced nil rate band) and …
- … HMRC issued a penalty notice to Mr Hutchings for 50% of the additional tax.
The main point from this decision is undoubtedly the assessment of Mr Hutchings to a penalty which was not only related to his own tax liability. In confirming the assessment of penalties on Mr Hutchings for the errors, the Tribunal found:
‘The inaccuracy in the IHT 400 submitted by the executors was attributable to Mr C Hutchings deliberately withholding information (the gift to him of the Julius Bär account) from the Executors with the intention that the IHT 400 would contain the inaccuracy (the failure to declare the gift).’
With regard to HMRC’s decision not to issue a penalty to the Executors the Tribunal noted:
‘while HMRC considered that the return filed … did contain an inaccuracy … the inaccuracy was not due to carelessness or deliberate behaviour of the executors.’
What is equally useful is the insight given into the Tribunal’s views on whether the Executors had fulfilled their duty to make reasonable enquiries in establishing the liability to inheritance tax.
In considering whether the Executors had been at fault in not searching the deceased’s house, the Tribunal noted:
‘it is not reasonable (unless perhaps there are specific indications that something was hidden) for Executors to conduct a thorough search of a deceased’s house where the family and advisers were present to inform the executors about the deceased’s affairs and the executors themselves had had a pre-existing relationship with the deceased.’
The Tribunal also pointed out:
‘Executors cannot write to every bank in the world on the off chance a deceased person might have had an account with them unknown to his advisers.’
It was also emphasised that a gift letter sent by the Executors ‘clearly conveyed the need … to tell the Executors about gifts’.
The case therefore gives guidance on the extent of the enquiries which personal representatives (PRs) should make. That is that PRs should be able to rely on information provided by families and their advisers. Further enquiries should be limited to organisations with which the deceased had a known connection unless there are indications that information is being concealed. Where information is being requested from non-professionals a clearly conveyed letter is needed.
The comments on the enquiries which PRs can be expected to make could be useful in other situations, for example where HMRC seek to pursue PRs for tax on lifetime gifts remaining unpaid a year after the end of the month of death. Following concern from the law societies HMRC advised that they would:
‘not actually pursue for inheritance tax personal representatives who
‑ after making the fullest enquiries that are reasonably practicable in the circumstances to discover lifetime transfers, and so
‑ having done all in their power to make full disclosure of them to the Board of HMRC
have obtained a certificate of discharge and distributed the estate before a chargeable lifetime transfer comes to light’
In particular, the Tribunal commented specifically on the gift letter sent by the Executors saying it was ‘very clear’ and complied ‘with the Executors’ duty to HMRC to investigate lifetime gifts for the purpose of paying inheritance tax’.
Finally, it is worth making a brief comment on the quantum of the penalty. At 50% this penalty could appear rather harsh but it clearly reflects HMRC’s view that the decision not to tell the Executors was both deliberate and concealed. However, even this penalty could be much higher in future cases involving an offshore element under the proposed extension of the more penal offshore penalty regime to inheritance tax.
For further information and help on inheritance tax, please contact the TaxDesk on 0845 4900 509 and ask for Lawrence Adair.
For further information and help in dealing with HMRC enquiries, ask for John Hood.