Executors pay the penalty

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16 November 2009

HMRC has in recent years become extremely keen to charge penalties where Executors fail to declare or undervalue assets comprised in a deceased's estate. Following the harmonisation of the penalty regime across all taxes earlier this year (and the cynical may also suggest a large deficit in the Government's coffers) they have continued with this approach.

The first point to emphasise is that a penalty is not a liability of the estate; it is a penalty levied on the Executors personally. If the Executors also happen to be the only residuary beneficiaries of the estate then this may not cause them too much concern but that is certainly not always the case. Indeed they are commonly not beneficiaries or even family members.

The Executors' obligation is to collect in the assets of an estate, pay the liabilities (including inheritance tax) and distribute the balance according to the Will. Whilst that sounds simple, ascertaining a deceased person's assets can be very difficult, particularly if their affairs were not in good order or there is nobody remaining who was familiar with them.

If the estate is taxable, the Inheritance Tax Return has to be submitted within one year of death but interest on any inheritance tax due starts to run from essentially six months after the date of death. Whilst interest rates have been very low in recent months HMRC controversially decided to charge a higher rate of interest at 2.5% above base from September 2009. Most Executors will therefore remain keen to submit a Return within six months.

In order to avoid any penalty an Executor has to act with reasonable care and be able to prove it. The new regime identifies three levels of behaviour that give rise to an inaccuracy, namely, "careless", "deliberate" and "deliberate and concealed". The less serious the reason for the inaccuracy, the smaller the penalty. HMRC will also have regard to the nature of disclosure of the inaccuracy, i.e. whether it was prompted or unprompted. The possible penalties range from 0% to 100% of the inheritance tax payable. For the honest Executor, who at worst has been careless, the maximum penalty is 30%.

Whilst in previous years there has been a tendency to "get the Return in" and amend it later so that Executors can get on and obtain the Grant of Probate to be able to progress the administration, they should now consider their own position more carefully. It is still possible, and often a practical necessity, to submit an Inheritance Tax Return which includes estimated values but HMRC is now stating that reasons should be given as to why an accurate valuation cannot be obtained and copy correspondence provided evidencing the position if the Executors are to protect themselves against possible penalties.

Practical Scenarios:

1. After submission of the Inheritance Tax Return, papers are discovered leading to an asset worth £100,000. The existence of the asset is reported immediately to HMRC and the inheritance tax due on it paid. One would hope that in such circumstances no penalty would be levied but HMRC will consider if the Executors have been careless. If the asset was a holding of shares, were any dividend payments evident from bank statements which could have lead to the discovery of the asset? If it was cash in a bank should this have been evident from interest included in previous income tax returns?

2. A verbal valuation of the deceased's property is obtained from a local estate agent and this value is included in the Inheritance Tax Return. As is the usual practice, the valuation is referred to the District Valuer who decides that the property is worth £30,000 more. HMRC has suggested that three such valuations or a formal chartered surveyor's valuation should be obtained if Executors are to protect themselves from an allegation of carelessness.

3. Five years before he died the deceased made a gift of £20,000 to his son. Such a gift would have utilised £20,000 of the deceased's nil rate band, leaving less to be applied against his estate and thereby increasing the estate's liability to inheritance tax. It is the Executors' obligation to report such gifts. Did they make the necessary enquiries of the family? Did they review the deceased's papers which may well have revealed a transfer out of £20,000 which would have put them on notice of possible gifts?

4. The deceased held stocks and shares through a stockbroker who provided a probate valuation of them. Upon receipt of subsequent investment reports it becomes apparent that they also held a cash balance which was not included in the valuation. Does the valuation protect the Executors or should they have made more specific enquires regarding cash?

If you would like further information please contact Rachel Pinn by e-mail or by telephone on +44(0) 117 902 2742.

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