If a person makes one or more gifts within seven years of their death, those gifts may result in a liability, or increased liability, to Inheritance Tax payable on that person’s estate. The executors of a deceased person have a duty to investigate whether any such lifetime gifts were made, to enable them to file an accurate Inheritance Tax return with HMRC. If they fail to make appropriate enquiries the executors may face substantial penalties, payable from their personal assets rather than from the estate. Additionally, if the recipient of such a lifetime gift does not disclose it to the executors then he may be personally liable to pay any additional tax due along with a penalty.

Earlier this year, the HMRC imposed an £87,000 penalty on Mr Hutchings, whose father died in October 2009. Mr Hutchings’ father had made a Will six months before he died leaving the bulk of his estate, worth over £3m, to Mr Hutchings.  
Mr Hutchings’ father appointed two professional executors to administer his estate. As part of their enquiries, the executors asked whether family members had received any gifts from the deceased in the seven years before he died. Those enquiries were made both at a meeting between the family and the executors and in subsequent letters to the family.Only one family member replied, saying that she was not aware that any such gifts had been made.  The executors therefore calculated the Inheritance Tax due and submitted the Inheritance Tax return on that basis.

Mr Hutchings had in fact received a gift of nearly £450,000 from his father, shortly before his death. The money was transferred between Swiss bank accounts in the names of the father and Mr Hutchings respectively. Neither of those accounts had previously been disclosed to HMRC. The gift came to light nearly two years after the Inheritance Tax return was filed, as a result of an anonymous tip-off received by HMRC. The result was that an additional £47,000 of Inheritance Tax was payable in respect of Mr Hutchings’ father’s estate.  HMRC claimed the additional tax from Mr Hutchings personally and also imposed a penalty of over £87,500 as a result of his failure to disclose the gift.

Mr Hutchings paid the additional tax but appealed against the penalty on the basis that he had believed that gifts of overseas assets did not need to be declared to HMRC, so he had not deliberately withheld information.  He blamed the executors for not having searched his father’s house for documentation relating to the Swiss account and for submitting the Inheritance Tax return too early.

The Tax Tribunal rejected those arguments and Mr Hutchings was required to pay the penalty. The Tribunal said the executors had behaved properly and were entitled to rely on what they were told by the family. They had asked Mr Hutchings on at least two occasions to disclose lifetime gifts and they could not be blamed for his failure to provide them with relevant information.

The case is a clear warning to recipients of lifetime gifts that they must be open and honest about such gifts and to provide the executors and HMRC with all of the information they need. Those ‘gifts’ may not always be obvious. In a recent matter that we dealt with, a father moved in with his daughter in the months before his death and made contributions to the daughter’s living costs. HMRC found that those contributions were gifts rather than living expenses and therefore should be factored into the Inheritance Tax calculations.

 Executors must also be vigilant. Although the executors were not personally liable on this occasion, they must nevertheless be thorough when investigating the deceased’s estate. Given the Government’s clampdown on tax avoidance, HMRC is likely to be increasingly unsympathetic if executors fail to identify and disclose all relevant information about the deceased’s assets and lifetime gifts. We have had a number of cases when HMRC has required the executors to go through the deceased’s bank statements covering the seven years before death to ascertain whether any relevant lifetime gifts have been made. It is vital, therefore, that executors don’t take any short cuts, and that they make sure they have taken all reasonable steps to identify gifts made by the deceased, as well as making enquiries of relatives and keeping evidence of those enquiries.