Administration of Estates: Lifetime Gifts and Penalties
When someone dies their personal representatives must enquire whether the deceased made lifetime gifts. The personal representatives must report the date and value of lifetime gifts to HMRC (in most cases limited to gifts within seven years of death).
If the personal representatives make an inaccurate report to HMRC regarding lifetime gifts which later come to light there may be further Inheritance Tax (IHT) to pay and they may be personally penalised for their inaccuracy.
Gifts made within seven years of death may be subject to IHT depending on the value of the gift and the particular circumstances of the estate. Any IHT is initially payable by the recipient of the gift. If the liability is not met by the recipient, it can fall on the personal representatives to be paid from the estate funds they are holding.
Ascertaining whether a deceased person made lifetime gifts or not may well be difficult to establish in practice. If there are extensive assets and/or poor or disorganised records it may be time consuming to piece this information together. Additionally, where there are gifts of assets other than cash or listed shares there may be a need for retrospective professional valuations to establish exactly how much value for tax purposes was given away at the time.
Ideally, the deceased will have kept accurate records of their lifetime gifts with contemporaneous valuations. A logical place for these records to be kept is with the original Will. Clients who keep their solicitor up to date with the details of their lifetime gifts will make the administration of their estate more straightforward.
The level of the penalty for inaccurate disclosure will depend both on the amount of tax lost by HMRC and also on whether the inaccuracy was careless or deliberate. The level of the penalty will further depend on whether HMRC prompted the disclosure of the inaccuracy or whether the personal representatives volunteered the information.
A careless action can incur a penalty of 30% of the lost tax revenue. A deliberate but not concealed action can incur a penalty up to 70% of the lost tax revenue. A deliberate and concealed action can incur a penalty up to 100%.
A careless error envisages more than a mistake. An arithmetical error when adding up figures from bank statements would be considered simply an error in the return, but not a careless one. A careless error would be failing to contact the deceased’s bank to obtain accurate statements and then using incorrect approximated figures. A deliberate error would involve intentionally using incorrect figures such as failing to report lifetime gifts known to the personal representatives.
Dealing with the administration of an estate, especially one with significant amounts of assets, should not be undertaken lightly or without considering the need for professional advice. In relation to lifetime gifts, HMRC can require the personal representatives to confirm that they have personally reviewed all of the deceased’s bank statements to check for evidence of lifetime gifts. In our recent experience HMRC will not simply accept confirmation from the personal representatives’ solicitors that the statements have been checked. HMRC require the personal representatives to confirm they have checked the statements personally.
Personal representatives must personally conduct thorough searches of the deceased’s records as HMRC have further powers to require the production of information reasonably required to check the tax position of the estate. Failure to comply can result in further penalties relating to non-disclosure of the information and those relating to inaccurate reporting.
HMRC are routinely conducting enquiries into high value estates and reviewing the valuations of assets. We can assist personal representatives to fulfil their duties in administering the estate and guide them in what can often be a difficult process. The legal responsibility will, however, always lie with the personal representatives themselves.
For more information please contact Edward Porter, Senior Associate.