If you make gifts of money or items of value to other individuals these gifts are chargeable transfers for inheritance tax purposes. At the point when the gift is made there is no charge as the gift constitutes a potentially exempt transfer (PET). A PET only becomes chargeable if the donor dies within seven years of making the gift. There are exemptions which apply to PETs such as small gifts not exceeding £250, wedding gifts subject to certain limits and gifts to a spouse/civil partner or charity. Each person also has an annual exemption of £3,000.
On 12 January 2015 the Tax Tribunal decided the case of Timothy Clayton Hutchings v HMRC concerning lifetime gifts and inheritance tax. In this case a beneficiary was held to be liable to a penalty for an error in the estate's inheritance tax account.
This penalty was introduced by the Finance Act 2007 ("the Act"). This case is the first of its kind on this section of the legislation. The Act states that a penalty is payable by a person where they have deliberately supplied false information or deliberately withheld information to another person with the intention that the declaration of tax liabilities to HMRC would be inaccurate.
In 2009 Clayton Hutchings' father transferred nearly £450,000 from his offshore Swiss account to Clayton Hutchings Swiss account. His father then died within a year of making this gift.
The executors of the estate wrote to the children of the deceased and spoke to them in person requesting information concerning lifetime gifts. Mr Hutchings failed to respond on both occasions.
In 2011, following an anonymous "tip-off", HMRC demanded disclosure regarding Mr Hutchings' offshore bank account. Following legal advice Mr Hutchings formally disclosed his Swiss account. This disclosure resulted in HMRC claiming £47,000, the tax due on the gift, from Mr Hutchings and also charging him a penalty of £87,553 calculated on the potential loss of IHT revenue.
Mr Hutchings accepted the additional IHT liability for the gift, however he disputed the penalty and brought an appeal arguing that he had not deliberately withheld information concerning the Swiss accounts.
Mr Hutchings claimed it was his belief that overseas assets did not have to be disclosed for UK inheritance tax purposes. Mr Hutchings also put forward various criticisms of the executors including that the letter they sent him requesting disclosure of any lifetime gifts was "gibberish". He said the executors should have carried out a comprehensive search of his father's home for documentation and contacted a greater number of organisations to find out about the assets in the estate. Another of his arguments was that the executors submitted the inheritance tax account too early.
The Judge did not consider the criticisms relating to the executors' actions to be justified and found that it was good practice to submit the return as early as possible. Mr Hutchings assertion that the executors should have searched the deceased's home was found to be unreasonable. It was also found to be reasonable that the executors limited the enquiries they raised with organisations to those they knew were connected to the deceased.
The two professional executors were found to have taken adequate steps to determine whether lifetime gifts were made. The omission of the gift on the inheritance tax return was not the fault of the executors as they asked Mr Hutchings to declare any gifts both orally at a meeting and in writing in a clearly expressed letter. The executors therefore avoided a personal penalty as they were deemed to be reasonable in their reliance on information provided by the family and advisers when preparing the inheritance tax return.
The Tribunal rejected Mr Hutchings arguments and found that he had deliberately withheld information from the executors and this resulted in inaccurate inheritance tax forms being submitted.
This case demonstrates how important it is for executors to raise enquiries concerning lifetime gifts and to ensure these enquiries are well documented. For beneficiaries, the case emphasises the importance of giving honest and considered responses to executors when enquiries are made of them to avoid the misfortune of incurring a penalty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
