The penalty for trying to evade inheritance tax.
If you make any gifts of money or items of value over £3000 to another person( excluding your spouse or civil partner) these gifts are actually regarded chargeable transfers for inheritance tax purposes. At the point when the gift is made there is no charge as the gift will be considered a potentially exempt transfer (PET). A PET only becomes chargeable if you subsequently die within seven years of making the gift.
On 12 January 2015 the Tax Tribunal decided the case of Timothy Clayton Hutchings v HMRC concerning lifetime gifts and inheritance tax. A beneficiary (Clayton Hutchings) was held to be liable to pay a penalty for an error on his father’s estate inheritance tax account.
This penalty was introduced by the Finance Act 2007 (“the Act”). 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 his son and 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. At this point 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 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. He also argued 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 instead found that it was good practice to submit the return as early as possible, and that they had made sufficient effort to ensure the return was correct.
The omission of the gift on the inheritance tax return was determined as not the fault of the executors as they asked Mr Hutchings to declare any gifts both orally at a meeting and in writing. The executors were deemed to be reasonable in their reliance on information provided by the family and advisers when preparing the inheritance tax return.
The Tribunal found that Mr Hutchings 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.
In another case
Theresa Bunn, 56, inherited £1.5m but told the taxman the sum was £285,000. She has been sentenced to two years in prison
HMRC said that Ms Bunn, from Hassocks, Sussex, confessed, following an investigation, that in addition to understating the value of her inheritance she also “failed to declare substantial cash gifts from her aunt while she was alive”.
Too many people seem to believe that not declaring assets to HMRC will be fine as “how will they know”. In many family cases the executors and the beneficiaries are actually the same people and so stronger action by HMRC will be taken if gifts from the estate are not declared.
It simply is not sensible to try and avoid the tax and be looking over your shoulder for many years. Simple planning in advance will mitigate most IHT problems – you just need to take action with experienced advice early enough.
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Investing in a business to avoid inheritance tax
Inheritance tax ( IHT) is often called a voluntary tax. The possibility of avoiding or reducing IHT by just giving away assets and surviving seven years seems pretty attractive on the surface but can have implications if income is required or if the beneficiaries divorce.
In some cases (especially if the planning is left until late in life) the most difficult part, is the risk of dying before seven years so the gift drops back into the estate. Therefore, making financial gifts later in life in the context of planning for reducing inheritance tax (IHT) bills usually comes with the strong caveat that it will take seven years for it to be effective.
There are many commercially-run business property relief (BPR) arrangements and they can be useful in certain circumstances. These are usually considered high investment risk products and so experienced advice is essential. An alternative simple and relatively cheap method of obtaining BPR for assets (turning the assets into one which is 100% IHT free) is to invest them in a trading business run by a beneficiary of your will. By becoming a shareholder or partner in the business you can reduce the seven years to two.
In either case, provided the business is trading at the date of death of your death as the investor and you have held the investment for at least two years, then on the basis of the existing rules BPR at 100% will be available –thus eliminating the IHT on the value of the investment.
Bearing in mind that a claim will be made for BPR will only be made on your death, it is very important that the investment is properly documented. This is usually something that should be dealt with by the person advising on tax planning and the accountant of the business.
Bearing in mind the amount of Inheritance tax that can be at stake, it is well worth getting the documentation correct. In addition keeping any eye on the trading status of the business is also a must.
In the right circumstances (you need to be confident in the ongoing viability of the business) this is one of the few arrangements where keeping an asset instead of giving it away can be IHT effective.
During your lifetime you can benefit from dividends or drawings from the business in which you have invested without risking the BPR. This will of course affect your income tax and so once again experienced advice is essential.
For those with a limited life expectancy and in the right circumstances, this method of avoiding Inheritance tax can be very useful.
Please call us if this is of interest to you.