The recent case of Hutchings v HMRC, 2015 UKFTT 9 TC highlights the importance of declaring all voluntary inter vivos dispositions (i.e. lifetime gifts) made by a deceased person in the 7 years preceding their death when submitting an inheritance tax return to HM Revenue & Customs (HMRC).
Under the current inheritance tax regime, subject to certain exceptions, the majority of lifetime dispositions made by an individual constitute either a potentially exempt transfer (PET) or a chargeable transfer which gives rise to an immediate charge to inheritance tax, such as a transfer of value into most types of trust.
The present case concerns a PET made by the deceased several months before his death. Under the current inheritance tax rules, inheritance tax is calculated by valuing all of the assets within the deceased’s person estate as at the date of death, plus the value (calculated by reference to the loss of value to the estate) of any PETs and chargeable transfers made within the last 7 years of the deceased’s life. However, where an individual has made a combination of both chargeable transfers of value and PETs during their lifetime, it is possible that a PET made up to 14 years before the deceased’s death can be brought into account when calculating any inheritance tax payable on death. This is a situation known as “the backward shadow”, and independent legal or tax advice should be sought where such circumstances exist.
In the present case, Clayton Hutchings, one of the children of Robert Hutchings, deceased, inherited the whole of his father’s residuary estate. Robert Hutchings’s estate, as at his date of death in October 2009, was worth approximately £3,000,000, which largely comprised his farm property.
When preparing the inheritance tax account, the deceased’s professional personal representatives wrote to the beneficiaries of the his will, which included two of the deceased’s other children who received legacies of £150,000 each (a further two children being disinherited) to determine whether the deceased made any gifts in the seven years preceding his death. Only one of the deceased’s children, Elizabeth, responded to these letters. She advised that she was not aware of any such gifts.
The facts also suggest that, during a meeting between the agent of the personal representatives and the family following the death of the deceased, when the family were prompted to declare any lifetime gifts the deceased had made, the family failed to do so.
Following representations by the family that no lifetime gifts had been made by the deceased, the deceased’s inheritance tax account was prepared and submitted on the basis that no such gifts had been made.
After a period of almost two years had elapsed following the above facts, an anonymous “tip-off” was made to HMRC that Clayton Hutchings held an offshore Swiss bank account. HMRC demanded disclosure of this offshore account and it was subsequently revealed that the deceased had also held an undisclosed offshore bank account from which he made a gift of approximately £450,000 to Clayton Hutchings’s offshore bank account in the April before his death.
This lifetime transfer from the deceased to Clayton Hutchings resulted in an additional £47,000 of inheritance tax being due, for which Clayton Hutchings, as the recipient of the gift, was personally liable.
HMRC also imposed a penalty of 65% of the potential loss of inheritance tax payable (£113,794) caused by the failure of Clayton Hutchings to declare the gift, although this penalty was subsequently reduced to £87,533. HMRC have the authority to impose such a penalty under Part 1 paragraph 1(1) of Schedule 24 of the Finance Act 2007 following a failure of a recipient of a lifetime gift failing to disclose such a gift to HMRC at the relevant time.
Clayton Hutchings subsequently appealed against the penalty imposed against him, although he accepted the additional inheritance tax liability attributed to the gift.
Clayton Hutchings averred that the personal representatives did not make it sufficiently clear to him that all lifetime gifts made by the deceased had to be disclosed. Clayton Hutchings also contended that, following conversations with his own legal representative, he did not feel that gifts relating to overseas assets had to be declared for inheritance tax purposes.
Furthermore, Clayton Hutchings contended that the personal representatives had not undertaken a sufficiently adequate search of the deceased’s property to enable them to discover all relevant paperwork, and had such a search been undertaken, documents pertaining to the gift may have been revealed.
On appeal, however, the First Tier Tribunal rejected Clayton Hutchings arguments, asserting that it is not ordinarily the personal representatives’ responsibility to search for every document at the deceased’s property, and that it is acceptable for the personal representatives to prepare the inheritance tax account based on the information that has been conveyed to them by members of the deceased’s family and their professional representatives.
The First Tier Tribunal rejected Clayton Hutchings’s appeal on the ground that he had deliberately withheld details of the lifetime gift from the deceased’s personal representatives when they were preparing the inheritance tax return. No inheritance tax penalty was attributed to the deceased’s personal representatives because they were able to demonstrate that they had taken adequate measures to determine whether such lifetime gifts had been made by the deceased by making enquiries of the family at the relevant time.