On death, it is the personal representative’s responsibility to ensure that the correct amount of Inheritance Tax is paid on the deceased’s estate. This amount can fluctuate dramatically depending on the value of gifts made in the seven years preceding the donor’s death. For example, gifts made by the deceased totalling £10,000 during this seven year period would push a £325,000 estate above the Nil Rate Band threshold and into taxable territory, potentially giving rise to a tax bill of £4,000.
Personal representatives (the executors or administrators of an estate) are under a duty to ensure that any relevant gifts made by the deceased in the seven year period prior to death are reported to HMRC. They should ask family, friends, beneficiaries, solicitors, accountants and other advisors of the deceased whether they had received any gifts or whether they had any knowledge of gifts being made to other parties. Personal representatives should also review the deceased’s bank accounts during the seven year period to identify any gifts made from the estate.
What happens if you don’t tell HMRC about a gift?
HMRC has a good nose for sniffing out undeclared gifts, if it is suspicious about an estate and it’s declarations (or lack of) it will delve deeper to find the truth. If a gift which gives rise to chargeable IHT is found which was not reported, not only could the estate now bear additional IHT but there could be interest payable on this sum as well as a penalty for not disclosing it in the first instance.
What happens if a family member lies about a gift?
While as a personal representative it is your duty to make extensive enquiries about gifts, it may be the case that a recipient of a gift does not disclose a gift which they had received. This could be the case where the receiver is a residuary beneficiary and disclosing the gift would result in an increase in IHT payable on the estate and therefore a lower inheritance for them. The Finance Act 2007 imposes obligations on recipients of gifts to disclose a gift made to them. Failure to tell a personal representative or otherwise report a gift will primarily be seen by HMRC as deliberate and HMRC does impose penalties for this behaviour. The penalty for a failure to report ranges between 50% to 100% of the undeclared potential lost tax and is payable by the recipient of the gift, not the estate or the personal representatives. In the event you fail to disclose a gift of £5,000 made in the seven year period prior to the deceased’s death, you could personally incur a penalty of up to £2,000.
An example of this in action is the case of CRC v Hutching 
. Mr Hutchings received a gift sum in excess of £430,000 from his father seven months prior to his death. He was also named as the residuary beneficiary in his father’s Will. His father died leaving an estate worth an estimated £3million.
Mr Hutchings did not disclose any gifts to the personal representatives despite them writing to him requesting any information he may have about gifts made from his father’s estate. HMRC received anonymous information about the gift made to Mr Hutchings and made further enquiries.
On discovery of the gift, HMRC charged Mr Hutchings personally for the IHT chargeable on the gift; after deduction of the Nil Rate Band (NRB) this totalled just over £40,000. However, as this gift exhausted the NRB this pushed more of the estate into taxable territory. HMRC is entitled to charge a penalty on the ‘potential lost revenue’ which could amount to 40% of the value on the entire gift. The potential lost revenue was therefore around £170,000 and the penalty charged for was 65% of this sum, meaning Mr Hutching would personally incur a penalty of just over £110,000. The court upheld HMRC’s decision but reduced the amount payable by Mr Hutchings to 50% of the potential lose revenue, meaning a penalty of over £85,000 was payable. Mr Hutchings had to personally pay a £85,000 penalty plus the £40,000 tax chargeable on his gift.