Do the executors always pay the penalty for non-disclosure on the IHT return?

 In Tax

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HMRC IHT penalties – Hutchings v HMRC [2015] UKFTT 9Case Summary from LawSkills | Private Client specialist trainers

It will be of comfort to practitioners to know that although the executors didn’t disclose a substantial gift by a father to his son in the IHT return, the penalty was charged on the son personally as he had failed to tell the executors about this gift after they had made reasonable enquiries.

This was the first time, according to HMRC, that there had been a case on paragraph 1A of the Finance Act 2007 which gives HMRC power to raise a penalty on a third party who provided inaccurate information or withheld information, rather than the advisers or executors who submitted the inaccurate document.

HMRC were clear that the executors had acted properly and made all reasonable enquiries of financial institutions. Clear guidance was given by the FTT on why the omission was not the executors’ fault and is useful in showing the lengths executors are expected to go to in discovering all assets and gifts of the deceased.

The facts

During his lifetime Robert Hutchings had had a Swiss bank account, which he had not disclosed to HMRC. In March 2009 Robert instructed the Swiss bank to transfer the balance of his account, some £443,669, to his son Clayton’s account with the same bank. Clayton did not declare any interest on it in his UK tax returns and HMRC were initially unaware of it.

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Robert died on 14 October 2009 leaving a Will dated 15 April 2009 which appointed a solicitor and land agent as his executors. Under this 2009 Will he left a legacy to each of his daughter Elizabeth and son Jeremy, with residue to his son Clayton, but nothing to his remaining sons Hugh and Shaun. Unsurprisingly, Hugh and Shaun contested the Will.

On 19 November 2009, as part of administering the estate, Mr Brookes, the solicitor acting for the executors (the solicitor executor having retired), wrote to various family members, including Clayton, asking if they were aware of any gifts Robert had made. Only Elizabeth replied to this letter, stating she was not aware of any gifts. When the executors submitted the IHT400 it made no mention of Robert’s gift of the Swiss bank account balance to Clayton 7 months before his death.

In July 2011 HMRC were told by an anonymous source that Clayton had an offshore bank account. HMRC wrote to Clayton and his accountant challenging him about the account and then subsequently, to the executors about the account. After Clayton admitted the existence of the Swiss account to his accountant in August 2011 the accountant replied to HMRC confirming its existence.

The executors raised the issue of the Swiss bank account with Clayton, who admitted its existence and the gift details via his solicitor. In September 2011, they therefore wrote to HMRC informing them of the gift of the Swiss bank account to Clayton. They said they had made enquiries of the family before submitting the IHT400 and had been “seriously misled about this gift.”

HMRC calculated IHT plus interest of £46,995.90 on Clayton for the failed PET (gift of £437,669 after deducting two annual exemptions, less £325,000 NRB, making £112,669 at 40%). As the estate was no longer entitled to the NRB, the estate had further IHT to pay as a result of this gift being admitted. HMRC calculated the ‘potential lost revenue’ as £175,067, being 40% of the £437,669 gift (having deducted the two annual exemptions).

Having looked through Mr Brookes’ probate file, in September 2012 HMRC issued a Notice of Penalty Assessment against Clayton under para 1A Finance Act 2007 for £113,793.94, 65% of this potential lost revenue. HMRC were satisfied that the executors had acted properly and in particular, had made reasonable enquiries of financial institutions. They were also satisfied that the executors had had no knowledge of the Swiss bank account and so they were not charged a penalty under para 1 Finance Act 2007.

Clayton asked for this penalty to be reviewed. On 18 December 2012 HMRC upheld the penalty being charged against Clayton, but reduced it to £87,533.80, 50% of the potential lost revenue. Clayton appealed against the review decision to the first-tier tax tribunal (FTT).

Clayton claimed that the executors hadn’t made the information they needed about gifts clear to him. Mr Brookes contended that as well as his 19 November 2009 letter, he had discussed the issue of gifts at his meeting with the family on 20 October 2009 too, making the necessary level of information clear. At the hearing Clayton claimed that the reason he’d failed to inform the executors of the account was because he’d forgotten about it. He’d previously told his accountant and the solicitor acting for him in the Will dispute a mixture of not knowing if it was his or his father’s, all the family knew about it, thinking it was his father’s still, thinking he held it for all the family and thinking it didn’t need to be declared as it was offshore and therefore non-taxable.

The law

Para 1 Sch 24 Finance Act 2007 provides:

Error in taxpayer’s document


(1) A penalty is payable by a person (P) where—

(a) P gives HMRC a document of a kind listed in the table below; and

(b) conditions 1 and 2 are satisfied.


(2) Condition 1 is that the document contains an inaccuracy which amounts to, or

leads to—

(a) an understatement of a liability to tax;

(b) [……..]


(3) condition 2 is that the inaccuracy was careless (within the meaning of paragraph

3) or deliberate on P’s part.

Para 1A Sch 24 Finance Act 2007 which came into force on 1 April 2009 provides:

Error in taxpayer’s document attributable to another person



(1) A penalty is payable by a person (T) where

(a) another person (P) gives HMRC a document of a kind listed in the table in paragraph 1,

(b) the document contains a relevant inaccuracy, and

(c) the inaccuracy was attributable to T deliberately supplying false information to P (whether directly or indirectly), or to T deliberately withholding information from P, with the intention of the document containing the inaccuracy


(2) A ‘relevant inaccuracy’ is an inaccuracy which amounts to, or

leads to –

(a) an understatement of a liability to tax,

(b) a false or inflated statement of a loss, or

(c) a false or inflated claim to repayment of tax.


(3) A penalty is payable under this paragraph in respect of an inaccuracy whether or not P is liable to a penalty under paragraph 1 in respect of the same inaccuracy.


IHT returns are within the documents listed in the table referred to above.

The decision

Ms Mosedale and Mrs Gable, as the FTT judges hearing the case, found that the omission of the gift from the IHT400 was not the executors’ fault.

Mr Brookes had raised the issue of gifts at the family meeting on 20 October 2009 despite Clayton’s denial of this. The FTT also found that Mr Brookes’ 19 November 2009 letter was very clear about the need to disclose any gifts [emphasis added]. It made no reference to cash or bank accounts specifically, but was clear in asking for details of any gift over £250 in the seven years prior to Robert’s death. It could not reasonably be read, as per Clayton’s suggestion, as only asking for disclosure of birthday gifts worth under £250. Nor was it justified to criticise the executors for failing to chase the family up who hadn’t replied to this letter.

The FTT did not accept Clayton’s criticism of the executors for failing to search his father’s house and find any paperwork for the Swiss bank account. In actual fact Clayton had moved into his father’s home and should have found any paperwork himself. In any event, the account was paperless so there wouldn’t have been any paperwork to find. In normal circumstances executors aren’t “expected to search a house for every document but are entitled to rely on information provided by the deceased’s family and advisers.” Where family and advisers were available to provide information it would only be reasonable for executors to search the house if there were “specific indications that something was hidden.”

The FTT also rejected Clayton’s criticism of the executors for submitting the IHT400 early: “It is good practice to do so where the executors believe they are in a position to make an accurate return.” The Grant cannot be obtained until the IHT400 has been submitted and it is good practice to complete the IHT400 before the IHT falls due six months after the death.

Clayton had suggested that the executors should have written to all banks, including those they had no reason to think the deceased might have had an account with and this was rejected as “utterly unreasonable. Executors cannot write to every bank in the world on the off chance a deceased person might have had an account with them unknown to his advisers.”

Altogether, the FTT doubted Clayton’s honesty, finding him to have lied. His evidence was unreliable and there was evidence that he would not have admitted the existence of the account and disclosed it without HMRC’s challenge about it. The reason for hiding it was to avoid paying any tax on it.

As para 1A applies where a person (P) ‘deliberately’ withheld information, the FTT stated that HMRC had to prove P to have such a subjective state of mind. HMRC would need to show evidence to support their contention, especially as deliberately supplying false information or deliberately withholding information in para 1A is very close to an accusation of dishonesty. The standard of proof is the balance of probabilities.

The FTT stated that HMRC had to prove that:

  1. The failure of the IHT400 to mention the lifetime gift was attributable to Clayton;
  2. Clayton withheld the information from the executors; and
  3. He did so deliberately;
  4. He did so with the intention that the IHT400 would omit the lifetime gift to him.

The FTT held that HMRC had shown that the prerequisites for a para 1A penalty had been met:

  1. If the executors had known of the gift they would have declared it. Clayton had failed to answer their question about gifts which made the omission just as attributable to him as if he had answered it falsely. It was no excuse that Clayton did not initially know the exact amount of the gift; he could have told the executors that there had been a gift and then found out the exact figures from the Swiss bank.
  1. Clayton was liable for the IHT on the failed PET from the moment of his father’s death and therefore had a duty to tell HMRC about his liability, despite his argument that he was not under any such duty. He could have discharged this duty by telling the executors about the gift so this was included on the IHT400. He had withheld information about the gift from the executors as he had known about the gift and had failed to answer their question when asked about gifts.
  1. It was not necessary for the tribunal to look at whether ‘deliberately’ meant dishonest in a criminal sense. Although “mere inadvertence or oversight would not amount to deliberate conduct” Clayton had not been truthful and had not ‘overlooked’ the gift due to his grief as he claimed; he chose not to tell the executors as he wanted to evade paying tax on it so his omission was deliberate.
  1. It was quite clear from their letter that when the executors asked about gifts it was so they could give all the information to HMRC on the IHT400. Clayton knew the executors would be making a return to HMRC with the information and intended the return to not contain information about the gift to him.

Clayton had argued about the quantum of the penalty, but the FTT upheld it at £87,533.80, being 50% of the potential lost revenue. This was the minimum possible percentage for a prompted disclosure. The FTT did not accept that Clayton’s disclosure was unprompted, having argued for a reduction to the permitted 30% for an unprompted disclosure. Nor were there any special circumstances to allow a reduction to less than 50%. Clayton’s appeal was dismissed and the penalty upheld.

Practice points

  1. When acting as personal representatives (PRs), or for PRs, make it part of your standard letter to spell out in some detail exactly what information you require about all assets and liabilities, together with all gifts by the deceased in the seven years preceding their death.
  1. Additionally, include the issue of gifts at any meeting you have with the family, people who knew the deceased or advisers and go into detail about the level of information the PRs require. Stress the necessity for full disclosure of ALL
  1. If there are no family or other advisers to provide information and you consider the probate to be unusual in any way or you believe something is being hidden from you, consider carrying out your own search for paperwork at the deceased’s home.
  1. Warn the family of the penalties which can and will be charged if any inaccurate information is given to HMRC. Point out that such penalties can be charged on them personally rather than the PRs or their advisers if the third party deliberately withheld the information or gave inaccurate information and the PRs had made all reasonable enquiries.
  1. Although HMRC may impose a penalty on a third party, this does not mean that the person who prepared and submitted the IHT return is safe. PRs and their advisers who submit an inaccurate IHT return prepared on the basis of information given by family members or other third parties must show that they took all reasonable steps to ascertain that the information was correct or they may face their own para 1 penalty.
  1. Make sure you not only keep a file copy of the letter asking for full disclosure of assets and liabilities, including details of any gifts, but also a detailed contemporaneous note of the meeting when you fully discussed it. Keep records of all the enquiries you made so you can show these to HMRC if necessary in order to successfully show you made all reasonable enquiries and therefore avoid a penalty.
  1. If your client has received a para 1A penalty notice, look at the four prerequisites the FTT said were necessary for such a penalty. Consider advising the client to appeal the notice if not all four prerequisites are met.
  2. Check HMRC Trusts & Estates newsletter: December 2015

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