What happens when assets are transferred to beneficiaries before IHT is paid?
Inheritance Tax – Harris v HMRC  UKFTT 204
Mr Harris had been appointed as Helena McDonald’s personal representative. He had dealt with the estate, but had allowed its proceeds to be transferred to the only beneficiary without retaining funds to pay IHT. HMRC sought payment from him, personally, and he appealed their assessment as he did not have the funds to pay the bill. His final appeal could be struck out at an early stage if it had no prospect of success.
Mr Harris was appointed as personal representative of Helena McDonald by letters of administration issued in June 2013. He filed an IHT 400 form. HMRC opened an enquiry into the account in April 2014, and in October 2015 they issued a determination of the amount of tax payable on the estate: £341,278.76. Mr Harris requested a statutory review of the determination, the conclusions of which were sent to him in June 2016 — the determination had been upheld. Mr Harris appealed the review decision, and HMRC applied to have his appeal struck out.
The grounds of appeal
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Mr Harris argued that he did not have the funds to be able to pay the inheritance tax (IHT). It appeared that he had released a substantial amount (possibly all) of the estate’s funds to the deceased’s brother and beneficiary of the estate, Mr Harewood, on the understanding that Mr Harewood would pay the estate’s bills and taxes. Mr Harewood subsequently travelled to Barbados, where he lived, and had not paid the IHT. The judge noted that Mr Harris had not been able to make contact with Mr Harewood.
S.200 IHT Act 1984 provides:
“(1) The persons liable for the tax on the value transferred by a chargeable transfer made (under section 4 above) on the death of any person are [. . .]—
(a) so far as the tax is attributable to the value of property which either—
(i) was not immediately before the death comprised in a settlement, or
(ii) was so comprised and consists of land in the United Kingdom which devolves upon or vests in the deceased’s personal representatives,
the deceased’s personal representatives;…”
Rule 8 of the Tribunal Procedure (First-tier Tribunal) (Tax Chambers) Rules 2009 provides:
(3) The Tribunal may [emphasis added] strike out the whole or a part of the proceedings if—
(c) the Tribunal considers there is no reasonable prospect of the appellant’s case, or part of it, succeeding.”
HMRC applied to have Mr Harris’s appeal struck out under Rule 8, on the grounds that it had no reasonable prospect of success. The Tribunal noted that strike out under Rule 8(3)(c) involves the exercise of the Tribunal’s discretion. Also, Mr Harris must be given an opportunity to make representations. The Tribunal confirmed this had been done, even though Mr Harris had not, in the end, appeared in the proceedings. The judge confirmed that he had had the benefit of reading the correspondence on the Tribunal file, which set out Mr Harris’s grounds for appeal.
“Nowhere in the correspondence does Mr Harris challenge the amount of the inheritance tax determination, or that it was properly issued to him in his capacity as administrator of the estate.”
The Tribunal held that s.200 IHTA 1984 was clear, and none of its limited exceptions were relevant to this case. It was the PRs of the deceased who had the obligation to account for any IHT arising.
The Tribunal held that it was no defence that —
- Mr Harris may have transferred the assets of the estate to a beneficiary on the basis that the beneficiary would be responsible for payment of the IHT due; or
- Mr Harris was ignorant of his obligations, as a PR, to pay the inheritance tax owing
It followed, inevitably, that Mr Harris’s appeal had no reasonable prospects of success, and the judge exercised his discretion under Rule 8(3)(c) to strike out his appeal.
- It is vital that PRs understand the personal nature of their liability for payment of IHT. Nothing can be done if they do not seek legal advice, but it almost goes without saying that the point should be emphasised to any PR who does seek such help.
- All PRs need to understand that relying on someone’s ‘honour’ will not be enough to extricate them from this kind of problem. It may feel mean, but proper procedures should always be followed.