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Jean-Yves Gilg

Editor, Solicitors Journal

Full disclosure

Full disclosure


Failing to disclose the existence of any assets to an executor will only result in the beneficiary facing increased costs and penalties

The case of Timothy Clayton Hutchings v Revenue & Customs [2015] UKFTT 9 (TC) highlights the need for absolute honesty in answering questions about lifetime gifts. In the case, a beneficiary of an estate failed to disclose a lifetime gift given to him by the deceased.

Some seven months before he died, the deceased transferred the content of an offshore account to one of his five children, Timothy Clayton Hutchings. The proceeds of this account were not declared by the beneficiary when questioned by the executors.

Nearly two years later, HMRC received an anonymous tip off about the beneficiary's account and made enquires. He ended up paying the additional inheritance, but was also landed with a penalty for failure to make a full and accurate disclosure to the deceased's executors of the lifetime gift.

The estate had an additional IHT liability of nearly three times the amount, due by the beneficiary, as the lifetime gift had utilised the nil rate band (NRB). The beneficiary did appeal, but this was rejected.

When starting the administration of the estate, the question of obtaining full and frank disclosure from the beneficiaries about lifetime gifts will vex many executors. There is often, I find, a common misconception among clients about passing information onto their professional adviser.

A family friend confidently told me recently that, provided the deceased had gifted the particular chattel regardless of the time frame between the gift and death, this then could be disregarded for IHTpurposes; unfortunately this is not the case.

Where an item is gifted by the deceased more than seven years before their death, then the item is outside of their estate. If they fail to live seven years from the date of the gift, then the item will need to be included in ascertaining the value of the deceased's estate, but taper relief will apply after a period of time.

This makes it essential for executors to receive full details of lifetime gifts. Where items have been gifted and their value exceeds the NRB the person in receipt of the gifts will need to pay the IHT on the gift and the estate will no longer have a NRB available.

Executors have a duty to make reasonable efforts to report lifetime gifts that have become taxable when completing the Inheritance Tax account IHT400. In Hutchings, the executors held a meeting at which they raised the question of lifetime gifts, and followed this up with a letter where they asked all the family members to disclose lifetime gifts they had received by the deceased.

Only one of the five children had responded to this, saying she was not aware of any lifetime gifts. In taking these two courses of action, the executors were considered to have met their obligations. The executors, interestingly, did not have to force the family members to reply to their letter.

The obligation is on the beneficiary to respond honestly and accurately to enquires made by the executors. In failing to disclose the information to the executors which led to the IHT400 being filed incorrectly, the beneficiary had failed to meet his obligation and was liable for the penalty.

The case can be seen as a positive decision for executors, especially professional executors where you may only be approached on the death of the deceased, and have no prior knowledge of the family or how they conducted their affairs.

Executors would be advised to make suitable enquires and although not mentioned in the case, a review of a deceased's bank accounts for the seven years leading up to deceased's death is certainly a safe starting point. However, executors do need to be able to rely on what they are told by the beneficiaries.

The case will also serve as a sharp reminder to beneficiaries that it is at their own risk if they fail to disclose something. The penalty imposed by HMRC in Hutchings was 50 per cent of the potential lost revenue, and in the case was over £87,000. This was substantially more than the inheritance tax bill he also had to pay.

Caroline Cook is a senior associate at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser