Inheritance tax relief penalties

Careless Inheritance tax relief claims cost penalties

We look at how inaccurate Inheritance tax returns can result in HMRC penalties and how this might apply to relief claims.

Penalties were introduced into the Inheritance tax regime by the Finance Act 2007 and apply where the date of death of the deceased is on or after 1 April 2009. An individual is liable for a penalty if an inaccurate return is made which leads to an understatement of the tax liability, but it is not only deliberate actions that are caught; this penalty applies whether the inaccuracy was careless or deliberate.

A penalty can also be imposed on a person who does not make the return but who deliberately supplies false information, or deliberately withholds information, from the person making the return. An example of this occurred in a recent case where a son withheld details of lifetime gifts made by his father from the executors of the father’s estate resulting in unpaid Inheritance tax and HMRC imposing a penalty on the son.

A not insignificant sum

Penalties are payable in addition to interest, from the due date of payment on the unpaid Inheritance tax. Whilst the interest due at current rates might not cause the executors too many sleepless nights, penalties can be much more expensive and could amount, in the most severe cases of a deliberate and concealed act, to up to 100% of the Inheritance tax due.

The most obvious action likely to lead to the issue of a penalty is the omission of an asset or lifetime gift from the Inheritance tax return and, for some time, it has been apparent that under-valuations of assets in the Return will also result in a penalty. For this reason it is essential that land valuers, for example, are instructed properly and given all the relevant facts. A move into new territory

It seems that HMRC is now applying penalties where unsupported claims for reliefs are made. For example, Business and Agricultural Property Relief are valuable reliefs and can reduce the taxable value of an asset to nil. In the past it would be common for executors to include the claims for these reliefs in the Return to HMRC and in due course deal with any queries raised, which might result in the extent of the claim being reduced. HMRC’s stance on penalties now means that executors should take much greater care in considering the claim and ensuring that it can be substantiated before making it.

At a recent STEP conference HMRC gave examples of claims made for both Business Relief and Agricultural Property Relief which were not substantiated and resulted in the imposition of a penalty.

The Business Relief claim concerned a company holding substantial cash balances which were not required for operational reasons and on which the claim for relief was refused. HMRC took the view that making the claim on the cash was careless and hence a penalty was issued. Another example was given of a claim for the transferable nil rate band; where this relief was not available as the estate of the first spouse to die had been subject to Estate Duty (and thus there was no nil rate band to transfer). Again this claim was regarded as careless and a penalty was imposed.

Due diligence required

The position for executors of estates is clear: while the beneficiaries of estates may have an entirely understandable wish to obtain the Grant of Probate and progress matters as quickly as possible it is essential to obtain all necessary information to ensure that all assets are accounted for, all failed lifetime gifts are declared and all relief claims are properly made. Failure to ensure that due diligence is applied from the outset could, in due course, be very costly for the estate.