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23rd January 2015

Beneficiary Penalised for Unreported Lifetime Gift

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HMRC sent a tax penalty of £113,794 to a businessman for not replying to the executors of his father’s estate to report an offshore lifetime gift.

Lifetime gifts can often, as here, result in extra Inheritance Tax being payable when the donor dies. The tax may be payable by the original recipient or by the executors of the estate. Where such gifts are not reported properly, HMRC can also charge a penalty of up to 100% of the extra tax. Normally where a gift is unreported, it is the executors of the estate who are responsible to pay both the tax and any penalty from their own pockets. This is one of the reasons why people need to think carefully before accepting the role of executor.

In this instance, however, it was the beneficiary himself who had to pay both the tax and penalty.

HMRC received an anonymous tip off, years later, concerning the lifetime gift. The beneficiary seemed to be under the mistaken impression that offshore accounts did not count for UK tax purposes and that similarly, because the gift was made abroad, it would not count for UK tax purposes. On this basis, he accepted the tax was due, but appealed against the tax penalty. The suggestion was that if anyone was at fault, and should pay the penalty from their own pockets, it should be the executors.

Fortunately for the executors, they were professionals and had taken professional advice. They were able to prove they had asked the beneficiary on two separate occasions whether any lifetime gift had been made to him by his late father. The tribunal therefore held that the penalty was firmly the responsibility of the beneficiary and not that of the executors.

This case is important as a reassurance to executors that they can be protected if they take, and act upon, suitable advice. It also serves as a warning to beneficiaries that they should reply openly to enquires made by executors.

For more information please contact Carolyn Bagley on 01908 247015 or click here to email Carolyn. For more information on our Inheritance Tax services please click here.