Inheritance tax penalties

The Capital Taxes Office has published its August 2000 newsletter and it is available on the Revenue's website. It contains an item of specialist interest to those acting for the personal representatives of deceased miners who are pursuing claims for compensation against the National Coal Board.
Of wider interest is an item concerning penalties. At one time, inheritance tax penalties were virtually unheard of as the Revenue received full recompense for delays in the form of interest on any additional tax due. Furthermore, executors are duty bound to complete their obligations and discharge all debts so that there were minimal risks of non-declaration.
Over the past few years shock stories have emerged of penalties being claimed by the Capital Taxes Office in circumstances where previously not a harsh word would have been uttered. The Revenue's newsletter states that its policy on penalties has not changed from that set out in leaflet IHT13 on penalties, but it is clear that in recent years the universally applied doctrine of penalising everybody everywhere for every minor misdemeanour or delay has firmly reached the Capital Taxes Office. Two examples are given to illustrate current practice.
In the first, the personal representatives in an estate did not check whether there were any lifetime gifts prior to the death and submitted an account on this basis. The Capital Taxes Office subsequently discovered that there were such gifts and challenged the personal representatives on the matter. Initially they maintained that there were no such gifts, but subsequently accepted that there were.
The Capital Taxes Office states that the maximum possible penalty in these circumstances (under section 247, Inheritance Tax Act 1984) would be the amount of tax under-declared plus £1,500. In the circumstances a reduction of 10 per cent would be allowed for disclosure, 25 per cent for co-operation ('the personal representatives were slow to reply to letters' — a case of the pot calling the kettle black) and 20 per cent reduction under the heading of gravity, it being accepted that there had been no fraudulent intent. The total reductions amount to 55 per cent, so 45 per cent of the maximum penalty would be charged. This could be a very substantial sum.
In the second example, an inheritance tax account is delivered with a property shown at a figure which turns out to be the insurance value of it. This was originally based on an estimate of the value of the property for insurance purposes some years before the death and uprated since in line with rebuilding costs. After reference to the District Valuer, the Revenue considers that the real value of the property is considerably higher. In this case, a 20 per cent reduction of the maximum penalty would be allowed for disclosure, a 40 per cent reduction for co-operation, 'all enquiries being answered quickly and frankly', and a 25 per cent reduction under the heading of 'gravity', there being no evidence of fraud. The total reductions in the maximum penalty therefore amount to 85 per cent in this case.
The newsletter goes on to explain the Revenue's requirements concerning newly discovered assets in estates. At one time it was general practice to submit a corrective account only when executors felt that they had made sufficient progress with identifying most necessary amendments to justify submitting a corrective account. Those days have gone, and the Capital Taxes Office now states that where £1,000 or more of tax is at stake, it requires to know about amendments:

(a) in informational documents within 30 days of discovery at the latest;
(b) in accounts within six months of discovery at the latest.

The Revenue states that, in practice, this means that it expects to be told about changes, singly or in aggregate, amounting to £2,500 or more in value as soon as possible. Failure to tell the Revenue within the above time limits about innocent errors resulting in tax of £1,000 or more may result in a penalty. The Revenue will apply these limits to errors, including newly identified assets, discovered on or after 1 September 2000.
Where errors in any accounts, information or documents arise as a result of negligence or fraud, penalties under section 247, Inheritance Tax Act 1984 can apply and the Revenue expects to be told about such errors as soon as they are discovered.

Categories: News , Inheritance Tax