Executor on trial

KEY POINTS

• Value of property to be included on form IHT200.
• Penalty for apparent negligence.
• Support found in First-tier Tribunal decision in Cairns.
• HMRC consider ‘usually’ to mean ‘invariably’.
• Extorting money from innocent taxpayers must stop.

A surprising and distressing cloud has darkened my life over the past two years. It was the kind of Kafkaesque nightmare that I believed occurred only in totalitarian states. I was appalled, as was everyone I have told about it.

A simple affair

My mother-in-law died on 2 June 2007. I was named in her will as sole executor. Her estate was very simple: about £150,000 at the bank and a one-half share of the house she lived in. The other half was owned by the estate of her second husband in trust for his children after her death.

I was one of the three executors of his estate. I am neither a lawyer nor an accountant. I have never read Taxation.

However, I was a consulting actuary and had specialised in institutional investment consultancy in a leading UK firm.

I decided I should be capable of winding up the estate on my
own – and it would probably be interesting.

With the help of HMRC’s excellent guidance notes and a friendly and constructive interchange of correspondence with the HMRC, the initial form IHT200 report was amended as additional information became available; I paid all inheritance tax due (just over £400,000) by the end of 2007.

I distributed the balance of the estate and filed the papers as a job well done.

Surprising turn of events

Four months later I received a letter from HMRC saying they were ‘considering the increase in value’ of my mother-in-law’s house.

I had submitted form IHT200 on 1 August incorporating the £1.4 million valuation estimate of a local professional firm for the house at the date of her death. Following a sealed-bid auction, the property was sold for £2,000,100 on 18 September 2007.

I was intrigued and puzzled by the investigation. Were HMRC going to try to penalise the valuer for putting too low a value on the house, or the purchaser for paying too much?

Following a lengthy, intrusive and bullying series of investigative letters, I was informed in September 2008 that I had negligently submitted an incorrect report and HMRC assessed the appropriate penalty at £44,700. The only evidence for negligence was that I did not amend the draft form IHT200 when I received a letter informing me of the non-binding sealed bids.

I explained I had given the matter considerable thought and that I had a number of good reasons (which I spelled out) for deciding to stick to the professional valuation initially and to let them know as soon as the sale was completed (which I did).

The inheritance tax had been paid on the full £2 million and the estate had nothing to gain and gained nothing, and they had lost nothing. Indeed, they had profited from my prompt payments.

HMRC agreed that had suffered no loss but insisted,‘the only issue is whether the incorrect account was negligently delivered’. If so, they felt a £44,700 fine was appropriate.

I had sufficient professional experience (as an expert witness in negligence cases) to be pretty sure their accusation of negligence would not stand up, so I proceeded to fight the case for myself.

In February 2009 HMRC accepted I had not been negligent, but ‘could not agree that no penalty at all is appropriate’.

However, they were prepared to reduce the penalty to £17,500. I replied I would pay neither £17,500 nor £1.75.

At the end of March, the judgment of the First-tier Tribunal in the similar case of Cairns (TC8) was published. The Revenue lost that case and was seriously reprimanded by the Commissioner for seeking a large penalty for a minor incident of technical and inconsequential negligence.

On 15 June 2009, after 15 months of persecution, HMRC abandoned their attempt to extort a penalty from me.

Whose negligence?

HMRC who (negligently, in my view) had not asked me whether I had considered amending the IHT200 on hearing of the sealed bids, asserted I had not taken account of this information and had therefore been negligent.

In fact, I had been informed of the non-binding sealed bids just as I was about to send off the IHT200, and I considered holding it pending completion of the sale, which was expected within eight weeks.

Since I had already completed the paperwork and I was hoping to finish the whole assignment by 31 December, I decided not to wait. The new problem was what to do with the information I had just received. I thought long and hard about it and took account of the following.

The guidance notes say, ‘If you are going to be selling … the sale price will usually be a good indication of the value at the date of death’.

However, this advice seemed to be irrelevant in this case for at least two reasons. At this stage there was no ‘sale price’. All we had was a number of non-binding offers.

What was ‘usually’ the case in normal market conditions might well be wholly inappropriate following an unusual form of marketing in a market that was seriously overheating.

The IHT200 incorporated the valuation with which I had been provided by a professional valuer, from whom I had commissioned an independent report. It stated that the present position of the sale was ‘with estate agents’, and that it was intended to complete the sale ‘within 12 months’.

In relation to property sales, the guidance notes state in bold type (which is used very rarely), ‘You only need to fill in columns I to L if the property has actually been sold before you apply for a grant’. HMRC clearly did not want to know about non-binding offers.

I had been informed that the district valuer would be asked to help assess the value for inheritance tax purposes. This would provide an opportunity to discuss and clarify the appropriate value.

It was clear the sale would be completed within a few weeks. Hence whatever value was entered on the IHT200 would lead to a one-tenth interim advance payment, which shortly thereafter, following the sale, would be subsumed into the 100% total inheritance tax payment.

So, should the estimated open market value as at 2 June 2007 entered on the IHT200, which was based on the report of a qualified independent professional who had cited information derived from the sale of seven comparable properties to support his view, be rejected in favour of the tentative non-binding result of a very unusual, closed-sale process carried out in very unusual market conditions two months later?

After long reflection and consideration, I decided it should not.

While HMRC were entitled to disagree with my decision, it was clearly substantiated and well considered. It was most certainly not arrived at negligently.

Extortion racket

In a conversation with an HMRC employee, I asked why she could not see I had not been negligent. Her chilling reply was, ‘That’s what most people say at first, but they pay up in the end’.

I could not believe what was going on and discussed it with an accountant friend, who sent me a copy of Malcolm Gunn’s article Saints and Sinners.

It concerns the decision of the Special Commissioners in the case of a solicitor, J K Robertson, from whom the Revenue tried to extort £10,000 because he wound up an estate with ‘undue haste’.

The Revenue lost the case and had their knuckles rapped severely by the Commissioner. In its evidence the Revenue pointed out that this was the first penalty case ever to come to appeal. Apparently, ‘thousands of cases’ had settled.

The injustice was so obvious and the reprimand so severe that it was impossible to understand how HMRC could still be playing the same game seven years (and, presumably, thousands of more cases) later.

Why have the Special Commissioners and/or the Government and/or the legal profession not put a stop to it?

I surmise that most citizens are scared of HMRC and would be shocked and intimidated by a huge penalty claim. While they might regard it as unjustified, the Revenue’s aggressive bullying, their own lawyer’s warnings about the accumulation of legal costs (HMRC twice tried to persuade me to take legal advice) and the uncertainty of success before the First-tier Tribunal would convince most to agree to pay a reduced penalty in settlement.

I reluctantly conclude that lawyers have been tacitly playing along in HMRC’s game in negotiating down the penalties, thus effectively assisting the department to extort large sums of money out of honest citizens over the past ten years.

An unusual omission?

In the letter in which HMRC informed me they had found me guilty of negligence they quoted from the guideline referred to above, but omitted the crucial word ‘usually’.

Since a key element of my decision had been that this was an unusual closed sale in unusual market conditions so that the sale price might not be a good indication of the open market value at the date of death, I queried the omission.

It could have been attributed only to ignorance, negligence or dishonesty. The official concerned refused to answer as, on a subsequent enquiry, did Keith Wright, the ‘complaints & communications manager’ (sic).

Following a third enquiry, I discovered that HMRC apparently have their own private and limited definition of the word ‘usually’ and will not accept its use in the normal dictionary sense.

This laughable explanation accords with their reluctance to accept anything other than the sale price for inheritance tax purposes. Their automatic substitution of ‘invariably’ for ‘usually’ explains the advice I received that I would be banging my head against a brick wall if I tried to persuade the Revenue to accept some value between £1.4 million and £2 million.

I suspect the professionals who read Taxation regularly have let them get away with this.

All right, so you weren’t negligent. Pay up all the same.

At the meeting in February 2009, HMRC accepted I had given the valuation ‘considerable thought’ and that ‘nobody would talk to [me] again about negligence’.

The Revenue’s concern rested with the decision I had taken. Thus HMRC appear to feel they are entitled to extort a penalty not only in cases of fraud and negligence, but also when they disagree with a carefully considered opinion. I wonder how many of the poor devils who paid up were trapped by this piece of nonsense.

National scandal

Nobody would object to some kind of properly controlled and limited-penalty system for people who provide HMRC with fraudulent information, or who carry out their duties in a blatantly negligent way.

What is unacceptable is for the taxman to search out minor issues that might be negligent and to try to use them to extort large sums. I believe that at the start of an enquiry HMRC should ask itself, ‘Did he try to make any money? Did he make any money? Did we lose any money?’ If the answers to all these questions are ‘no’, the enquiry should be closed.

The most upsetting aspect of what I was made to suffer was that nobody at HMRC, from the official who started the ‘investigation’ to David Shaw, the head of the IHT department, Lesley Strathie, or Michael Clasper, the chief executive and chairman of HMRC respectively, understood that what they were doing was profoundly unjust and immoral.

Nobody whistle-blew. Nobody apologised. All I got was bluster and self-justification.

I do not believe Parliament intended to empower HMRC to extort huge sums of money from honest members of the public for minor acts of inconsequential (and in my case wrongly perceived) negligence.

It is a national scandal, and it should be stopped.

Editorial note

Taxation and our readers in the profession do not necessarily have to agree with all of Mr Lever’s views to recognise the validity of his feelings about his experience.

A penalty demand for nearly £45,000 would frighten anyone, and when the penalty eventually turns out to be nil, there are questions to be answered.

HMRC’s duty of confidentiality prevents them from commenting on specific cases, but it is clear from Cairns and Robertson that this approach by the Revenue is not a one-off.

An in-principle justification of it would be a starting point for discussion.

Issue: 4239 / Categories: Comment & Analysis , Admin , Inheritance Tax