Kirsti Harvey and Katherine Dimmock, in our leading Wills, Probate, Tax & Trusts team, answer the question.
An Executor of an Estate has personal accountability to make a full and frank disclosure of the value of the Estate to HM Revenue & Customs (“HMRC”) so that the Inheritance Tax position can be accurately assessed. Not only does this involve declaring all assets and liabilities as at the date of death but it also includes declaring any gifts that the Deceased made in their lifetime.
What is a gift?
A gift is a transfer of any assets without any consideration. The assets can include money, household and personal items, a house or other land or buildings, stocks and shares. A gift can also include any loss that you may incur for selling something for less than it is worth e.g. if your house is valued at £500,000 but you sell it to your child for £300,000 then the £200,000 loss would be considered a gift.
If you make a gift but still benefit from it in some way then HMRC consider this a “gift with reservation of benefit”. Further information can be found in our blog article, ‘Can I Gift My Property to My Children?’
How are gifts taxed?
The taxation of lifetime gifts can be a complex area but, generally speaking, any gifts that the Deceased made in the seven years before their death form part of the Estate for Inheritance Tax purposes. Any gifts that are within the Deceased’s Nil Rate Band (being the amount that can pass free of Inheritance Tax) receive the benefit of the Nil Rate Band. However, any gifts in excess of this will be subject to Inheritance Tax and the burden of payment is on the recipient of the gift.
There are various allowances that could potentially be utilised against the gifts. Further information regarding these exemptions can be found in our earlier blog article, ‘Inheritance Tax – How Much Can I Give Away?
Whilst it can be difficult to ascertain whether the Deceased made any lifetime gifts, HMRC expect the Executor to make extensive enquiries. This can include asking friends and family whether they received a gift or even requesting historic bank statements and reviewing the transactions. A Testator could assist their Executors with their enquiries by keeping an accurate record of any gifts that they make during their lifetime.
What happens if I don’t declare the gifts?
As an Executor is personally liable, it is vital that they make the necessary enquiries into lifetime gifts. HMRC can impose financial penalties when gifts are not declared correctly and the Executors may be liable to pay these penalties themselves.
However, it is not always the Executors who are responsible for the payment of the penalties. In Hutchings v HMRC , the Deceased’s son failed to declare a lifetime gift of £440,000 despite the Executors asking for confirmation of any gifts the family had received. In this case, HMRC demanded the additional Inheritance Tax of £47,000 plus a penalty of £87,000. The Executors were found to have made reasonable enquiries and therefore, the penalty was payable by the son as he had deliberately withheld this information from both the Executors and HMRC.
For further information or legal advice, please contact email@example.com or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.