Beware Forgetting Lifetime Gifts: There is a Penalty

A very interesting and breakthrough case in January 2015 is the first case where a third party (i.e. not the executors but the beneficiary) has been punished with a penalty under schedule 24 of the Finance Act 2007. With many members of ICAEW considering registering to undertake probate work, the need to ensure all “bases are covered” when advising executors on the correct administration is highlighted by this case. This was quite a hefty penalty and whereas Mr Timothy Clayton Hutchings realised that as a beneficiary of a lifetime transfer the estate had to pay inheritance tax, he was not happy that the penalty was assessed on him personally as the beneficiary who failed to give the detail of the lifetime gift.

Good Checks by the Executors

The executors had carried out their correct checks as to whether or not there were lifetime gifts with the family and potential beneficiaries, and the lifetime gift only came to light with an anonymous tip off received by HMRC. This would have been difficult for the executors if they had not carried out detailed checks.

The facts were that the father, Mr Robert Hutchings, had an undeclared Swiss bank account which contained £443,669 and this was gifted to his son, Timothy Hutchings, via a transfer to his Swiss bank account seven months before Mr Robert Hutchings died. As mentioned, in dealing with the estate the executors had asked all the beneficiaries, including Mr Timothy Hutchings, for details of gifts made as is a correct procedure. Mr Timothy Hutchings failed to disclose the gift to the executors and also omitted interest on his Swiss bank account from his own Tax Returns.  Mr Timothy Hutchings reason for not disclosing the amount was because he thought that monies held in Switzerland did not come into the scope of UK tax. The First-tier Tribunal determined that the prerequisites to a penalty under the Finance Act 2007, Sch 24, para 1A, had been met. The penalty had originally started at 65% but dropped to 50% and the FTT determined that no further reduction was due.

Timothy also raised criticisms about the executors but they were not considered applicable by the FTT as the executors were able to prove that they had carried out good work with regard to the gifts and had documented this accordingly. The key here is diligent work and retaining evidence of that work. The work must not be routine but meaningful to arrive at the correct answer and complete answer.

Documentation of Checking Procedures

The case does emphasise the need for executors to carry out good research work regarding lifetime transfers and to fully document this. This also shows the need for beneficiaries if they are genuinely confused to ask the right questions about any lifetime gifts. The key has to be for beneficiaries to disclose to the executors all lifetime gifts made in the seven years before death and indeed prior to that if they are worried about the importance thereof. A key point is for the beneficiaries to place the responsibility with the executors and those advising the executors.

Registration

As mentioned, with many members of ICAEW considering probate registration or the licensing route, the responsibilities of work that needs to be carried out in connection with probate is shown very clearly in this case. Indeed it also shows the responsibilities of those who are not registering for the probate certificate within ICAEW and the strain that is placed on everyone who accepts the role of executor. This can be considered a landmark case as it is the first time the penalty has been placed on a third party (in this case, the beneficiary) and for those involved in all areas of probate, executor work, advising executors etc, this case will be able to be used very clearly as a warning as to what happens if details of lifetime gifts are apparently deliberately withheld from the executors. The 65% penalty in this case was reduced to £87,593.

In practice sometimes the deceased might have made gifts to one of their relatives without telling other relatives of that fact due to various reasons and family members can be very reluctant to disclose lifetime transfers as these can cause arguments within the family. There can also be confusion between loans and gifts as to what is the nature of monies given by a parent to one of their children for example. Where there is a family business (e.g. say a farming operation), a large amount of the information concerning lifetime gifts can be contained within the accountant’s working papers and there are responsibilities associated therewith.

Practical Tip

The practical tip of the Hutchings case is that all executors must document the full work they carry out with regard to lifetime gifts and all beneficiaries must be, to put it bluntly, chased and pushed with regard to information concerning possible lifetime transfers. With the obvious statement that there are jealousies within families and beneficiaries, everyone must be aware of the anonymous tip off to HMRC!

Get Authorised for Probate with SWAT UK

Any accountancy firm may now apply to be accredited to carry out probate work by ICAEW (not just ICAEW members). This means that ACCA firms, CTA firms and AAT firms (any firm!) can apply to ICAEW to be accredited to perform probate work once they have authorised individuals in place. In order to obtain authorisation from ICAEW, you must first attend a suitable training course and pass an assessment;

SWAT UK’s Certificate in Probate and Estate Administration has already helped hundreds of firms acquire the training and accreditation needed to apply for a probate licence. Courses and assessment days are running throughout this year, but hurry - spaces are limited and filling up quickly. Click here for more details and to book your place or call 0845 450 5555

This article demonstrates the clear importance of correct procedures when undertaking probate work. If you’d like to find out more about providing probate services to your clients, please call us on 0845 450 5555 or visit www.swat.co.uk/probate where we have included some useful guidance from ICAEW and our own technical team.

This article was kindly supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email: j.butler@butler-co.co.uk, Website: www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).