Beneficiary of will penalised for failing to reveal lifetime gift to executors

A Sussex man has received a GBP87,000 penalty from HM Revenue and Customs for failing to tell his father's executors about a cash gift he received the year before his father's death.

The father, Robert Hutchings, was a businessman and farmer. At his death in October 2009, his estate was worth at least GBP3 million – the value of his farm property.

Hutchings had five children, but his final will, executed six months before his death, disinherited two of them. A further two were left legacies of GBP150,000 each. The residue went to the fifth child, Clayton Hutchings. The will also nominated two professional executors.

While preparing for probate, the executors wrote to the family beneficiaries asking if they had received any gifts from their late father in the preceding seven years. Only one of the beneficiaries, Elizabeth, replied saying that she was not aware of any gifts. It also appears that there was a meeting between the executors' representative and the family soon after the death, at which the family were asked to disclose lifetime gifts. No disclosures were made and the executors duly submitted an IHT400 form on this basis.

Nearly two years later, HMRC received an anonymous tip-off that Clayton Hutchings had an undisclosed offshore bank account. HMRC wrote to him and to his father's executors demanding disclosure.

Clayton's solicitors then advised him to make a formal disclosure of the Swiss account, which he duly did. It emerged that, in April 2009, Clayton's father had transferred nearly GBP450,000 from his own Swiss account (which was also undisclosed) into Clayton's account.

This disclosure led HMRC to claim an additional GBP47,000 in inheritance tax (IHT) on Clayton Hutchings personally. However, HMRC also charged him a penalty of 65 per cent on the potential loss of IHT revenue linked to the gift. This penalty was calculated at GBP113,794, though HMRC later reduced the figure to GBP87,533.

Although Clayton Hutchings paid the additional IHT bill attributed to him, he appealed against the penalty. He argued that he did not deliberately withhold information and never knew how much money was in the Swiss account. Notes of his conversations with his solicitor suggest that he believed gifts of overseas assets were not subject to UK tax and thus did not need to be declared.

Clayton, a self-employed carpenter, said his father's executors had not made it sufficiently clear to him that he must declare all lifetime gifts, and that the letter they sent him asking for disclosure of gifts was 'gibberish'. He also criticised the executors for not thoroughly searching the late Mr Hutchings' home for relevant documents, which might have disclosed the gift to them; and for submitting the IHT400 form earlier than it need have been.

However, the First-tier Tribunal disagreed. It ruled that executors are not normally expected to search a house for every document but are entitled to rely on information provided by the deceased's family and advisors. Moreover, it was unlikely that there would have been any documents about the Swiss account in the house, as it was a 'mail-only' account.

Second, the Tribunal stated that it is good practice to submit the IHT400 form early, if the executors believe they are in a position to make an accurate return. It was not the executors' fault that they had not been given the correct information. According to the Tribunal, 'Mr Hutchings had been asked at least twice and failed to reply'.

The Tribunal thus rejected his appeal, finding that he had deliberately withheld the information. The penalty imposed under paragraph 1A of Schedule 24 to the Finance Act 2007 was upheld (Hutchings v HMRC, 2015 UKFTT 9 TC).

The executors avoided a personal penalty for filing an inaccurate return because they were able to show that the question of lifetime gifts was appropriately raised, both in person and in formal correspondence. The blame thus fell on the person who had deliberately failed to provide them with the required information.

According to James Sedgley of law firm Penningtons Manches LLP, this is the first case of its kind to be tested in the courts, and should serve as a warning to beneficiaries that they must take care to respond honestly and openly to executors' enquiries.

'It should also remind executors of the importance of making and properly documenting thorough enquiries when completing an IHT return', he noted.

Sources

• BAILII