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Lilly Whale, an associate at RWK Goodman <\/p>\nUnlock the Editor\u2019s Digest for free<\/p>\n
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We were recently granted probate on my mother\u2019s estate. We paid inheritance tax (IHT) at 40 per cent on the \u00a385,000 which was above her\u00a0IHT allowance.\u00a0As the only executor, I worked hard to ensure that all her assets, such as her jewellery and property,\u00a0were valued and declared. It now transpires, after an HM Revenue & Customs investigation, that one of my siblings did not declare a gift of about \u00a314,000, which was received six years before my mother\u2019s death.\u00a0Will I be held responsible?<\/p>\n
Lilly Whale, an associate at RWK Goodman <\/p>\n
Lilly Whale, an associate in the private client team at RWK Goodman, a law firm, says that while it is not unusual, receiving a letter from HMRC about your mother\u2019s estate is understandably worrying, particularly when you have valued her assets and liabilities, paid IHT, and obtained the grant of probate.\u00a0<\/p>\n
We do not know precisely why HMRC chose to investigate or what caused the discovery of the \u00a314,000 gift. Inquiries can arise for many reasons \u2014 random or routine selection, minor valuation discrepancies, or information from third parties such as banks or government bodies. It does not necessarily mean that you, or anyone else, has done something wrong.\u00a0<\/p>\n
As executor, you are legally obliged to provide a full and accurate account of the estate through the information reasonably available to you and your own investigations. But HMRC recognises that executors can only declare what they know: if a lifetime gift was made without your knowledge and you acted in good faith when submitting an IHT400 form, the risk of personal liability reduces. You must, however, now co-operate fully.<\/p>\n
Your mother\u2019s \u00a314,000 gift is a potentially exempt transfer (Pet) and must be reported. As she died within seven years of making the gift, it becomes a \u201cfailed Pet\u201d and is brought back into account when calculating IHT. Failed Pets use up the \u00a3325,000 nil-rate band before the rest of the estate, so the gift is likely to mean a slightly higher proportion of the estate is taxed at 40 per cent. Note that HMRC will consider whether any part of the \u00a314,000 falls within the \u00a33,000 annual exemption or \u00a36,000 if the previous year\u2019s allowance was unused.<\/p>\n
Responsibility for paying the tax on a failed Pet can be written into the will. If no one is named, the default position is that HMRC may recover owed IHT from the gift\u2019s recipient, your sibling. If the tax remains unpaid 12 months after the end of the month of death, HMRC can seek payment from you as executor, but only if the estate funds remain under your control.\u00a0\u00a0<\/p>\n
You have not mentioned how your mother\u2019s will divides the rest of her estate, nor whether she made further lifetime gifts that could ultimately affect how much each person receives. However, if the estate still has enough funds and the beneficiaries all agree, it may be possible to settle any additional tax due from the rest of the estate via a deed of variation. signed within two years of your mother\u2019s death and recorded with HMRC.\u00a0<\/p>\n
The IHT must be accounted for using a so-called corrective account. You should respond promptly to the tax authority, confirming your co-operation and providing any explanatory evidence or correspondence, to ensure that the matter is resolved without personal liability to you as executor.\u00a0<\/p>\n
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent. <\/p>\n