a thorough search by the PRs through the deceased’s papers;
· an analysis of self-assessment tax returns as a pointer to assets held (while acknowledging that this is not a watertight test);
· an examination of bank statements and building society passbooks covering the seven years up to death;
· enquiries of professional advisers, family, business associates, financial advisers inter alia;
· enquiries at the bank as to property lodged for safekeeping; and
· enquiries of trustees where the deceased had an interest in settled property.
The problem is that these standards of enquiry are simply impracticable. There can be no suggestion that in most cases solicitors or other advisers working with the family in putting together a record of the deceased’s estate and any chargeable transfers including gifts in the seven years before he died are not scrupulous in the attention that they give to the task. There was always a concern on the part of PRs in identifying lifetime gifts. In 1991, the CTO confirmed to the Law Society that ‘they would not usually pursue for inheritance tax PRs who:
- after making the fullest enquires that are reasonably practicable to discover in the circumstances lifetime transfers, and so
- having done all in their powers to make full disclosure of them to the Board of Inland Revenue
have obtained a certificate of discharge and distributed the estate before a chargeable lifetime transfer comes to light.’ (Letter published in the Law Society’s Gazette 13 March 1991).
Best practice: an imperfect world
The 1991 CTO letter was of some, if not complete, comfort. IHT 14 refers to ‘the deceased’s papers’. Far from the papers being tidy in the sense of leaving everything together in one place, they may not all even be in the house or office (and indeed the deceased might have wanted the existence of a particular gift to have remained hidden from view). Reference to the self-assessment tax returns can at best be only rough and ready. It is unlikely in the extreme that banks or building societies will be able to provide statements and passbooks for up to seven years before death and even then, without for example detailed cross referencing with cheque book stubs, the identity of any transferee may not be known. Indeed, when the transferee can be identified, it will not be clear whether this was a transfer of value or a payment for goods or services rendered. That said, Peter Twiddy of the CTO is reported as having said at a recent conference ‘that it was not normally the duty of PRs and their advisers to peruse the bank statements of the deceased over the last seven years of his life – that would be asking too much’ (see Taxation 23 November 2000 p.222).
Thinking of what might be practicable, PRs could perhaps be advised:-
· to reconcile the entries in the tax returns for the last six years with the known bank accounts, to ensure that all interest has been returned and that no interest-bearing accounts have been omitted from the self assessment returns; and
· to attempt to get from the family explanations of any large debit entries over the six year period which do not seem to relate to standing orders, payment of credit card bills or which may not be otherwise identifiable with obvious transfers of value or inter-account transfers, since those might represent lifetime gifts of cash. A trigger amount of £3,000 might be thought reasonable here. The problem is that in the absence of cheque stubs or annotations on the bank statements by the deceased, one can really only ask the obvious relatives and friends if the debits relate to gifts to them.
The above is written against the background (see below on Penalties) that, if a subsequent lifetime gift does come to light, the practitioner seems to be at risk of criticism, i.e. with the benefit of hindsight, as to why he had not asked a particular donee whether the deceased had made a gift to him. Bearing in mind the problem of possible family sensitivities, it may be that all close members of the family (again which raises a questions as to how close is ‘close’) should be asked whether they had received gifts.
The writer has suggested to firms of accountants that, when drawing up the self-assessment return each year, they might ask their client to complete a non-statutory form of gifts (gross, that is before e.g. the annual exemption or normal expenditure out of income exemption) as a document to be kept with their Will. The suggestion has been met with amusement, as wholly impractical. Similarly, the writer has suggested to solicitors that on each occasion a new Will is made (which the counsel of perfection might put every five years or sooner on any major change in family circumstances or the applicable legislation), again a form is handed to the client for him to fill in year by year and keep with his Will. If one could demonstrate to the satisfaction of the CTO that a particular client had followed such a procedure in an orderly and thorough way that might be sufficient to satisfy the statutory obligations. Such conscientiousness, however, must be rare in the extreme.
A related difficulty is the new focus on penalties. In their August 2000 newsletter the CTO say that, while they have not changed their policy on penalties, there may have been noticed an increase in the number of enquiries saying that the CTO may be considering whether a penalty may be due. This is apparently because the CTO feel that it is fairer to raise the possibility as soon as enquiries are started. Certainly the writer’s impression from speaking to solicitors is that the subject of penalties is indeed a frequent one and that penalties are levied.
Two examples are given in the newsletter, one of which has no enquiries at all made by the PRs as to whether there has been any chargeable lifetime gifts. Clearly there can be no defence in such a case. What is odd is the degree of mitigation allowed, 10 per cent out of a possible 20 per cent (or 30 per cent if full disclosure). Up to 40 per cent is allowed for co-operation and up to 40 per cent for gravity. It is hard to see that, where the PRs had made no attempt to discover the existence of lifetime gifts, any mitigation should be allowed for disclosure at all. In a case where co-operation does not seem to have been very great, 25 per cent was allowed out of a total of 40 per cent. The example in that case concerned non-disclosure of a lifetime gift worth £100,000 with additional IHT due of £40,000. The penalty sought was the standard £1,500 for negligence plus 45 per cent of £100,000, a total of say £18,650 after rounding, which might be considered generous. There is also of course interest to consider, now running at a rate of 5 per cent after the end of the six months following the month of death.
These penalties are due under IHTA 1984, s. 247(1). In cases where the CTO consider that a penalty is due they will propose an amount which if agreed becomes the subject of a formal letter of offer to be signed by the PRs or their agents. The offer is then accepted and if payment is made that is the end of the matter. In the absence of an acceptable offer the CTO will take proceedings under IHTA 1984, s. 249 before the Special Commissioners or the Courts.
Evidence does seem to be emerging that penalties are raised under s. 247 even where the difference in value is very small in relation to the context of the estate as a whole. The CTO do not seem to distinguish between cases of the deceased having been a regular client of the firm (where greater awareness might be assumed) and an estate with which the firm is not familiar which came to the firm through an executor who happened to be an existing client or through some other connection.
Any penalty is of course a personal liability of the PRs, is non-deductible for tax purposes and cannot be recovered by them either from the estate (unless perhaps, rather unusually, the Will included such a power) or from the donee of a lifetime gift – hardly a happy state of affairs.
The new legislation has been on the statute book for some eighteen months. Representations made by the Capital Taxes Sub-Committee of the Chartered Institute of Taxation during the passage of Finance Bill 1999 met with no sensible response. Our concerns on the part of professional PRs were not recognised. It seems essential that every firm of solicitors and others acting as or advising PRs need to clarify their procedures. The additional enquiries necessary will obviously add to the costs of obtaining probate, which needs to be recognised by the beneficiaries and perhaps specifically drawn to their attention. Everyone acting in a deceased estate should establish a clear ‘paper trail’ recognising the CTO’s ‘best practice’ from page 10 of IHT 14 to ensure that the procedures have been met.
Meanwhile, it is well possible that penalties have been levied in cases which are thought to be quite unjustifiable. For example, it does not seem fair to have what amounts to a strict liability for behaviour which by ordinary standards would not even be considered negligent (let alone committed in bad faith). The fact that there is a procedure for corrections surely is acknowledgement that we live in an imperfect world and it must be rare indeed that a person submitting an Inland Revenue Account will be able to get it right first time. While the writer would applaud the attempt to ensure care in submitting information that is accurate, the current approach seems to have taken this too far. Readers are requested to supply Bianca Marsden at the CIOT with examples so that a dossier can be built up and the issue discussed in detail with the CTO.
020 7235 9381
January 2001 by