Inheritance tax - don’t lose on penalties!

by Malcolm Gunn of

On the merger of the Inland Revenue with Customs & Excise to form HMRC, the decision was taken to harmonise the tax penalty regime across all taxes.

The net result is that in the fullness of time inheritance tax (IHT) penalties will, for the first time, follow the same pattern as the penalties applied to other direct taxes.

Failure to make a return

At present, late IHT returns do not incur any significant penalties until more than a year has elapsed from the due date and, even then, the maximum penalty is £3,000. This is set to change.

Although not yet implemented, the legislation has been passed to enable penalties of the greater of £300 or five per cent of the tax due to be charged for an IHT return which is six months late. 

After one year, the penalty will be the greater of £300 or 70 per cent of the tax due on the return in cases where there has been deliberate delay but no concealment.

The 70 per cent figure can be reduced to 20 per cent if the return is duly made without prompting from HMRC.

These percentages are subject to a reduction for special circumstances, which HMRC says will only be given in rare cases, and there is also a reasonable excuse provision. 

However, the basic message is that late IHT returns will quickly collect substantial penalties once this legislation is brought into effect for inheritance tax purposes.

Errors in IHT accounts

More penalties can be raised by HMRC where there are inaccuracies in IHT returns. These apply where the IHT liability arises on or after 1 April 2010, and given the sums which are commonly involved with inheritance tax, may amount to substantial figures.

The error must be due to careless or deliberate conduct. If HMRC discovers the inaccuracy first, and writes to prompt a disclosure about it, the minimum penalty will be 15 per cent of the tax involved.

The best way to ensure that this penalty is not incurred is to make any disclosure of errors as quickly as possible before HMRC discovers the inaccuracy. In that case, so long as the initial disclosure was not deliberately inaccurate, HMRC is permitted to reduce the penalty to zero.

HMRC has recently put out a statement to allay fears that this means that every correction to an IHT return should be disclosed individually as soon as it is identified.

Provided the corrections to a return do not: total more than £50,000, nor involve land or unquoted shares, and the case is not subject to a check by HMRC, notification to HMRC need only be made 18 months from the date of death or at the point when the estate is finalised.

Problem areas

Inheritance tax is full of all sorts of grey areas as to what constitutes a chargeable transfer and what does not. For example, HMRC is on record as stating that with transfers to employee benefit trusts, there can be an IHT charge, but this is disputed by experts in the field.

So one might take a decision not to make an IHT return in such circumstances contrary to HMRC’s published statement.

If it turns out that the expert opinion on the matter is wrong, and HMRC is right, it is possible that HMRC would then seek substantial penalties under the new provisions for failure to make a return. Obviously, one would vigorously resist penalties in such a situation, but it will be source of further dispute.

Practical tip

Clearly IHT returns must be made more promptly in the future and errors should be corrected before HMRC has the chance to point them out themselves.

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Published on: June 1, 2012

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