Beware of not declaring lifetime gifts

Have you been lucky enough to be on the receiving end of someone’s generosity as part of their inheritance tax planning? It is typically parents or grandparents who are the donors.

If you have, then you need to be aware that if the donor dies within 7 years of the gift then inheritance tax may become payable on the gift received.

Inheritance tax is potentially payable on a person’s estate on any assets held and on assets gifted away in the 7 years before death, if the total amount exceeds the available nil rate band.

On a persons death the Executors need to ascertain the chargeable value of the estate for inheritance tax purposes which will usually involve a conversation with the family on gifts that the deceased person may have given to them in the previous 7 years.

A recent court case highlighted the problems that can arise if there is a failure by a recipient of a gift to disclose to the Executors that a gift has been received.

In this case the Executors asked the family for details of gifts that may have been received but no such gifts were reported.

However, after an anonymous tip off, it transpired that the son had received a gift of £450,000 but had not disclosed this to the Executors. As a result inheritance tax of £47,000 was underpaid. The Tax Office not only demanded that the underpaid tax be paid over but also added interest and a fine of £30,550. Normally the Executors are held personally responsible for a failure to pay the correct amount of tax, but, in this case because they had asked about gifts the courts held the beneficiary responsible for the failure and fined the beneficiary rather than the Executors.

The courts ruled that the Executors are not expected to search every scrap of paper in the deceased’s house but are entitled to rely on information provided by the family.

The moral to this tale is threefold:

  • Firstly, if you are acting as an Executor you may become personally liable to fines if things go wrong so appointing a professional Executor may be advisable.
  • Secondly, do not try to avoid disclosing details of gifts when asked as it may lead to you being fined if it subsequently turns out that you tried to avoid paying tax on a gift received. If you do this deliberately the fine can be as much as 100% of the tax lost.
  • Thirdly, if you do receive a gift and are concerned that inheritance tax would be payable if the donor dies within 7 years, then consider insuring against the risk. There are specific insurance policies that can be taken out to cover this possibility.

For more information about dealing with estates and inheritance tax liabilities, please contact our Private Clients Team 0113 273 9600 or