Failure to reveal lifetime gifts

Making gifts to your family during your lifetime is one of the most effective ways of mitigating exposure to inheritance tax.

The amount you can give is not restricted and as long as you survive the gift for 7 years it becomes exempt from inheritance tax.

Problems can and do arise if the donor does not survive the required 7 years and the gifts need to be brought back into account in calculating any liability to inheritance tax.

One of the main problems facing Executors, particularly professional Executors, is determining whether or not any gifts have been made in the 7 years prior to death. This can be especially difficult if the person who has died did not keep a record of the gifts made.

A professional Executor will normally sit down with the family and ask family members for details of any gifts that they may have received in the previous 7 years and will rely on the family to be open and honest about disclosing any gifts.

A recent court case has highlighted this problem and the courts have ruled that where a beneficiary has not been open and honest to enquiries made by the Executors and the Executors have prepared the inheritance tax return to the best of their knowledge and belief then the Courts will hold the beneficiary responsible for any interest and penalties imposed by H M Revenue & Customs on a discovery by them of any failure to notify.

In this case the deceased left an Estate of around £3m. The Executors made enquiries about lifetime gifts but none were disclosed.

Two years after death after a tip off H M Revenue & Customs discovered that the deceased had an undisclosed offshore bank account and from this account made a gift of £450,000 to his son just 6 months prior to his death.

The Revenue requested inheritance tax of £47,000 on this gift but also imposed interest and penalties of a further £31,000.

Normally these would be payable personally by the Executors but because they had made enquiries and the beneficiaries had not be forthcoming about the gifts they ruled that they should be liable for the amounts due.

There are three lessons to be learnt from this court case:
  • Firstly if you are a beneficiary you need to respond honestly and openly to Executors otherwise you may find yourself responsible for more than the tax due.
  • Secondly if you are appointed as an Executor you need to make thorough enquiries when completing the inheritance tax return and this may mean asking for bank statements going back 7 years.
  • Thirdly if you are making lifetime gifts keep a record of these for the benefit of your Executors. After all you will not be around to provide any assistance to your Executors when they need it most.

If you would like any further information on this subject, please contact Robert Peel or – 01904 464 100