A question sometimes asked by recipients of gifts (e.g. if a parent has gifted cash to an adult child) is whether there are any inheritance tax (IHT) consequences for them in respect of the receipt? Aside from the value of the recipient’s estate generally being increased for IHT purposes, very often the answer is ‘no’. However, that will not always be the case.
As a general rule, the gift of an asset from one individual to another (e.g. the cash gift from parent to child in the above example) is normally a potentially exempt transfer (PET). This means that the gift will become exempt from IHT if the parent survives at least seven years after making the gift. In the meantime, there is no IHT liability upon receipt of the gift, and no immediate obligation to report the gift to HM Revenue and Customs (HMRC).
Simple…or is it?
So far, so good. However, what happens if the donor dies within the seven-year period? Things could become much more complicated for the recipient of the gift.
In the above example, if the parent’s cash gift results in an IHT liability due to the gift becoming chargeable, the child would strictly need to report the gift to HMRC (on form IHT100), within 12 months from the end of the month in which the parent’s death occurred (IHTA 1984, s 216(1)(bb), (6)(aa)).
The deceased’s personal representatives (PRs) are generally required to report the gift as part of an IHT return (form IHT400) on the deceased’s death. In most cases, HMRC will therefore not require a return from the gift recipient as well (see HMRC’s Inheritance Tax manual at IHTM10821). However, this relaxation should not generally be relied upon if there is an IHT liability on the gift; check with HMRC.
In addition, the child in the above example is primarily liable for the IHT liability on the parent’s gift (IHTA 1984, ss 199(2), 204(8)). The IHT on the ‘failed PET’ must be paid within six months after the end of the month in which the parent died (s 226(3A)).
Spill the beans!
The deceased’s PRs may need to make enquiries about gifts made by the deceased in the seven years before death for reporting purposes. Tax-geared penalties may be incurred if the PRs submit an incorrect return to HMRC and the error results from their failure to take ‘reasonable care’.
However, suppose that the PRs took reasonable care; the error in the PR’s return to HMRC was instead caused by the person who received the gift from the deceased (i.e. by failing to tell the PRs about the gift). In that case, the recipient of the gift would be potentially liable to a penalty, not the PRs (FA 2007, Sch 24, para 1A).
HMRC recently pointed out (in its Trusts and Estates Newsletter, December 2015): ‘The operational approach of HMRC in these circumstances is that failure to tell the personal representative of any such gifts and failure to report the gift will be considered primarily as deliberate behaviour. The minimum penalty in these circumstances is 50% of the tax undeclared and could be up to 100% of the undeclared tax.’
In Hutchings v Revenue & Customs [2015] UKFTT 9 (TC), a beneficiary who was found to have withheld information requested by the deceased’s executors was liable to a penalty (amounting to 50% of the ‘potential lost revenue’) for the resulting error in the IHT return prepared by the executors in relation to the deceased. HMRC has indicated that it will take a ‘consistent line’ in such cases.
Practical Tip:
Recipients of gifts from individuals (particularly those who have died in the previous seven years) should be very careful to ensure that they comply with any obligations to file IHT returns and pay IHT liabilities in respect of the gifts. Even if no filing or payment obligation arises, they should answer very carefully any enquiries from the deceased’s PRs about gifts received; otherwise, they could be liable to a penalty if they give incorrect information resulting in additional IHT becoming due.
