Malcolm Finney highlights a potential trap for the personal representatives of deceased individuals.
On death, as in life, one cannot escape taxation. On death, an individual’s estate (broadly, assets less liabilities) is subject to inheritance tax (IHT) at the rate of 40% on the amount of the estate over the current nil rate band of £325,000.
Persons responsible for discharging IHT arising on death
The persons responsible for accounting to HMRC for IHT on a person’s estate are the executors (where a will exists) or the personal representatives (where no will exists).
In the case of Harris v HMRC [2018] UKFTT 204 (TC), Helena McDonald, the deceased, left no will and it was a Mr Harris who arranged for the issue of letters of administration (i.e. Mr Harris became the sole personal representative).
Helena’s estate amounted to just over £1 million and the IHT charge amounted to just under £350,000. The bulk of her estate comprised her home.
Mr Harris sold Helena’s home, but instead of paying over the IHT charge to HMRC out of the proceeds (as he should have done), he handed over the proceeds to Helena’s sole beneficiary, her brother Whitfield Harewood.
But Mr Harris didn’t just hand over the monies to Whitfield. He said that he was prepared to hand over the monies if Whitfield agreed to pay off all Helena’s estate expenses, including the IHT liability. Whitfield agreed.
Unfortunately for Mr Harris, Whitfield not only failed to honour his promises, but left the UK and headed for Barbados where he apparently now lives. Mr Harris, apparently (but sadly albeit not surprisingly!) has failed to make contact with Whitfield.
Despite the above facts, HMRC ploughed on and sought to collect from Mr Harris the £350,000 amount of IHT due. Mr Harris objected, but the First-tier Tribunal ruled that his liability was clear, and it was no defence that he had only parted with Helena’s monies to Whitfield in exchange for the latter agreeing to discharge the tax charge.
So, Mr Harris was left high and dry.
What should have Mr Harris done?
At its simplest, after selling Helena’s house, Mr Harris should have paid over the IHT owed to HMRC and then discharged any other expenses (e.g. funeral costs). Any monies left over could then have been paid over in safety to Whitfield.
Alternatively (but perhaps not really advisable), Helena’s home could have been handed over to Whitfield if he had wanted to inherit it and possibly live in it or rent it out, but with a charge over the property for the appropriate amount (i.e. IHT and other expenses), and should Whitfield not have produced the appropriate amount in the necessary timeframe Mr Harris could have seized the property for sale.
It could be argued that Mr Harris was somewhat naïve to do what he did. However, similar scenarios are not all that uncommon, particularly where the executors/personal representatives and beneficiaries are all family-related and the executors/personal representatives are not professionals, and property passes among the parties with little thought to the requirement on the part of the executors/personal representatives to discharge any IHT on the deceased’s estate.
Practical Tip :
Executors/personal representatives have a number of onerous responsibilities for which they are personally liable. Professional advice should be taken before any distribution of a deceased’s estate is made.
