HMRC Inheritance Tax: Customer Guide

Tell me about inheritance tax and penalties.

Contents

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When may penalties be due?

If you are responsible for delivering an inheritance tax account you have a legal duty to

  • deliver the account within the time allowed
  • provide a correct account and correct information and documents
  • tell us, without unreasonable delay, if you find out that any account, information or document is incorrect.

If you don’t, you may be liable to penalties.

Tell me about penalties for accounts not delivered within the time allowed

The usual time limit for a transfer on death is 12 months after the end of the month in which the person died.

If we think an account is due but has not been received within the time allowed, we can ask the Special Commissioners to award penalties. If they agree that an account is overdue, they can

  • impose an initial penalty of up to £100 plus
  • a maximum penalty of £60 for each day until the account is delivered.

If we receive a late account and we have not already taken proceedings before the Special Commissioners to obtain it, a penalty of £100* is due. If the account is more than 6 months late, the penalty is £200*. If the account is more than 12 months late the penalty increases to a maximum of £3,000*

*If the actual tax liability is less than these figures, the penalty cannot be more than the amount of the tax due.

In such cases, we will send you a letter asking for the relevant penalty.
If you have an excuse for delivering the account late, the penalty may be avoided, providing the account was delivered without unreasonable delay after the excuse had ceased and we accept that the excuse is reasonable.

If you don’t pay the penalty when we ask for it and don’t give us a reasonable excuse for the delay in delivering the account, we can ask the Special Commissioners to award a penalty.

We can also ask the Special Commissioners to award a penalty if we do not agree that the excuse, or that the delay after the excuse has ended, is reasonable.

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What is a reasonable excuse?

The law does not say. We consider each case individually. Our view of what is a reasonable excuse is strict, but in the event of a disagreement the Special Commissioners will decide.

In our view, an excuse is reasonable only if an event beyond your control has prevented you from sending us the account before the deadline.

Examples of what we may agree as a reasonable excuse

The account was lost or delayed in the post
You should allow sufficient time for the account to reach us by the due date. Where the return is posted in good time, an unforeseen event which disrupted the normal postal service and led to the loss or delay of the account, such as

  • fire or flood at the Post Office where the account was handled, or
  • prolonged industrial action within the Post Office.

would be a reasonable excuse.

Loss of the deceased’s financial records or other relevant papers
The loss of records through fire, flood or theft is a reasonable excuse, although we may need evidence of the circumstances. We will need to be satisfied that the information necessary to complete the account could not be replaced in time for the deadline.

Serious illness

The illness must be so serious that it prevented you from dealing with inheritance tax affairs before the deadline and from that date to the time the completed account is sent in, such as

  • coma
  • major heart attack
  • stroke
  • any serious mental or life-threatening illness.

Where illness involves a lengthy stay in hospital or convalescence, we normally expect you to have made arrangements for completing and sending in the account on time. There may be cases where this is not possible. If the excuse involves the serious illness of a close relative or partner, we agree this only if

  • the situation took up a great deal of your time and attention during the period from the deadline to the date the completed account was sent in, and
  • you had already taken steps to have the account ready on time.

Bereavement

We agree the death of a close relative or partner shortly before the deadline is a reasonable excuse, as long as you had already taken the necessary steps to have the account ready on time.

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What is not a reasonable excuse?

The law gives ample time for completion and delivery of inheritance tax accounts in most circumstances. It is your responsibility

  • to gather all the necessary information
  • to ensure that the account is completed, and
  • to send the account in to us by the deadline.

We are unlikely to agree that you were prevented from sending in the account if you were able to manage the rest of your private, or business affairs during the period that you claim is covered by the reasonable excuse.

Examples of what we do not agree as a reasonable excuse

  • Did not know that an account had to be delivered - Ignorance of the law is not a reasonable excuse.
  • The account, or the affairs of a deceased person, are too difficult - If you experience difficulties, we expect you to seek our help or that of a professional adviser at an early date.
  • Pressure of work - The time that you are allowed for completion of an account enables you to arrange matters so that the account can be sent in on time.
  • Failure by agent - The failure of an agent is not a reasonable excuse. It is your responsibility to ensure that the account is sent in on time.
  • Lack of information - If, after making the fullest enquiries reasonably practicable before the deadline, you have not been able to obtain certain details you should include a provisional estimate in the account. You should also include a statement drawing attention to the estimate and an undertaking to deliver a further account once the details are obtained.

Tell me about penalties for incorrect accounts, information or documents

Section 247 Inheritance Tax Act 1984

If we find out that any account, information or document supplied to us is incorrect and the correction results in more tax being payable, we will normally ask about the circumstances. If we then believe that the account, information or document is incorrect because of your fraud or negligence, we will seek a penalty.

How are the penalties worked out?

For incorrect accounts, information or documents supplied before 27 July 1999 the maximum penalty is

  • for fraud - £50 plus 200% of the additional tax liability arising from the correction
  • for negligence - £50 plus 100% of the additional tax liability.

The maximum statutory penalty from 27 July 1999 to 22 July 2004 is

  • 100% of the additional tax liability plus
  • for fraud - £3,000
  • for negligence - £1,500.

For accounts delivered after 22 July 2004 the maximum penalty for negligence and fraud is

  • 100% of the additional tax liability

In practice, we will normally exercise our statutory powers to seek a lower penalty in a negotiated settlement. We start with the maximum figure and reduce it depending on

  • how much information you disclose to us
  • how co-operative you are, and
  • how grave the offence is.

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How are the penalty reductions worked out?

Disclosure - a reduction of up to 20% (or up to 30% for voluntary disclosure).
We may reduce the penalty considerably if you ensure a full and voluntary disclosure is made to us without any prompting. But, if you, or your agent, deny that there is anything wrong until the last possible moment, there will be little or no reduction.

Between these two extremes, a wide variety of circumstances are possible. We will consider

  • how much information you, or your agent, give us
  • how soon the information is given, and
  • how the information contributes to settling our enquiries.

Co-operation - a reduction of up to 40%.

We will give the maximum reduction for co-operation if you, or your agent

  • supply the information promptly after discovery
  • answer our questions honestly and accurately
  • provide the relevant facts, and
  • pay any tax we estimate to be due promptly.

We will not give any reduction for co-operation if you, or your agent

  • delay supplying the relevant information to us
  • give untrue or evasive answers to our questions
  • do nothing until we take formal action, and
  • obstruct the course of our investigation.

Between these extremes there is a wide range of possible circumstances and we have to compare the extent of the co-operation given with the co-operation we believe was possible.

Gravity - a reduction of up to 40%.

We take into account the reasons for failing to deliver a correct account and the amount of money involved. The less serious the matter, the bigger the reduction of the penalty.

There is a wide range of possible circumstances and the overall reduction will depend on the degree of disclosure, co-operation and gravity.

How is the penalty negotiated and finalised?

We will consider if a penalty is due and the appropriate level of that penalty.

Example

The maximum statutory penalty after 22 July 2004 in a case involving negligence.

100% of additional tax owing - £8,500
Maximum penalty - £8,500

But, we may conclude that a reduction is due

Disclosure - 20%
Co-operation - 25%
Gravity - 20%
Total reduction - 65%

The penalty will therefore be
35% (100% - 65%) x £8,500 = £2,975

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What happens if I make an offer?

We will consider any representations that you may make about matters affecting the penalty if you think that we have not given them sufficient weight. We will then let you know our views and, if possible, will aim to reach agreement quickly.

We will ask you for a formal letter of offer, to cover the agreed penalty (and sometimes any outstanding tax and interest), signed by you or an authorised and professionally qualified agent on your behalf. We will then issue an acceptance letter and include a request for payment.

This exchange of letters amounts to a contract between you and the HM Revenue & Customs, so that both parties are bound by its terms.

If you make a payment in accordance with the terms of the contract, the matter will be at an end and we cannot then use our statutory powers to recover the penalty (or any tax and interest included in the letter of offer). For this reason, we have to make sure the terms of the acceptance letter are precise.

If you do not keep to the terms of the contract, we will charge interest for late payment and we may take action in the courts to recover the whole amount due under the terms of the contract.

What if an offer is not made?

If you don’t make an offer or we cannot accept an offer that you have made, we can take proceedings under Section 249 Inheritance Tax Act 1984 before the Special Commissioners, or in the courts, to seek the penalty that we think is due.

If negotiations to this stage have been conducted solely with an agent on your behalf we may ask you to have a meeting with us. Any penalty proceedings that we take will be against you and we have to make sure that you fully understand the position. You do not have to attend a meeting, but if you refuse we will write directly to you to explain the situation.

Section 248 Inheritance Tax Act 1984 (IHTA)

This Section applies where negligence or fraud is not involved.

If you discover that any account, information or document you have delivered is materially incorrect, you must notify us without unreasonable delay. If you don’t, you will be liable for a penalty under Section 248(1) IHTA.

If you are liable for tax and do not personally deliver the account, information or document, but discover it is incorrect (and that leads to an underpayment of tax) and you do not inform us without unreasonable delay, a penalty can be charged under Section 248(2) IHTA.

This can apply to beneficiaries, trustees and transferees.

In both cases, the penalty and procedure is the same as Section 247 IHTA above.

For any incorrect information or document, we do not normally consider a delay of up to 30 days from discovery to telling us as unreasonable.

Where incorrect accounts result from innocent errors, we will not seek a penalty if we are told of the errors within 6 months of discovery (the time limit for delivering further accounts under Section 217 IHTA). However, we normally expect to be told sooner than this.

Where errors in the original account arise as a result of negligence (or fraud), you should disclose the information immediately in order to benefit from any reductions to the maximum penalty described above.

We will regard any account, information or document as ‘materially incorrect’ only if the total tax arising from the correction, or corrections, amounts to £1,000 or more.

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What other penalties are there?

Section 247(3) Inheritance Tax Act 1984

If you are not liable for tax but provide incorrect information or documents in connection with a transfer

  • negligently - you may be liable to a penalty of up to £1,500 (£250 if either was provided before 27 July 1999)
  • fraudulently - the maximum penalty is £3,000 (£500 if either was provided before 27 July 1999).

Section 247(4) Inheritance Tax Act 1984

If you assist in, or induce, the delivery of an account, information or documents which you know to be incorrect you will be liable to a penalty of up to £3,000 (£500 if either was provided before 27 July 1999).

Section 245A Inheritance Tax Act 1984

There are penalties under this section if you fail to

  • make a return under Section 218
  • provide information under Section 219, or
  • provide accounts, particulars or documents under Section 219A.

Regulation 24 Statutory Instrument 1994 No. 1811
Penalties may be imposed if you fail to comply with Special Commissioners notices for particulars and witness summonses in connection with appeals.