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Penalties for failing to make full disclosure

A son has been ordered to pay a penalty of over £87,000 for failing to disclose a cash gift received from his father, in the months before his father’s death.

Robert Hutchings died in 2009 appointing professional executors (PR’s) and leaving his estate to three of his adult children. When preparing the probate application, the executors asked the family if they had received any gifts from their father, but nothing was reported and so the probate papers were prepared on this basis.

Sometime later, HMRC received an anonymous tip off that one of his sons, Clayton, had an undisclosed offshore bank account. On advice, Clayton made a formal disclosure of the account and it then came to light that a few months before his death, Robert had transferred £450,000 from his own Swiss Account, also undisclosed, to Clayton’s offshore account.

When preparing an application for probate, PR’s must report all assets in the deceased’s estate at death and for these purposes, they must also include all gifts made by the deceased (whether of money or otherwise) in the seven years before death.

The PR’s are primarily responsible for making an accurate return and they can be held liable if any inaccuracies result from their failure to take reasonable care when completing that return. However, the error may be attributable to the person who received the gift, by failing to tell the PR’s about it. In any event, there is an obligation on the recipient of the gift to report it. HMRC’s approach is that failure to tell the PR’s about any such gifts and failure to report them will be considered as deliberate behaviour. The minimum penalty in these circumstances is 50% of the tax undeclared and could be up to 100%. This is in addition to the tax itself.

In the Hutchings case, Clayton paid the tax that was due on the lifetime gift, but appealed the penalty, imposed on him in this case (rather than the PR’s) which was calculated at 65% of the tax that was due on that gift. The imposition of the penalty was upheld by the Upper Tribunal, although the amount was reduced to 50%, being the maximum possible reduction in the circumstances. So he paid just under £47,000 of tax, plus a further £87,534, as a penalty.

This is the first case of its kind and demonstrates the importance of:

  • PR’s making the fullest possible enquiries about lifetime gifts made by the deceased in the seven years before death; and, in particular,
  • beneficiaries (whether they are named in the Will or not) telling the PR’s about gifts they have received in that time.