Last summer I was standing in the hall of a village manor house in the Midlands. The owners were collectors: there were more than 100 clocks in the house, and the secure gunroom was the size of an average modern home.
That room had a stock of antique firearms that could have equipped a small private army. Chattels were everywhere.
As I was leaving, I asked one of the owners what they planned to do about inheritance tax (IHT) – had they considered leaving items to the nation/local museum? The response was to the effect that by the time they were dead everything would have been given to their beneficiaries.
To be successful, a strategy of gifting a significant number of chattels to avoid an anticipated IHT charge has some hurdles to overcome. First, the gift must be completed seven years before death. Second, reservation of benefit rules must be observed – just leaving items in the house and saying they now belong to a beneficiary will not be successful. Third, is there a potential charge to capital gains tax (CGT) on the gift?
Ignoring the rules brings its own difficulties and could prove a disastrous course to take. A criminal offence could have been committed, leaving personal representatives, beneficiaries and possibly their advisers open to sanction. Ignoring rules also assumes HMRC will not discover the breach. That assumption underestimates the depth of HMRC’s checking and intelligence-gathering ability, particularly its powerful Connect computer program.
Chattels have to be acquired and collectors will often purchase at auction. Most auction records are likely to be linked to HMRC’s program, as will many other records stored on third-parties’ computers.
The case of Hutchings v CRC 2014 shows the severe financial penalties that can be imposed by HMRC for not disclosing lifetime gifts in an IHT return. Here, the deceased held an offshore bank account with a balance of £443,000. In March 2009, the balance was transferred to a son; in October 2009, the father died.
This gift was not disclosed to the executors when the IHT account was being prepared. The report of the case states that in 2011, HMRC received anonymous information that the son held an offshore bank account. The son had seen his solicitor, had inadvertently disclosed he held an offshore account and was advised to report it.
The appeal by the son concerned the penalty imposed by HMRC. The tax charged was approximately £175,000, spread between the son (some £47,000), and the balance from the father’s estate where the son was the residuary legatee. The lifetime gift of the bank account took the full benefit of the £325,000 nil-rate band. A penalty was sought from the son as the recipient of the lifetime gift of the bank account.
Initially, HMRC asked for 35 per cent of the unpaid tax as a penalty and then increased that to 65 per cent. The tribunal reduced the penalty to 50 per cent – that is, another £87,000 – as the maximum penalty that can be imposed for “prompted disclosure”. Altogether the principal tax and penalty took 60 per cent of the bank deposit. There would have also been professional fees incurred leading up to the tribunal hearing, and then for representation at said hearing.