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.
A pyrrhic victory
The initial decision by the father to open – but not disclose to HMRC – the existence of an offshore bank account could have been an attempt to evade higher and additional rates of income tax. There was likely to have been a HMRC investigation into the source of the deposit(s) and more tax and penalties levied, at least on the undisclosed interest credited to the deposit account.
HMRC would also take the view that if a taxpayer cheats in one area, all of the taxpayer’s financial affairs are worth an in-depth investigation, resulting in more professional fees to pay at the very least.
Compared with estate duty, IHT rates are relatively benign. But there is now a real risk that rates could increase with a change of government. With this in mind, it is sensible for advisers to reassess all clients’ potential IHT liabilities. Higher tax rates can prompt more attempts to cheat the system, which is where HMRC’s Connect program will fight back.
With IHT in mind the checklist in Box One shows some of the questions to ask clients resident and domiciled in England and Wales. Box Two shows some areas that can be opened up following the answers to those questions.
Life insurance
One way to make an immediate difference to a potential IHT liability is to use life insurance. Often clients seem reluctant to spend the money on premiums. Where appropriate, a compromise could be to effect whole-of-life cover with no savings element (with any proceeds written in trust and trustees appointed) and to encourage the client(s) to effect their own savings programme for the intended beneficiaries.
