The executors of a deceased’s estate have the following duties (and this list is not exhaustive):-
- Arrange the funeral.
- Obtain details of all assets and debts.
- Pay any inheritance tax (IHT) due.
- Obtain a grant of probate (a document which allows the executors to deal with the assets of the deceased).
- Gather in all of the assets.
- Pay the deceased’s debts.
- Distribute the deceased’s estate in accordance with their Will.
Payment of Inheritance Tax
The duty to pay any IHT (and other taxes) due may seem a straightforward one, but it is, in fact, a complicated process of valuing the assets of the estate, determining which (if any) exemptions apply, filling in a return (including potentially multiple supplementary forms), assessing what tax (if any) is due and then paying that tax.
An error made in this process could potentially result in the executors being personally liable to HMRC for a penalty imposed, which as you will see below could be as much as 100% of the tax due. This cannot be reclaimed from the estate. It is therefore essential that executors submit an accurate IHT return and pay the correct amount.
Valuation of Assets
The basis for the valuation of the deceased’s assets for IHT purposes is the ‘open market value’, which means the price the asset might reasonably be expected to make if sold on the open market at the time of their death.
Some of these valuations will be obvious, such as bank accounts, shares, etc. Others will require formal valuations. With regard to land, it is recommended that executors obtain at least two estate agents’ valuations. If the land (or the property on it) is unusual in some way or the land itself has the potential for development it will be advisable to obtain a surveyor’s report.
Whatever method is used to value the land, it is important that the executors are able to justify the value submitted as HMRC can raise a penalty where it considers the executors have negligently supplied a valuation.
Penalties for failure to pay IHT
HMRC penalties will generally fall under three headings:-
- failure to deliver an account
- inaccuracies in returns delivered
- late payment of IHT due
Inaccuracies in Returns
Penalties apply to errors in an IHT return (including supporting documentation), whether the errors are ‘careless’, ‘deliberate but not concealed’ or ‘deliberate and concealed’.
An inaccuracy will be ‘careless’ if it as a result of a failure to take reasonable care. HMRC will assess whether reasonable care has been taken by examining what the executors did or failed to do and asking whether a reasonable person would have acted the same in the circumstances. Executors can ensure that they take reasonable care by:-
- Following HMRC’s written guidance.
- Making enquiries of asset holders.
- Ensuring that correct valuations are obtained.
- Keeping accurate records.
- Advising HMRC promptly of any error.
HMRC will also consider whether the disclosure of an inaccuracy was prompted or unprompted. A disclosure will be ‘unprompted’ if it is made by a person who has no reason to believe that HMRC has discovered or are about to discover the failure to pay the correct amount.
Level of Penalty
The following table sets out the penalties that will apply. (Correct as of 17th October 2019)
|Behaviour||Penalty range for unprompted disclosure||Penalty range for prompted disclosure|
|Careless||0% – 30%||15% – 30%|
|Deliberate but not concealed||20% – 70%||35% – 70%|
|Deliberate and concealed||30% – 100%||50% – 100%|
As you can see, a return which contains inaccuracies that are deliberate and concealed can result in a penalty that is up to 100% of the amount of IHT due.
Considering executors will be personally liable to HMRC for this amount, they need to take extra care to ensure that inheritance tax returns are accurate. For lay executors, the surest way of achieving this and ensuring peace of mind will be to instruct solicitors to prepare the IHT forms and pay the tax due.
Jack Lightburn – rhw Solicitors llp
Want to know more about executors duty to pay inheritance tax or do you specifically need Inheritance Tax Advice? Need to understand how to appoint a solicitor as executor? Please contact rhw for an initial chat.