Death and Taxes – Avoiding Penalties

Death and Taxes – Avoiding Penalties
Paying Inheritance Tax is never a pleasant experience - and it’s about to get even more stressful with the behaviour-based penalty regime now extended to IHT!

The behaviour-based penalty regime was introduced (by FA 2007, Sch 24) from 1 April 2008.  It was believed to be HMRC showing that they wanted to punish those who do not comply with heavy penalties for non-disclosure.


The behaviour-based penalty regime introduced in Schedule 24 was extended to IHT (by Schedule 40 FA 2008) from 1 April 2009.

There are many who consider that the rate of 40% Inheritance Tax (IHT) is very punishing, especially those who consider the tax unfair as for many it is seen to be taxing retained earnings twice.  It is therefore important to beware of the relatively new penalty regime which could add further to the liability.

Areas of Review by HMRC

Areas of the IHT account that HMRC has been known to look closely at following the submission of IHT 400 are as follows:

- Under-valuations where there are no IHT reliefs available;

- Over-valuations where there are reliefs and the high value could benefit tax relief in the future, e.g. base costs for Capital Gains Tax (CGT);

- Incorrect claims for reliefs, e.g. Business Property Relief (BPR) where there is no business carried on for gain, where there is an investment business not a trading business (IHTA 1984, s 105(3));

- Omitted assets at date of death;

- Omitted lifetime transfers.


In practice, it is less likely that an asset held at death is omitted by the Personal Representatives (PRs) than a lifetime transfer. 


All assets must be ascertained at date of death and included in the Estate Accounts and distributed, whereas correctly recording the lifetime transfer will depend on the gathering of historic information and good record keeping.

HMRC has issued guidance aimed at helping taxpayers avoid a penalty for failing to take reasonable care with their tax affairs.  HMRC are able to charge a penalty on a third party from 1 April 2010. 


This position will only apply if a third party deliberately withholds information from or deliberately supplies false information to another person who has to complete a return or send HMRC a document.  In order to apply the penalty, HMRC have to be able to show that the third party intended to cause the other person’s return to be inaccurate.

What is Helpful Behaviour by PRs?

The question has to be asked – what is helpful behaviour for PRs?  HMRC evaluate what is helpful behaviour by how much the PR’s behaviour involves “telling” “helping” and “giving”.  In the same way HMRC officers are encouraged to build a picture of the deceased when investigating the IHT accounts, the PRs are expected to carry out checks and look for mismatches.  This responsibility puts a lot of pressure on PRs.