When someone dies, family members or friends may have the responsibility of dealing with the deceased’s estate. This may involve (among other things) applying for a grant of representation (in England and Wales), reporting the value of the deceased’s estate, and paying any inheritance tax (IHT) liability.
There is a lot of information available to the public on wills, probate and IHT, including on the Gov.uk website (for example, see www.gov.uk/wills-probate-inheritance). Family members or friends often take on the responsibility of dealing with the deceased’s estate without professional help, where (for example) the estate appears straightforward. However, aside from the personal representative’s legal responsibilities (which are beyond the scope of this article) there are certain tax obligations, such as filing tax returns and paying liabilities including IHT, as appropriate.
Becoming the personal representative of a deceased person is a responsibility which should not be taken lightly. For example, HM Revenue and Customs (HMRC) can impose penalties for late tax returns. This is perhaps unsurprising, but what may come as a shock to some personal representatives is that they can also become personally liable to IHT on the deceased’s estate.
The IHT in respect of the deceased’s estate is primarily the liability of the personal representative, subject to certain limited exceptions (e.g. in respect of trust property) which are not considered further here (see IHTA 1984, s 200(1)). It is therefore vitally important that the deceased’s estate is not distributed to beneficiaries without ensuring that sufficient funds are available to discharge the personal representative’s IHT liability. Otherwise, the personal representative could be held personally liable for the unpaid IHT.
For example, in Harris v Revenue and Customs  UKFTT 204 (TC), the appellant was appointed as personal representative of a deceased individual (HM), who had died without making a will. In April 2013, the appellant filed an IHT account (IHT400) with HMRC. In April 2014, HMRC opened an enquiry into the account, and in October 2015 issued an IHT determination on the basis that the value of HM’s estate on death was £1,178,196, and that the IHT payable was £341,278.
The appellant appealed. The grounds of his appeal were broadly that he did not have the funds to pay the IHT liability. He had apparently released a substantial amount (possibly all) of the estate’s funds to HM’s brother (WH) (i.e. a beneficiary of the deceased’s estate), on the understanding that WH would pay the estate’s bills and taxes. The circumstances were not entirely clear, but this may have occurred following the sale of HM’s home, and the proceeds were then given to WH. WH subsequently went to Barbados (where he lived) and had not discharged the outstanding IHT. The appellant was not able to make contact with WH.
The First-tier Tribunal considered that the legislation (in IHTA 1984, s 200) was clear; it is the personal representatives of the deceased (i.e. the appellant in this case) who have the obligation to account for any IHT arising in respect of the deceased’s estate on death. The tribunal held that the appellant’s appeal had no reasonable prospects of success, and therefore exercised its discretion to strike out the appellant’s appeal.
Unfortunately for the appellant in Harris, it was no defence that he may have transferred the assets of the estate to a beneficiary on the basis that the beneficiary would be responsible paying the IHT due. Nor was it a defence that the appellant was ignorant of his obligations, as a personal representative, to pay the IHT owing.
Family members or friends who are not qualified or experienced in such matters should think very carefully before agreeing to take on the responsibility of becoming the personal representative of the deceased, and should seek professional assistance if they decide to do so.
It can potentially take HMRC some time to deal with IHT returns on death (forms IHT400). Personal representatives may understandably want to seek comfort from HMRC about the amount of IHT payable before considering how much of the estate can be distributed to beneficiaries. There is a facility (in IHTA 1984, s 239(2)) to apply to HMRC for a ‘clearance certificate’ (on form IHT30) if personal representatives believe that they have reported all the assets, liabilities and variations in the estate and that the IHT position will not require further amendment. If HMRC gives clearance, it normally discharges taxpayers from further liability to tax on the assets specified in the certificate (subject to certain exceptions in s 239(4)).
HMRC has published some helpful guidance on its processes and timescales for dealing with forms IHT400 and clearances (https://tinyurl.com/HMRC-TEN-Special-Apr18). HMRC do not normally expect personal representatives to apply for clearance until at least a year has passed since the date of death. As mentioned, professional help should be obtained if necessary.
The above article was first published in Tax Insider (September 2018) (www.taxinsider.co.uk).