Inheritance Tax Returns and Penalties

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When someone dies usually the first stage is for the personal representatives (executors/administrators) to apply for a grant of representation in order to deal with the assets of the estate.

The most common types of grant are:

  • Grant of Probate – where the deceased left a Will
  • Grant of Letters of Administration – where the deceased did not leave a Will

Before you can obtain the grant of representation it is necessary to pay any inheritance tax due or be able to show that no inheritance tax is payable. Therefore the personal representatives must complete the appropriate Inheritance Tax Return.

There are two types of Inheritance Tax Returns:

  1. Inheritance Tax Return IHT205. This form is used for estates that have no inheritance tax to pay because the estate has a gross value of less than the excepted estate limit (the excepted estate limit as at October 2010 is £325,000) or less than £1,000,000 and there is no Inheritance Tax to pay because of spouse/civil partner/charity exemptions
  2. Inheritance Tax Return IHT400 for estates that are more than £1,000,000 or are more than the excepted estate limit and there are no spouse/civil partner or charity exemptions. There are some other conditions which make it is necessary to complete the IHT400, for example if the deceased made gifts totalling more than £150,000 in the seven years before death.

IHT205 is a brief summary of the deceased’s assets and liabilities that is provided to the probate registry when applying for the grant of representation. IHT400 however is a more detailed and formal account that is sent direct to HM Revenue and Customs (HMRC). It is viable for personal representatives to complete the IHT400 themselves without professional assistance – but they should be aware that these are complex documents that have significant consequences!

In particular, HMRC introduced a new penalty regime in the Finance Act 2007. The new regime applies to deaths after 31st March 2009.

There is a statutory due date for the delivery of an IHT return, this is 12 months from the end of the month in which the death took place.

If the return is not delivered in this time then a penalty of £100 is payable. If the return is more than six months late then a penalty of £200 is due. If the account is more than 12 months late the penalty increases up to a maximum of £3,000.

If HMRC believe that the personal representative has a ‘reasonable excuse’ for failure to deliver an account in the required time limit then the penalty will be waived. A reasonable excuse would include the personal representative suffering from a life-threatening illness or a bereavement of a relative/partner shortly before the deadline as long as steps had already been taken to prepare the account.

When completing the IHT return personal representatives must take ‘reasonable care’ to complete the return accurately. If HMRC find that reasonable care has not been taken then new penalties apply where the return contains a careless inaccuracy or a deliberate inaccuracy.

There are three categories of offences which give rise to penalties:

  • Careless Action
  • Deliberate but not concealed action
  • Deliberate and concealed action

The penalties are a percentage of loss revenue, being the amount of tax due or payable as a result of correcting the inaccuracy:

  • Careless Action Maximum 30% – Minimum 0%
  • Deliberate but not concealed action Maximum 70% – Minimum 20%
  • Deliberate and concealed action Maximum 100% – Minimum 30%

There are possible reductions for unprompted disclosure or prompted disclosure of the errors. If a return contains more than one error then a penalty is charged for each error.

It is important for personal representatives to obtain correct information to include in the return such as property valuations, valuations of unquoted shares and valuations of personal chattels and to obtain the valuations from the appropriate source.

HMRC recently issued new guidance regarding property valuations that strongly advises personal representatives to instruct a professional valuer, and if the personal representative discovers information that casts doubt on the original valuation then they must reconsider it. Failure to do this could result in a penalty.

Due to the new penalty regime, HMRC are looking more closely at Inheritance Tax returns submitted and the basis of valuations. Therefore in order to avoid the issue of penalties personal representatives must take care, and seek professional advice where necessary, to ensure that the Inheritance Tax return is dealt with correctly.


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