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DIYers - Beware of Tax Penalties for Innacuracy

Grace Li is Tax Manager at Kings Court Trust and explains what it means to be the Personal Representative of someone’s estate and what you should be aware of when it comes to submitting Inheritance Tax (IHT) forms and other documents to HM Revenue & Customs (HMRC).

PRs are liable
Firstly, I would like to remind you of the fact that Personal Representatives are personally, legally and financially liable for any mistakes in the estate administration process. They are responsible for applying for a Grant of Representation and then dealing with a deceased person’s affairs by administering the estate and distributing the assets.

If you are considering making a personal (DIY) application for probate, please be mindful of the repercussions of submitting IHT Accounts, without having taken reasonable care to get them right, and which are eventually proven to be incorrect or incomplete. The key here is this phrase “reasonable care,” which I’ll come back to shortly.

What can happen if I submit inaccurate forms?
Most people do take care to produce IHT Accounts correctly and pay the right amount of tax at the time it’s due.  For those who don’t, HMRC use penalties to stop them from “gaining an unfair advantage.”

For all deaths on or after 1 April 2009, HMRC may impose penalties for inaccurate tax returns. Failure to comply with HMRC rules on producing tax accounts could have serious consequences; penalty charges are levied at rates ranging from 30% to 100% of the undeclared tax.

Take “reasonable care”
HMRC will not penalise you if you take reasonable care to get your tax right, which includes:

  • making a thorough search and review of the deceased’s papers and records
  • conducting a full enquiry on deceased’s affairs with surviving family, friends, associates and professional service providers that the deceased appointed
  • reconciling any inconsistencies arising from the enquiry
  • checking what the correct position is when you don't understand something
  • keeping and updating records of your enquiry to back up your tax returns
  • producing tax returns in accordance with the prevalent tax rules
  • presenting your tax account in the prescribed formats; i.e. using the correct Tax Forms
  • telling HMRC promptly about any error or omission you discover in a tax return or document after you've sent it BEFORE HMRC raise questions

Avoiding a penalty
I was recently made aware of a case where HMRC indicated their intention to impose penalties for inaccurate accounts on the allegation that the “personal representatives of the estate did not make the fullest enquiries with a view to including best possible estimate of value…”

In this example, the PR was able to prove that reasonable care had been taken in obtaining, checking and auditing all of the information before completing and submitting the account to HMRC. So, despite some figures transpiring to be inaccurate, the inaccuracy penalty was reduced to 0%.

Therefore, I can’t stress enough the importance of taking reasonable care in circumstances where an inaccuracy has been found, as these things can sometimes happen. Equally, the importance of note-taking and record-keeping cannot be ignored because of the need to provide evidence that reasonable care has been taken. You should keep copies of the important documents in case they are required at a later date.  As a matter of fact, failing to keep records for a prescribed length of time in support of your tax account may expose you to a separate penalty charge.

Grace Li is Tax Manager at Kings Court Trust and can be reached on grace.li@kctrust.co.uk.