Declaring Lifetime Gifts
26th February 2015
Secrets in Switzerland lead to big penalty bill
Failure to report a cash gift from his late father has landed a carpenter with an £87,000 penalty from HM Revenue and Customs.
The case, the first to test the position in court, is a warning to anyone who fails to come up with the facts when asked questions by those handling the estate of someone who has died.
When Clayton Hutching's father died, he left an estate of farm property worth around £3million. The executors of the estate had a meeting with the family and also wrote to them, asking if they had received any gifts from their late father in the previous seven years. When none were reported, the executors submitted the estate tax return to HM Revenue & Customs saying none had been made.
But two years after his father died, Clayton Hutchings was reported to HMRC in an anonymous tip off, alerting them to an undisclosed offshore bank account. When he responded to their enquiries by disclosing details of an account in Switzerland, it turned out that his father had transferred nearly £450,000 from his own undisclosed Swiss account into Clayton's.
The disclosure resulted in an extra £47,000 worth of inheritance tax being charged to Clayton Hutchings personally, which he paid, but HMRC also charged a penalty of £87,533 for loss of income, which he appealed against, arguing that he had not deliberately withheld information and never knew how much money was in the Swiss account. His appeal was supported by notes of his conversations with his solicitor which indicated that he thought 'any gifts of overseas assets did not need to be declared as they were not subject to UK tax'.
Clayton, a self-employed carpenter, said his father's executors had not made it sufficiently clear to him that he must declare all lifetime gifts, and that the letter they sent him asking for disclosure of gifts was 'gibberish'. He also criticised the executors for not thoroughly searching the late Mr Hutchings' home for relevant documents. Both objections were kicked out by the Tribunal, who found that he had deliberately withheld the information, and the penalty imposed under paragraph 1A of Schedule 24 to the Finance Act 2007 was upheld (Hutchings v HMRC, 2015 UKFTT 9 TC).
The executors avoided receiving a personal penalty for filing an inaccurate return as they were able to show that the question of lifetime gifts was raised, both in person and by letter.
This is an extreme case, involving large sums and a Swiss bank account, but it could equally have involved a more modest transfer between UK bank accounts. It is important to be aware of the need to disclose such gifts, and to recognise that it is not just down to executors or HMRC spotting the trail, there is every chance that someone else may report it, as in this case.
Making a clear record of all lifetime gifts is a good idea. It means there is less work for executors to do when you die, and it helps to clarify potentially exempt transfers and where, for example, you are making exempt gifts, using either your annual allowance, or out of surplus income good record keeping can help your executors to prove where gifts should be exempt.
The main exemption for gifts is an allowance of £3,000 each tax year, and any unused part of this allowance can be carried forward once to the next tax year and used when the next year's exemption has itself been used up. This can be to one recipient, or split across a number of people. In addition, small gifts can be made of up to £250 per recipient per year, with no limit on the number of recipients involved. However, if you give more than £250 to any individual using the main exemption, you can't claim the first £250 was a small gift.
Gifts can also be made out of surplus income. This does not create an automatic exemption from tax and has to be claimed by the tax-payer and allowed by HMRC. The claim is made following death by the executors of your estate, because it is only on death that the gifts might become taxable. The person making the gifts has to record their own income and expenditure to demonstrate that they have surplus income to make gifts, without drawing on capital.
Any other lifetime gifts, other than gifts into a trust, are known as 'potentially exempt transfers' (PETs) and these become an exempt gift if you survive the making of the gift by seven years.
This is not legal advice; it is intended to provide information of general interest about current legal issues.
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