additional inheritance tax

[JOHN2016]

My father passed away in 2011 and a professional firm were the executors. They completed the estate, paid the inheritance tax and the balance was paid out to me as sole beneficiary.
It would appear that in 2010 the executors had been made aware of a gift my father had made in 2005 (was therefore the following year a failed potentially exempt transfer) but they omitted it when dealing with the estate after he died in 2011.
So the executors now have an additional inheritance tax liability to pay but no funds as they have paid everything out in 2011. They have admitted it was there fault as they had details on their files but are demanding that I repay them the inheritance tax now being demanded by HMRC.
In cases of negligence am I obliged to refund them?

[des8]

Re: additional inheritance tax

The recipient of the gift is responsible for paying the tax within 6 months of the deceased passing.
If it isn;'t paid it falls to the executors to pay it out of the estate assets, but if they have distributed the funds .....
As a start I would tell them to claim on their insurance as they are legally liable

If they were a professional firm I would expect them to carry professional indemnity insurance &/or executors liability insurance.
This would not cover a fine issued by HMRC, but should cover a failure by the administrators to pay the correct taxes.

[JOHN2016]

Re: additional inheritance tax

Thank you for the reply. the gift or failed potentially exempt transfer was valued at below the inheritance tax zero rate band and therefore has to be added into the free estate, so the additional IHT is on the free estate and not the recipient of the gift. My understanding is that what should of happened is that the zero rate band should have been reduced by the gifts value and the balance set against the free estate. What incorrectly happened was that the entire zero rate band was set against the free estate.
They do hold professional indemnity insurance. There would appear to be three liabilities due, the missing IHT, a HMRC penalty and interest due on the late payment. Ironically they have accepted liability for the penalty as they had details of the gift on their files but are seeking to recover from me the additional IHT and also the interest as I (unknowingly) have had use of the funds paid out to me in error back in 2011

[des8]

Re: additional inheritance tax

I suppose the principle that one cannot profit from the error of another might come into play.

If you no longer have the funds they will have difficulty recovering it.
[MENTION=85500]Peridot[/MENTION] any ideas?

[Peridot]

Re: additional inheritance tax

Hi,
Technically the personal representatives are liable for the IHT payable on potentially exempt transfers (PET - being the value of the gift made 2005, prior to your father passing). When did your father pass away? The value of the estate from what you say was below the Nil Rate Band (NRB) until the gift was 'included', is that correct? Is your mother still with us and did the professionals deal with any transferable NRB available?
Who is/are the executor(s) under your father's Will? Are you the sole residuary beneficiary? Were you ever provided with the IHT 400 to consider? Did you 'flag' the PET yourself in 2010?
What penalty is being levied? The rules changed in 2009 but from what you have indicated you may come under the old rules. Did HMRC pick up on the error or did the Personal Representatives 'offer' this to them unprompted?
Sorry a few queries to answer before I can hopefully try and point you in the right direction.

[JOHN2016]

Re: additional inheritance tax

Thank you for looking at my problem. Let me reiterate.
My father dies in April 2011 and his executors were a firm of solicitors and Mr A was named as Personal Representative on all the forms including the IHT forms. The year previously ie 2010 my father had supplied Mr A with details of a potentially exempt transfer he had made in December 2005, including all relevant paperwork.
The solicitors completed the Estate, paid the IHT that was due and then paid the balance of the estate to me as I was the sole beneficiary. However for some unexplained reason they did not include the potentially exempt transfer when calculating the IHT payable. The PET was less than the IHT zero rate band and therefore should have been brought into the free estate. As I understand it that whereas the solicitors reduced the value of the free estate by the whole IHT zero rate band in calculating the IHT payable, what they should have done was to reduce the zero rate band by the value of the PET and then used that figure against the free estate to calculate the IHT payable. The above facts are not in dispute.
Then last year I instructed the same solicitors to carry out work which evidently had a connection with the gift made in 2005, although I had no knowledge of this connection and was then informed by the solicitors that the IHT on my fathers estate had been underpaid. HMRC have now issued demands to the solicitors for an underpayment of IHT, interest for late payment and also a penalty. The solicitors have accepted that this was their fault and have agreed to pay the penalty but having paid out all of the free estate in 2011 have no funds (through their accepted negligence) to pay the IHT and interest. They are demanding that I pay this additional IHT and the interest on the basis that they paid me out too much in 2011.
My question is basically in a situation where the executors are negligent (and they are not attempting to dispute that) am I liable to meet the additional IHT and interest.
Thanks

[enaid]

Re: additional inheritance tax

I may be wrong but am sure they should have insurance in place to cover such things happening.

[Peridot]

Re: additional inheritance tax

Hi John2016,
The executor has responsibility to pay inheritance tax, if due, and to complete tax returns covering the administrative period. If they miss deadlines they will be liable for both interest and penalties and these cannot be claimed from the estate.

Where gifts were made within seven years of their death that are liable for tax then the recipient of the gift is responsible for paying this tax within six months of the death. If they fail to do so then it becomes the executor's responsibility to pay it. The tax can be claimed out of the estate but if you have distributed all the assets then the executor could end up paying it out of their own pocket.

In a similar vein, if the executor does not make reasonable efforts to enquire about lifetime gifts they could find themselves responsible if they subsequently come to light.

In the circumstances I would try and be practical. Do you have the funds to pay the IHT that would be due? As you'll see from the forgoing technically you would have been responsible for the IHT and any interest accruing upon it if it had been dealt with correctly at the time. I would suggest that if you have the funds available and as you benefitted from the gift then maybe agree to pay the IHT. The solicitor executor is on somewhat thin ice if he didn't flag that there would be IHT payable or ask you whether there had been any lifetime gifts made in the last 7 years before your father passed away. Even if you had been made aware of the tax due, and did not have the funds to settle it then, the tax could have been paid on time from the estate without incurring interest or a penalty.

I would have an issue with paying the penalty (which it appears is no longer an issue, the firm agreeing to pay this) and the interest that has accrued both on the IHT due and the penalty, bearing in mind this could have been avoided had they told you at the time that IHT would be due on the gift.

Basically, had you been made aware of the tax due at the time then no doubt this would have been paid either by you or from the estate, if you did not have the funds (thus reducing the residue that you received) But you would not have incurred interest or the penalty on the payment.

It is down to you how you wish to deal with it. Personally, if I had the funds, I would pay the IHT, as I have benefitted either way both from the original gift and the residue. I would be arguing however, that but for the omission of the solicitor, there would not have been penalties or interest due so they should be the responsibility of the solicitors firm.

As a law firm they will have to have indemnity insurance for just such events. In the usual course of events the firm's insurers should already have been notified. I hope this helps.