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HMRC outlines the new penalty regime as it applies for Inheritance Tax purposes.

HMRC has developed one consistent penalty regime for inaccuracies in tax returns and other tax documents that will apply across almost all the taxes and duties HMRC administer. Under the new regime, if the liable person(s) take reasonable care to gettheir tax right HMRC will not penalise them, even if they do make a mistake.

Finance Act 2007 Schedule 24 introduced this new regime for Income Tax, Capital Gains Tax and some other major taxes. As a reminder, the new Income Tax and Capital Gains Tax regime applies to Trust and Estate Returns filed after 1 April this year. This change was covered in the HMRC IHT & Trusts Newsletter - December 2008

Finance Act 2008 Schedule 40 contained provisions to extend this regime to many other taxes and duties including Inheritance Tax.

The commencement order for Schedule 40 has been published and the new penalty regime will apply to Inheritance Tax for all chargeable events that occur on or after 1 April 2009. The provisions of Inheritance Act 1984 s.247(1)and(2) will continue to apply to events before that date.

So, for events on or after this date, the liable person(s) may be charged a penalty if they do not take ‘reasonable care’ in preparing their Inheritance Tax account or excepted estate return. There may also be a penalty if the liable person(s) subsequently discovers an inaccuracy but does not take reasonable steps to tell us about it. There is a lot more information about the new regime at: Take Care to Avoid a Penalty, but what follows highlights some of the aspects of general interest and of particular relevance to Inheritance Tax.

The test is now of ‘reasonable care’ rather than ‘negligence’. HMRC considers the personal representatives will have taken reasonable care where they

  • follow the guidance provided about filling in forms such as the IHT400 and IHT205/207/C5
  • make suitable enquiries of asset holders and other people (as suggested in the guidance) to establish the extent of the deceased’s estate
  • ensure correct instructions are given to valuers when valuing assets
  • seek advice about anything they are unsure of
  • follow up inconsistencies in information they receive from asset holders, valuers and other people
  • identify any estimated values included on the form

Where the personal representatives leave all this in the hands of an agent, HMRC expects them to check through the form before signing it and to question anything that does not accord with what they know about the deceased. Simply signing an account completed by an agent is not taking reasonable care.

And where Inheritance Tax is payable other than on death, HMRC expects the transferor (or trustees) to deliver a full and complete return of the transaction concerned, and to have sought professional advice as necessary. Again, simply signing an account completed by an agent is not taking reasonable care.

The new penalty regime identifies three levels of behaviour that give rise to an inaccuracy in an account or return that may give rise to a penalty

  • careless,
  • deliberate,
  • deliberate and concealed

The less serious the reason for the inaccuracy, the smaller the penalty.

In addition, HMRC will have regard to the nature of disclosure of the inaccuracy – whether it was prompted or unprompted. The legislation sets out a minimum penalty for each combination of behaviours.

Behaviour DisclosureMinimum penaltyMaximum penalty
Careless Unprompted0%30%
 Prompted 15%30%
Deliberate Unprompted20%70%
 Prompted 35%70%
Deliberate and

The new regime caters for a penalty to be charged where a document given to HMRC contains an inaccuracy in connection with a deduction, exemption or relief taken against the estate or transfer. This includes the information given on the relevant supplementary pages to the account and makes explicit what was implicit in the Inheritance Tax legislation.

The new regime also contains a provision that allows a penalty to be charged where an inaccuracy in the liable person’s document was attributable to another person. This is particularly relevant to Inheritance Tax where the personal representatives will inevitably be relying on other people to provide them with information about the deceased’s estate.

Where it can be shown that the other person deliberately withheld information or supplied false information to the liable person, with the intention that the Inheritance Tax account or return would contain an inaccuracy, a penalty may be charged on that other person. But that will not necessarily mean that the personal representative themselves may not also be chargeable to a penalty. If the withheld or false information gave rise to inconsistencies in the information they had received about the estate and they did not question those inconsistencies; the liable person may still be charged a penalty for failing to take reasonable care as well.

Procedurally, HMRC will continue to discuss with you any case in which it is considered that a penalty may be charged. The extent to which you are able to help HMRC with those enquiries and provide copies of any documents requested will govern the extent to which the maximum penalty payable can be reduced. It is hoped that, as now, the majority of penalties will be settled through discussion.

If HMRC is unable to agree that a penalty should be charged, or the amount of a reduction, a penalty assessment will be issued. It is this document against which the liable person can appeal, and they will then be subject to new processes that apply (also from 1 April 2009) within the tribunal system. Factsheet HMRC1 – HM Revenue & Customs Decisions - What to do if You Disagree – explains how to appeal. Further details on the new tribunal system can be found in the next article.

The new tribunal system will include the option of asking HMRC to conduct an internal review of the decision to charge a penalty. Alternatively, or if the internal review upholds the decision to charge a penalty, the liable person will be able to ask for the case to be heard before the First-tier tribunal of the Tax Chamber.


Crown Copyright - The above was taken from the HMRC Inheritance Tax and Trusts Newsletter (April 2009), and is reproduced with the permission of HM Revenue & Customs.

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About The Author

HM Revenue & Customs
HM Revenue & Customs is the UK's primary taxing authority, responsible for the administration (and collection) of direct and indirect taxes and duties, and certain benefits.

For further information please visit the HMRC Website and in particular the About Us section.

Article Added Saturday, 23 May 2009 | 4271 Hits


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