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Mark McLaughlin CTA (Fellow) ATT TEP looks at a recent case which considered whether the use of an inaccurate property valuation in an Inheritance Tax return was negligent.

Property Valuation

The new penalty regime for inaccuracies in tax returns, etc., has arguably increased the stakes and made it even more important that all possible steps are taken to ensure tax returns are complete and correct. Incorrect tax returns resulting from careless (previously negligent) behaviour are subject to penalties under the new regime. But what is ‘careless’?

In a recent case, Cairns v Revenue & Customs [2009] UKFTT 00008 (TC), HMRC tried to impose a penalty on Mr Cairns, a solicitor acting as personal representative for a deceased person’s estate. Mr Cairns submitted an IHT return to HMRC following the deceased’s death in October 2004, which included a value of £400,000 for the deceased’s residence. This was based on a valuation by chartered surveyors in January 2004, which had been heavily qualified due to the poor state of the property. The District Valuer subsequently valued the property at £600,000 as at the date of death, which was also the amount for which the property was sold.

Incorrect and Negligent?

The Special Commissioner was asked to consider whether Mr Cairns had submitted an incorrect IHT account, and whether he had acted negligently. The Special Commissioner held that:

 “…the mere failure to obtain another valuation when it has not been established that a second valuation would have led to a different figure being inserted in the statutory form does not constitute negligent delivery of an incorrect account.”

He added:

“On the evidence before me, even if it were concluded that an incorrect account was delivered or furnished, it is simply not possible to conclude that it was negligently delivered or furnished except in one minor respect.” 

‘Minor and Technical’ Error

The minor matter referred to related to the fact that the valuation obtained had been heavily qualified, and was a provisional estimate. Mr Cairns had not disclosed this in the IHT account. The omission to do so was a careless error. However, the Commissioner added that “…it was minor, technical and of no consequence whatsoever.” He concluded that there had been a “narrow, technical failure…” The account was incorrect. The sum of £400,000 should have been described as a provisional estimate. Whilst that failure was negligent, it was held to be a “failure of the merest technicality”. The summons against Mr Cairns was dismissed. The Commissioner added that even if he had been wrong to dismiss it, he would have reduced the penalty to a nominal amount, or recommended that it be so reduced. 

Whilst this case is potentially helpful in terms of identifying the circumstances in which penalties can be imposed for an incorrect return, there are a few points worth noting.

The first point is disclosure. The Commissioner said it would have been prudent for Mr Cairns to describe the value attributed to the deceased’s property as a provisional estimate. As mentioned, this was careless in the Special Commissioner’s view.

Secondly, HMRC produced no valuation evidence in this case, such as an independent valuation of the property as at the date of the deceased’s death. The onus was on HMRC to prove negligence on the balance of probabilities, and it probably did not help their case that no valuation evidence was submitted.

Thirdly, the Special Commissioner concluded that negligent conduct amounts to more than just being wrong, or taking a different view from HMRC.

The conclusion to be drawn from this case would seem to be that under-valuations of assets will not always be negligent, and may not necessarily be careless, but that there must be full disclosure in the return.

Since the Cairns case was reported, HMRC’s Inheritance Tax & Trusts Newsletter (August 2009) has been published, which includes guidance on various steps which can be taken when obtaining valuations, in order to demonstrate that ‘reasonable care’ has been taken. If HMRC is satisfied that reasonable care has been taken despite a valuation being too low, no penalty should arise on any additional IHT due for ‘careless’ behaviour.  

The above article is reproduced from 'Practice Update' (July/August 2009), a Tax Newsletter produced by Mark McLaughlin Associates Limited.