Author: Wellers

Any inaccuracy when filling in your tax return can have severe consequences, so it really does make sense to seek professional assistance. The point was powerfully made by the case of a financier who narrowly escaped a stiff financial penalty after failing to declare all of his income and benefits.

After being made redundant by an investment bank, the man failed to include in his self-assessment tax return a severance payment of £176,738 he had received. He also made no reference to the bank having written off a loan to him of £143,420. As a result, his Income Tax liability was understated by £68,015.

After HM Revenue and Customs (HMRC) launched an enquiry and discovered the omissions, he was required to pay the additional tax due, plus interest and a penalty of £23,805. Given that his tax affairs were very straightforward, HMRC asserted that it was unlikely he had made an innocent mistake.

The man acknowledged the inaccuracies but asserted that he had made every effort to complete his return correctly, without professional help. He said that he had relied on documents provided to him by the bank and his subsequent employer and that he was unaware prior to HMRC’s inquiry that the severance lump sum and the written-off loan were taxable.

In upholding his appeal against the penalty, the First-tier Tribunal ruled that HMRC had failed to establish that the omissions were deliberate or that he had consciously or intentionally chosen not to find out his true tax position. Given that HMRC had not advanced an alternative case that the omissions were careless, the penalty was overturned.

The tax regime is subject to constant change and it is generally up to taxpayers to keep their knowledge up to date in a fluid landscape. However, as a case concerning tax charged on high-income recipients of Child Benefit showed, HM Revenue and Customs (HMRC) is also under a duty to keep the public informed.

Until January 2013, Child Benefit was not means tested. However, the introduction in that month of the High Income Child Benefit Charge (HICBC) meant that those who earned more than £50,000 a year were subject to tax on Child Benefit that they or their partners received. Those who fell into that category who did not opt out of receiving Child Benefit were required to inform HMRC of their liability to HICBC.

HMRC carried out an awareness campaign prior to the introduction of HICBC. The measure was announced by the Chancellor in the 2012 Budget; it was debated in Parliament and adverts were placed widely in the media.

The taxpayer involved in the case earned more than the £50,000 threshold but did not declare his liability to pay HICBC. In 2019, he was informed by HMRC that he owed several thousand pounds in HICBC, which he swiftly paid. HMRC also imposed a late payment penalty of £509.20, which he challenged.

Upholding his appeal, the First-tier Tribunal (FTT) noted that public information campaigns have their limitations. Even when a newspaper is delivered to one’s door, one does not always have the time to read it. Many media articles concerning the introduction of HICBC were in any event misleading, displaying a misunderstanding of a novel measure that required parents to make a choice between a charge to tax or a disclaimer of Child Benefit.

The FTT accepted that the taxpayer, a scrupulous record-keeper, had not received an HMRC letter informing him of the introduction of HICBC, nor had he become aware of the new tax by way of the awareness campaign. His children having been born prior to the inception of HICBC, he did not receive information supplied to new applicants for Child Benefit.

As he was taxed entirely through the PAYE system, he had never been required to submit a self-assessment tax return. The information campaign was not targeted at employers, who could have been expected to inform employees of their obligations. HMRC was throughout aware of the taxpayer’s earnings but had waited over six years before informing him of his HICBC liability. The penalty was overturned on the basis that he had a reasonable excuse for late payment of HICBC.

Rather than giving money to your children directly, you may choose for a variety of good reasons to provide for them by way of a discretionary trust. Such a step is a serious matter, however, and as a High Court case underlined, it is extremely difficult to alter a trust deed after it has been formally executed.

The case concerned a father who wished to make provision for his three children from an inheritance of about £450,000 that he had received from his mother. He signed a deed that varied the terms of his mother’s will. As drafted, the deed placed all of his inheritance into a trust for the benefit of his children. The deed having been duly executed, he could neither cancel nor amend it.

The father launched proceedings seeking rectification of the deed on the basis that it did not reflect his true wishes. He said that his intention was that he and his wife would be included with their children as beneficiaries of the trust.

Ruling on the matter, the Court found that his instructions concerning the deed had not been correctly recorded. As a result, his name and that of his wife had been omitted from the list of beneficiaries. Regardless of where responsibility, if any, for that omission lay, the deed did not implement his intentions.

The Court found that the father wished to earmark £100,000 for the benefit of each of the three children and the remaining £150,000 for the benefit of himself and his wife. He wanted to create a discretionary trust so that the children’s access to funds would be controlled by trustees. One of the children was disabled and the trust was also designed to safeguard his access to state benefits. The Court exercised its discretion to rectify the deed so that it gave effect to those intentions.

If you require information on using or setting up a trust please contact our Private Client team at enquiries@wellerslawgroup.com.

Disputes between neighbours frequently inflict enormous emotional and financial harm on all involved. A High Court dispute concerning use of a shared driveway showed why any lawyer would advise sensible negotiation as a far better alternative to litigation.

A couple’s right of way over the driveway, by which they accessed their rural home, was restricted to passage on foot or by private motor vehicles. Their neighbour, with whom they shared the driveway, launched proceedings against them alleging that they were in long-standing breach of that restriction by permitting its use by heavy lorries, plant and machinery. The couple asserted that their use of the right of way was entirely lawful.

Ruling on the dispute, the Court found that the right of way permitted any reasonable and otherwise lawful vehicular use of the driveway for the purpose of maintaining or repairing the couple’s home or otherwise enabling its use as a private dwelling. That included use of the driveway by, amongst others, visitors’ cars, postal vans, trade vehicles and lorries required to empty the property’s septic tank.

The right of way, however, did not embrace large vehicles which might be used in construction or demolition works unconnected to the couple’s day-to-day domestic enjoyment of their home. The physical size of the driveway rendered it unsuitable for use by vehicles exceeding 2.6 metres in width or 10 tons in weight. The Court noted that, if the couple wished large vehicles to pass along the driveway, they would be expected to seek their neighbour’s permission in a friendly manner.

Lamenting the falling out between the neighbours, who were formerly on good terms, the Court noted that such disputes commonly grow out of all proportion from small seeds and are inevitably made worse by litigation. In order to resolve any further issues between them, both sides were strongly urged to seek creative solutions via mediation or a binding process of alternative dispute resolution.

When the recording artist Prince died without a Will in 2016, aged 57, controversy soon began surrounding the administration of his estate. Fast-forward almost five years and the storm is still raging as the IRS (Internal Revenue Service) has determined that the estate administrators’ original valuation of the estate was woefully low. In fact, the IRS has calculated that the estate was undervalued by approximately 50%.

This means that the federal tax bill on Prince’s estate could double and the IRS has also ordered an “accuracy-related penalty” to be levied due to a “substantial” undervaluation of assets.

Just not worth it

The figures in the probate dispute relating to the Prince estate are eye watering: the original estate valuation was $82.3 million, re-evaluated by the IRS as $163.2 million which will require a further $32.4 million in federal taxes to be paid alongside a penalty of $6.4 million. However, whatever the value of an estate, the story should serve as an unambiguous message that undervaluing an estate during the probate process is not a sensible thing to do.

Taxable estates in the UK run similar risk of penalties if not valued accurately and Her Majesty’s Revenue and Customs (HMRC) has the power to levy a fine of up to 100% of the additional Inheritance Tax (IHT) liable, as well as recovering the IHT at 40%. For example if a house is undervalued by £50,000, this could result in £20,000 additional tax liability and a possible fine of £20,000 on top.

Real estate is probably one of the easier types of asset to value; Royal Institution of Chartered Surveyors (RICS) registered valuers will carry out a “Red Book” valuation for probate purposes ( which may differ from an estate agent’s market value appraisal), but certain other assets are likely to be more challenging.

The problems with Prince’s estate stemmed from the difficulty in valuing his back catalogue and the associated music publishing and recording interests. For non-popstars, however, shares in private companies and similar investments can be problematic for valuation purposes. The value of shares for IHT purposes is calculated based upon the closing share price on the day of death.

Any valuation of such assets provided to the HMRC, should be as accurate as possible, as discrepancies are likely to be investigated by the Share Valuation Division.

Gifts and reliefs will also play a part

When calculating the tax payable on an estate, HMRC will also be concerned with any money or assets given away by the deceased in the seven years prior to death, and if any reliefs and exemptions from Inheritance Tax have been over-inflated this is also likely to be subject to scrutiny.

For instance, if a husband leaves his wife the entirety of his estate in his Will, when the wife dies checks must be made to ascertain the amount of inheritance tax nil rate band used on gifts/bequests made to non-exempt beneficiaries (such as their children), as this will affect the amount of transferable nil rate which can be claimed and, ultimately, the tax due on the estate.

Selling property at reduced value

If land or property is sold for less than the market value within four years of the death of the title holder to a person connected to the estate, HMRC can claim relief for the loss.

In the recent case of the Estate of Douglas Charles Thomas v HMRC [2020], an application was made by estate representatives to the  Upper Tribunal (Lands Chamber) for loss relief in respect of the sale of a piece of land to the deceased’s daughter and son-in-law.

The land had been sold for £500,000 which the HMRC claimed was significantly lower than the market value of £800,000. The Upper Tribunal considered the evidence and found that a reasonable valuation for the land at the time of sale would have been £645,000 – the claim for loss relief was therefore fixed at this amount.

This case highlights the need for correct valuations when selling property to connected persons and that any misevaluation is likely to be investigated. There is a legal obligation to accurately report the value of an estate and if a personal representative of an estate knowingly misleads the HMRC, there is a risk of criminal proceedings for fraud being brought against them.

What if property is overvalued during probate?

If land or property is valued for IHT purposes at the market value prevailing at the time of death and then it is sold for less within four years of the date of the owner’s death, the personal representatives can apply to the HMRC for a refund of any overpaid tax.

How to avoid an HMRC investigation

The HMRC carries out thousands of investigations annually into the valuations of estates for IHT purposes. While the Government obviously wishes to clamp down on tax dodgers, the vast majority of executors and personal representatives do not set out to defraud the HMRC and it is generally due to the complexity of the system that mistakes are made.

Many probate solicitors and tax specialists believe the current IHT system is overly convoluted, particularly in relation to time-limits on gifting, however, there no plans afoot to change the rules and the safest way to ensure that an estate is handled accurately and efficiently is to seek the advice of experienced probate lawyers and tax advisers.

Contact Wellers Law today.

Even apparently obvious or trifling clerical errors in a will or codicil may provide fertile ground for dispute and that is why it is so important to have such documents drafted by a professional. In a High Court case on point, a straightforward mathematical blunder came close to defeating a deceased scientist’s wishes.

By his will, the man divided his residuary estate – which was worth over £900,000 – into 52 equal parts. Six named individuals were each to receive six of those parts and the remaining 16 parts were to be distributed equally between eight charities.

By a subsequent codicil, however, he deleted the gifts of 12 parts to two individuals who had died before him. Four further parts were bequeathed to charity, but the end result was that only 44 of the overall 52 parts were allocated. The remaining eight parts were worth over £140,000 and the executor of his estate launched proceedings in order to resolve doubts as to what should become of them.

Ruling on the matter, the Court noted that the terms of the codicil created an evident mathematical inconsistency with the will. That had the potential to create a partial intestacy by removing the eight unallocated parts from the scope of his will. In that event, they would fall to be distributed to his next of kin. The Court, however, found that such an outcome would not reflect his true intentions.

The Court found it unlikely that, having taken the trouble to make a detailed will which, on the face of it, provided for the distribution of his entire estate, he would have intended the codicil to create a partial intestacy. The likelihood was that the mathematical mismatch arose from a simple clerical error.

That conclusion was supported by close analysis of other documents – including a previous will – that had been created during his lifetime. The Court exercised its powers under Section 20 of the Administration of Justice Act 1982 to rectify the will so as to delete the words ‘fifty-two parts’ and replace them with the words ‘forty-four parts’. That amendment, the Court found, resulted in the whole of his estate being distributed under the terms of his will and in accordance with his wishes.