Saints and Sinners

MALCOLM GUNN FTII, TEP discusses a recent Special Commissioner's decision concerning inheritance tax penalties.

THE REVENUE SHOULD now be viewed by the general public as an 'enabling department'. So says its Chairman, Mr Nick Montagu. No longer is it simply a tax collecting body but it also administers welfare matters in the form of the tax credit system and the national minimum wage. So the character of the organisation is fundamentally different in the twenty-first century and the Revenue can no longer be unfairly grouped as the 'tax collectors and sinners' of New Testament days.

A similar theme has surfaced in the quarterly newsletter of the Capital Taxes Office designed to provide guidance to those who have dealings with that Office. For example, the December 2000 newsletter included the department's customer service aims, which were to provide 'the high quality service' which taxpayers require and 'the help they need to comply with their obligations'.

Against this background, consider the story which unfolded in a recent case before the Special Commissioners. It was the story of a solicitor, Mr J K Robertson, and the decision number is SpC 309.

The late Mrs Stanley

Mrs Stanley died on 10 October 1999. Mr Robertson and another were appointed executors by the will. With most remarkable efficiency, Mr Robertson had established assets of the estate and had completed the necessary inheritance tax account, which was submitted on 24 November 1999 together with a cheque in payment of the duty amounting to just over £400,000. Under the legislation, the account was not actually due for submission until twelve months after the death and interest on the tax would not run until six months had elapsed from the death.

So did the Capital Taxes Office commend Mr Robertson for early submission of the form? Did it offer the estate interest on the money as a deposit paid before due date? Did it welcome a case which was evidently being progressed with the utmost speed and efficiency, where others have to be coerced into complying with their obligations?

The answer to all these questions was no. In the Revenue's eyes, Mr Robertson was no saint at all. The Capital Taxes Office criticised Mr Robertson for the 'undue haste' with which the inheritance tax form had been submitted and issued a penalty notice for £10,000. Bear in mind that the penalty would not be paid from the estate but would be paid out of Mr Robertson's own pocket.

Nor was this a maverick decision which was out of the ordinary. The report makes it clear that the case had been examined by various parties at the Capital Taxes Office, and indeed they had considered issuing a penalty in another case dealt with by Mr Robertson where the situation was rather similar. Is this how the Revenue plans to be 'an enabling department'?

The full story

The facts of the case will send a shiver down the spine of many executors. I started my working life dealing with estates and after the death you start with a clean sheet of paper with the deceased's name at the top. That is frequently all you know about the person. You piece together details of the deceased's assets and liabilities from what you can find at the home address and, in the case of elderly people, frequently the information can be out of date, hopelessly muddled, incomplete and incorrect. In one case in a million, there is a sheet of paper in the drawer listing all the assets, which has been kept up to date, but even then the location of those assets might be scattered around the globe; unless they are quoted investments, the executor can only guess at the current values of them.

Mrs Stanley lived in Kincraig, Scotland, where she had a house worth about £60,000, plus furnishings and contents. Mr Robertson, a local solicitor, put in a fairly generous figure of £5,000 for the contents of what must have been a small property. She also had a let property in Hertfordshire and a photograph of it at her house showed it to be a small cottage and it was subject to a protected tenancy. So an estimated value of £50,000 was entered for this asset.

At the same time, professional valuers were instructed for the household goods and furniture and for the Hertfordshire property. It transpired that the furniture included some antiques and the valuation figure for these came out at £24,845. The Hertfordshire property also had a surprise feature; with it was five acres of agricultural land and so the valuation figure came out at £315,000. Both of these valuations were available within two months or so, and the executor, with the same efficiency as before, sent a corrective account to the Revenue seven days after the second valuation was received, notifying the Revenue of the increased value of the cottage. By oversight, he omitted to mention the valuation of the house contents and this was put right in correspondence early in February 2000.

The complaint

There were one or two other matters before the Special Commissioners, but it is not necessary to trawl through all the detailed facts of the case. The Revenue's complaint was that the inheritance tax account did not comply with section 216(3A), Inheritance Tax Act 1984 which reads as follows:

'If the personal representatives, after making the fullest enquiries that are reasonably practicable in the circumstances, are unable to ascertain exact value of any particular property, their account shall in the first instance be sufficient as regards that property if it contains (a) a statement to that effect; (b) a provisional estimate of the value of the property; and (c) an undertaking to deliver a further account of it as soon as its value is ascertained.'

Anyone who has been involved in probate work will know that, historically, the Capital Taxes Office took a very lenient approach to the use of estimated figures in inheritance tax accounts. Looking back some years, I never knew a case where a professional executor was issued with a penalty; in fact there was often a practice of using purely nominal figures for items where a valuation was being obtained so that it was abundantly clear to anyone reviewing the file that the figure was awaiting a professional valuation. There must have been a policy change within the Revenue in comparatively recent times to start applying section 216(3A) aggressively. There was no officially announced change of practice but the shockwaves from a rumour machine in the profession to spread the news around, eventually to be confirmed by an item in the August 2000 Capital Taxes Office newsletter. Hence, at the Special Commissioners, the allegation by the Revenue was that the executor of Mrs Stanley had not made any enquiries, let alone 'the fullest enquiries' and had simply put in estimated figures in his haste to get the grant of probate.

The decision

The Special Commissioner was plainly not impressed at all with the Revenue's approach. He noted that the full enquiries which are required by the statute are those that are 'reasonably practicable in the circumstances'. The Revenue had apparently not made any submissions as to what it considered to be reasonably practicable, but the Special Commissioner concluded that the executor had acted entirely properly. He made a thorough examination of the deceased's home shortly after her death. He appreciated that valuations would be required of certain assets. 'In accordance with accepted practice he inserted an estimated valuation in the inventory and disclosed that it was an estimate … I cannot classify Mr Robertson's actings as amounting to negligently delivering an incorrect account.' The Special Commissioner continued, in forthright terms, stating that he was of the view that the Revenue had wholly failed on the facts to establish, either beyond reasonable doubt or on a balance of probabilities, that the executor negligently delivered the account of the deceased's property. It was perfectly proper for him to insert estimated figures and to put in hand immediate steps to get professional valuations.

The Revenue also argued that this was the first penalty case ever to come to an appeal; all others ('thousands of cases') had been settled and so the Commissioner could surely see how fair and reasonable the Revenue were. I am pleased to say that that argument got short shrift. One can only commiserate with the thousands of others who had suffered under this unnecessarily harsh régime, introduced without announcement and without any fiscal purpose other than to increase the tax yield at the personal expense of those who take on executorships.

Wider significance?

This case sets no precedent. It was decided by reference to its own facts and the precise facts will be crucial in any other case involving the application of section 216(3A). Nevertheless, the Special Commissioner's general approach and wider remarks will be an encouragement to others not to join the thousands of cases already settled, but to dispute the imposition of penalties in run-of-the-mill cases. If the Capital Taxes Office does not soften its line after this decision, we can no doubt expect to see more appeals against inheritance tax penalties.

Existing policy

Some examples of penalty cases, according to the view of the Capital Taxes Office, were set out in its August 2000 newsletter. One relates to a case where personal representatives had not checked whether any gifts had been made during the lifetime of the deceased and submitted an inheritance tax account assuming that there were none. The case study indicated that a penalty would be sought upon it coming to light that there were in fact some gifts.

A second example refers to a case where the insurance value of a property was used as the probate value. The insurance value was a market value from an earlier time uprated for inflation. Upon it being established that the property was in fact worth considerably more, the newsletter indicated that a penalty would be sought.

Of course, in real life situations there will always be more facts to bring into account than the bare details given in the two examples from the August 2000 newsletter. In particular, as regards the second example, it would be very relevant to know whether or not in an actual case a professional valuation is in the pipeline to establish whether or not an insurance value is accurate. It would also be highly relevant to know whether the declaration at section L of the inheritance tax account contains a note to say that the particular value used is a provisional estimate.

It is probably the case therefore that nothing in this latest decision necessarily casts doubt on the policy statement in the August 2000 newsletter, although one would not necessarily expect such simplified facts in real life and any other relevant details could well swing things towards a radically different conclusion from that drawn in the Revenue's examples.

Urgent grant cases

The December 2000 newsletter contained a specific concession in cases where personal representatives have a need to obtain a grant of probate urgently. In such cases, the Revenue allows the use of estimated figures in the inheritance tax account even where the representatives have not made any enquiries at all. In other words there is, by concession, a disregard of section 216(3A). The Revenue thought that the case of the late Mrs Sinclair discussed above did not fall in the urgent grant category, although there was some dispute about this (and in the event it did not matter because the Special Commissioner found for the taxpayer).

One has to persuade the Revenue that the case is one falling within the urgent grant concession and it has published the fax number to use which is 0115 9743045.

Future cases

The best advice for personal representatives in the future must be, so far as possible, to follow published Revenue guidance in completing their inheritance tax accounts. At least that way they will be minimising the risks as regards penalties.

Clearly, one of the safest methods is to persuade the Revenue that a particular case is an urgent grant case. By concession, they are then immune from problems arising from the use of estimated values.

In other cases, the next best course of action must be to make some enquiries concerning the value of other unquoted assets, such as furniture, properties and unquoted shares. No doubt this advice will often be given verbally and it would be necessary for there to be a file note to back it up. The inheritance tax account must indicate the use of the estimates.

In the case of Mr Robertson, as before the Special Commissioners, it is hard to see what he could have done better as regards the furniture and the property located hundreds of miles from his practice. He had no personal knowledge about the values and no immediate means of getting an informed opinion. The Revenue thought that he should have delayed matters until written professional valuations were received, but this to me seems to be the tail wagging the dog. If an executor wants to get on with his job, why should the Revenue stand in the way? It is therefore very pleasing to see the Revenue's case wholeheartedly thrown out by the Special Commissioner - and there was even, it appears, some hope at the end of the decision for the executor to recover his legal costs. It is plain to see who was the saint and who was the sinner in this tale, according to the Special Commissioner.

The wider issue

This issue brings into sharp focus the general policy of the Revenue to all returns which are submitted before their due date, including self-assessment returns. If these have to be corrected for some reason, the Revenue maintains that it is open to it to raise a penalty for an incorrect return, depending on the circumstances, even if the amendment is made before the filing date and all tax duly paid on time. This is a bizarre feature of our tax system and the sooner sanity is restored, the better. Penalties should be reserved for the sinners who need encouragement to comply with their fiscal obligations, not the saints who are more than eager to make honest and timely returns.

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