Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the inheritance tax (IHT) implications of ‘compensation’ being paid by a bank to an estate that had been wound up.
The tax query
‘We acted for an estate that was wound up and distributed eight years ago. Inheritance tax was payable on the estate.
Out of the blue, we have received a letter from a major high street bank saying that it has reviewed the bank accounts the deceased had been advised to invest in, and believes incorrect advice was given. Had the correct advice been given, the deceased would have been £35,000 better off. Therefore, the estate is now to receive £35,000 as compensation.
Do readers consider the receipt is subject to IHT or is it outside the scope as it was not an asset at the date of death.
If it is not with the IHT charge, is it subject to income tax? Or can we ignore taxation and distribute?’ Query 20,640– Windfall.
Terry Jordan’s reply: HMRC should be informed of the receipt
‘The relevant statutory provisions pertaining to this query were considered in the recently reported First-tier Tribunal case of Richard Thomas as the executor of the will of Eunice Thomas (deceased) (TC9716), with the judgment delivered on 11 December.
In that case, Mr Thomas contended that an income tax repayment did not form part of his late mother’s estate for inheritance tax purposes.
In summary, tribunal judge Blackwell held that the operation of IHTA 1984, s 171 caused the refund to form part of the estate and that the relevant valuation point is the open market value at the time of death. At the point of death, the amount of the tax refund was calculable. The open market value would be approximately equal to the value of the refund.
In Windfall’s case, the receipt of compensation was not in contemplation when the estate was wound up.
We are not told if a certificate of clearance was obtained by the personal representatives but, even if it was, it would not necessarily prevent HMRC from collecting additional inheritance tax as this is an additional asset, not an increase in value of an asset originally disclosed.
HMRC’s Inheritance Tax Manual at IHTM40142 says:
‘In general, you should seek to recover tax in full at the title at which the additional assets have been disclosed. You may also need to consider the possibility of a penalty.’
And at IHTM30461:
‘Similarly, where an account has been delivered but which omitted an asset that is later disclosed, IHTA 1984, s 240(2) does not apply (as the tax attributable to the value of the undisclosed asset cannot have been paid in accordance with the account that was delivered). And for the same reason the time limits in IHTA 1984, s 240(4) and (5) cannot apply.
‘As an omitted asset does not fall within IHTA 1984, s 240(2), it is the twenty-year time limit under IHTA1984, s 240(7) that applies; so generally, with an undisclosed asset where the loss of tax was not brought about deliberately, the tax may be recovered up to twenty years after the date of death. But in the event that omission, and so the loss of tax, was deliberate, there is no time limit for the recovery of the unpaid tax.’
Accordingly, it appears that HMRC should be informed of the receipt.
So far as income tax is concerned, I understand it is anticipated that money received under the car finance redress scheme will not be liable to tax and that a liability arose on the statutory interest at 8% paid on PPI compensation (but not on the compensation itself), which was taxable as savings income.’
The full article was published in Taxation magazine (issue 5016) and is available to subscribers here on the Taxation website.
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