The DIY executor: why ignorance of the law is no defence
In Usher and another v HMRC, the first-tier tribunal has ruled that a lay executors’ ignorance of the law is not a special circumstance under tax penalty regime.
If you’ve been named as an executor in a person’s will then in the months following the death you’ll be involved in the administration of the estate.
Executors can, of course, choose to go ahead without legal advice especially if the will appears to be uncomplicated and straightforward.
But beware you don’t fall foul of any Executors’ Liability through ignorance of the correct legal and accountancy procedures.
The deceased, Mr T. Guy, died on 15th October 2012 leaving an estate was worth £1.5M.
The executors (Usher) didn’t seek professional legal help. They submitted an inheritance tax return in January 2013 and applied for probate in February 2013.
The executors filed an annual self-assessment return for 2012/13, which covered the period from 6th April 2012 to the date of death, and wrote to the HMRC enclosing a cheque for £15,332.92 in September for the outstanding tax due, saying:
“I will have to presume this is in full and final settlement, as I am now proceeding to finalise and distribute the estate” to eight individuals and four charities named in Mr Guy’s will.
The executors proceeded with distributing the estate to the beneficiaries. A year later, HMRC raised queries on the accuracy of the income tax return, and sent a revised statement and penalty fine for the inaccurate return to the executors.
The executors complained about the delay in HMRC’s query. However, both the revised statement and penalty fine were maintained by HMRC.
Meaning the executors were now personally liable for the income tax bill due to the estate funds having been distributed to the beneficiaries.
The executors appealed to the tribunal.
The first-tier tribunal decided that lay executors' ignorance of the correct legal and accountancy procedures when administering the estate were not grounds for special circumstance that would result in a reduction of the penalty charged for under-declaring income tax liability of the deceased.
They did, in this instance, decided not to impose the penalty after taking into account the overall circumstances including the slow conduct of HMRC and the difficulty in retrieving the overpaid amounts back from the beneficiaries (in particular the charities) who couldn’t repay the money.
What this means for you
The judge's very critical view of the executors' unfamiliarity of legal and accountancy procedures acts as a warning to those administering estates without legal advice.
Had the circumstances been different, the penalty, outstanding tax and interest would have fallen to the executor for payment.
When deciding to “do it yourself” and not involve the professional legal services then the full process of making and dealing with claims against the estate will fall to you to administrate.
You’ll need to make sure the right amount of Inheritance Tax is paid on the estate by completing and submitting the final tax returns and place statutory advertisements for creditors – publishing notices in the London Gazette and in local newspapers where the deceased owned property.
What are the penalties for inaccurate tax returns?
Schedule 24 to the Finance Act 2007 (Schedule 24) provides that, where there is an error in a taxpayer's return, a penalty may be payable.
The level of penalty can depend on the behaviour of the taxpayer. The penalty tariffs for inaccuracies in documents for UK tax matters are:
- 30% of the potential lost revenue for a careless action
- 70% of the potential lost revenue for a deliberate but not concealed action
- 100% of the potential lost revenue for a deliberate and concealed action
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