This is one of the most frequent comments I hear when discussing Inheritance Tax with clients. The simple answer is that if H M Revenue and Customs don't know, they are entitled to ask, and your Executors are obliged to answer.
Nobody likes to pay unnecessary tax. Wouldn't it be nice to give it all away, and leave nothing to be taxed? Of course it would, but unfortunately this is rarely possible. Many people think that they can just cross their fingers and that no questions will be asked.
Inheritance Tax will be charged on the value of your estate which exceeds the threshold in force at the date of death, unless the estate passes to charity, a civil partner or a spouse. Currently this threshold is £325,000. For the purposes of calculating whether this tax is payable, the value of all gifts (less any appropriate exemptions) made in the 7 years before your death will be included.
Before your Executors can distribute your estate to your loved ones, they will have to apply for a Grant of Probate. This is the court authority allowing the banks, building societies and any other institution to accept their instructions. When making the application for the Grant of Probate the Executors must swear an oath that they are providing accurate information. If the Executors knowingly swear a false oath they are committing perjury which carries a penalty of up to 7 years in prison.
Alongside the oath, the Executors are required to complete an inheritance tax form, which asks for full details of the estate, including gifts and any overseas assets. The Executors are required to use their best endeavours to find out the necessary information. Ignorance certainly is not bliss, negligence is unforgivable.
Recent court cases have shown that H M Revenue and Customs are increasingly questioning the information on the returns submitted by Executors. Examples include challenging property valuations, attempts at limiting the exemption for businesses and questioning the figure given for the contents of a property. Even when the matter does not reach the courts, the Executors may find themselves entangled in lengthy correspondence to justify the account. Tax evasion can result in a fine, and if serious enough, a prison sentence.
So, who will ever know?
Whether or not you tell your Executors about your financial position before the date of your death, they must make full enquiries after to check whether this tax is payable. You choose your Executors because you trust them. Hopefully they will trust you too, not to ask them to lie to H M Revenue & Customs.
For more information contact me on firstname.lastname@example.org or one of the Probate, Trust and Wills team.