Inheritance tax has some unique rules regarding remedying defective returns. Under IHTA 1984 s.217 the error must be fully reported to HMRC within 6 months of it being discovered by the taxpayer. Irrespective of when the original return was due.
If, HMRC are out of time to recover the then they will also be unable to charge a penalty.
Regarding liabilities. HMRC have 4 years to take proceedings where there has been an error, increasing to 6 years and 20 years if careless behaviour or deliberate behaviour is involved respectively.
Under the rules in IHTA 1984 s.240(2) where a return is submitted and tax is paid, the beginning of that period is from the later of
(a) “the date on which the payment (or in the case of tax paid by instalments the last payment) was made and accepted, and
(b) the date on which the tax or the last instalment became due;”
However, the taxpayer has not paid any tax on the estate so that period has not started yet. In a situation where no return was made or if a return was made, no tax was payable IHTA 1982 s.240(6 and 7) gives HMRC up to 20 years from the chargeable transfer to open an enquiry unless this was brought about deliberately in which case there is no time limit mentioned.
HMRC’s underpayment proceeding regarding this can be found in IHTM30462
In your client’s case so long as the personal representatives did not deliberately omit the asset, then your client should face no penalties relating to the original error. Additionally, they will not need to pay the original unpaid tax and interest. However, it is important to note that notifying HMRC under IHTA 1984 s217 is still required even if you believe the tax due cannot be recovered based on the above time limits.
If for any reason the remedy return is not delivered to HMRC within 6 months of the taxpayer realising, then penalties will be due under IHTA 1984 s.245 for the late remedy return – but again, if there is no liability there can be no penalty.
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