Section 247 of the Inheritance Act 1984 (IHTA) provides that anyone who fraudulently or negligently submits an incorrect account, information or document to the Inland Revenue shall be liable to a penalty.

In Robertson v IRC [2002] STC (SCD) 182 one of the special commissioners quashed the imposition of a penalty on a Scottish solicitor, awarding costs against the Revenue. The same commissioner has upset another penalty in Cairns v HMRC [2009] UKFTT 00008 (TC).

The commissioner had two grounds for dismissing the penalty.

First, the summons issued by the Revenue was insufficiently specific. Apart from attaching extracts from the relevant legislation, the summons, which the commissioner described as having ‘the flavour of a summary criminal complaint’, contained no further specification whatsoever of how or in what respect Mr Cairns had acted fraudulently or negligently.

The account or document to which these allegations related was not even identified. It was irrelevant that the notice had been preceded by lengthy correspondence. An initiating document, be it summons, summary complaint or indictment, must set out the parameters of the enquiry, and the essential facts and basis in law on which a public authority relies. If it does not do so, there is bound to be significant prejudice or the risk of such prejudice. It cannot be determined where the enquiry will begin or end.

Second, the commissioner said that he would in any event have dismissed the case on its merits.

An individual who later died was not capable of managing his own property and affairs. He was residing in Roslynlee Hospital, but was anxious to return home to Stonefield, which he owned. Mr Cairns was asked by Midlothian Council to act as the individual’s guardian.

He obtained a valuation of Stonefield in January 2004 of £400,000 but this was stated to be an ‘arbitrary figure pending investigations as to costs involved in upgrading’. The property was in a terrible condition, suffering from wet rot, dry rot, rising damp and structural defects in the roof. Mr Cairns spent some money making one room habitable, and the owner did return home but died in October 2004.

Mr Cairns submitted a form IHT 200 in which he valued Stonefield at £400,000 and paid the tax due at that point. He was uncertain of the true value of Stonefield but considered that the sale price would probably be agreed, in due course, with the district valuer, to be the date of death value.

He considered it unnecessary to go to the expense of obtaining a further valuation, which would probably be heavily qualified and not necessarily any more accurate than the existing valuation. There was no evidence of any significant increase in the value of properties in the locality between January and October 2004. He did not describe the value attributed to Stonefield as a ‘provisional estimate’, something which the commissioner described as ‘in the circumstances, careless’.

There were difficulties selling the property and HMRC was informed, responding that the district valuer ‘must still consider the date-of-death value... regardless of any subsequent sales. But he will of course take the (sale) into account when considering his values’. Stonefield was subsequently sold for £600,000. Mr Cairns sent a cheque for the tax, based on an HMRC estimate of the tax due. There was still some doubt as to the full extent of the deceased’s estate and, in the event, some tax was refunded.

HMRC argued that Mr Cairns should have obtained another professional valuation. However, the commissioner described this is bare assertion. The mere failure to obtain another valuation, when it had not been established that a second valuation would have led to a different figure being inserted in the statutory form, did not constitute negligent delivery of an incorrect account. It could not be suggested that a prudent personal representative, or even a solicitor acting as such, should have foreseen when completing the statutory form that Stonefield was likely to sell for £600,000.

The commissioner said: ‘Negligent conduct amounts to more than just being wrong or taking a different view from HMRC.’

The only respect in which it could be said that the account had been negligently furnished was the failure to describe the value as a provisional estimate. Omitting to do so was a careless error. However, the commissioner said that it was ‘minor, technical and of no consequence whatsoever’.

It had no effect on the dealings between HMRC and Mr Cairns as executor. Stonefield was sold. HMRC was kept informed. In effect, the Revenue reserved its position as to whether it would regard the sale price as the date-of-death value. The tax was duly paid, indeed overpaid, and a refund eventually paid to the deceased’s estate.

Turning to another case, Margaret Lau v HMRC SpC 740 18 March 2009 is a salutary reminder of the perils of IHTA, notably section 142(3) of the act, which provides that the reading back effect of section 142(1) ‘shall not apply to variation or disclaimer made for any consideration in money or money’s worth …’

The deceased had died with a gross estate of £7m, leaving legacies of £665,000 free of tax, to his two daughters and one stepson and the residue to his second wife. After grossing up the legacies and paying the tax due, the second wife would be left with £3m.

Mrs Lau’s advisers realised that IHT could be saved if the disposition of the estate was rearranged. They wrote to the children, suggesting that ‘an enhanced figure can be paid if what is known as a Deed of Variation is entered into. We enclose for your consideration a draft deed of variation. The document indicates that each of the three beneficiaries renounce the bequests which are made to them. In the event that such a document is agreed, signed and accepted by the UK tax authorities, then the appellant will pay each of the beneficiaries from her own resources the sum of £1m net.’

The daughters varied and the stepson disclaimed. HMRC refused to allow reading back. It was agreed that the variation entered into by the daughters was caught by section 142(3) but Mrs Lau argued that the gift of £1m to her son was made partly as a wedding gift and partly in pursuance of a previous agreement to finance her son in the pursuit of business ventures and had no connection with his disclaimer of the legacy.

The commissioner rejected this argument as unsubstantiated by the evidence.

Professor Lesley King, College of Law, London