Interest due on unpaid IHT

Trusts Discussion
1

The deceased’s estate was left on discretionary trust. The trust assets were appointed to a charitable beneficiary almost 12 months from the date of death, at which point they qualified for charitable exemption under s23(6)(a) and became exempt from that date. At the time the IHT400 was submitted however, the assets were not exempt.

Under s226(1) of IHTA 1984 inheritance tax is due six months from the end of the month in which the death occurred. Under s233(1) interest shall be borne on any amount of tax that is due but has not been paid. As this was not paid at the time, HMRC have charged interest on the unpaid IHT, notwithstanding that there is now no IHT liability (whilst s144 applies, there is no mirroring corresponding provision for income tax or CGT).

Is HMRC right to charge interest in these circumstances (and considering it has not been raised before in similar circumstances where trust assets were appointed out to a surviving spouse)?

Peta Shanks
Michelmores

2

s.144(2) states:

“this Act shall have effect as if the will had provided that on the testator’s death the property should be held as it is held after the event”

In which case, I do not understand how HMRC can assert that any interest can be due on the IHT that is no longer opayable.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

Our thoughts exactly. The case of Marshall (Inspector of Taxes) v Kerr is in point. To apply interest on a tax that is deemed not to have ever arisen is surely illogical and leads to an absurd result. We have never come across HMRC running this argument before, and wondered whether anyone else has.

Peta Shanks
Michelmores

4

I tend to agree with Paul’s response.

IHTA 1984 s 226(2) provides that “PRs shall, on delivery of their account, pay all the tax for which they are liable”.

If therefore by the date of delivery of the account a s144 appointment has been validly made (or a disclaimer or DoV) then the effect of the appointment may mean that no IHT arises on death and thus no late payment interest under s. 233 would seem to be chargeable for failing to pay IHT within the six month period post death which is not in fact due.

If, however, by the date of lodgement of the account by the PRs no s144 appointment has been made then any IHT due but which had not been paid within the six months deadline would give rise to late payment of interest charges.

If a s144 appointment was made say 15 months after death as a result of which no IHT fell due on death then again no late payment of interest would arise although presumably late filing penalties would be in point.

Malcolm Finney