Lifetime Gifts (possible financial abuse by attorneys) and IHT403

I am dealing with an estate where partners in my firm are named as executors. The estate is subject to IHT.

Having requested the usual bank statements for valuation purposes a number of unexplained transactions became apparent.

In the 2 weeks prior to death £4,000 was withdrawn in cash. A further £500 was withdrawn the day after death (clearly not by the deceased!). The deceased was elderly and incapacitated (and not capable of leaving her home/hospital). The bank confirmed that there was a mandate in place enabling her EPA attorneys to access the account. The EPA was not registered. One of the attorneys has confirmed that she regularly withdrew monies on the deceased’s behalf.

Having noted these irregularities we then requested 7 years bank statements pre-death and have identified over £160k in unexplained cash withdrawals. Save for grocery shopping and discretionary spending, all the other usual expenses were covered by Standing Orders / Direct Debits. The deceased had little need for cash. Needless to say this has been raised with the attorneys who have been less than forthcoming with information. They are non-committal regarding gifts received.

Leaving aside the potential fraudulent use of the bank account (and we have not ruled out involving the Police), we now need return the correct information to HMRC.

Absent the attorneys supplying us with further and better particulars (unlikely), we are minded to simply declare all of the unexplained transactions to HMRC as gifts, with suitable explanation in the white space on the IHT400. We intend to deduct a weekly cash spend of £200 and deduct the full amount of annual exemptions.

Has anyone dealt with a similar scenario? I am anxious to protect the professional executors.

Thank you in anticipation of your assistance.

Paula Shea
Lester Aldridge LLP

Regrettably, this is not a particularly unusual situation.

I suggest that the estate, as currently known, is disclosed to HMRC with a “white space” statement that the executors are making ongoing enquiries about the nature of various, unexplained, withdrawals from the deceased’s bank account, and that further information will be provided to HMRC once those enquiries have been completed. This will comply with the obligation to disclose relevant information and avoid having to pay IHT up front if, in the event, the withdrawals prove to be justified.

To show the withdrawals as “gifts” will, in effect, penalise the residuary beneficiaries as additional IHT will be payable out of the residue by virtue of the reduced nil rate band. This could bring the executors into conflict with the residuary beneficiaries.

If the withdrawals might be classified as “gifts” which the attorneys have no authority to make, they are recoverable from the attorneys, unless the residuary beneficiaries of the estate decide to ratify them. Where the attorneys have no authority to make gifts, the value of any “gifts” purported to have been made should be added back in to the estate and, if ratified by the beneficiaries, are treated as a reduction in the residuary estate. Until ratified, the estate retains the right to recall the subject of the “gifts”. If the beneficiaries do not ratify the withdrawals, and the executors are unable to recover the monies, HMRC will usually allow the value of the estate to be reduced to recognise the lack of recovery.

Even though the EPA was not registered, the attorneys have a duty to account for their dealings with the client’s assets. Now the client has died, I believe the Court of Protection has no jurisdiction, and so if the attorneys are unwilling to comply with any request for an account, it will be necessary to apply to the County Court for an appropriate order.

Paul Saunders

We are dealing with a case where we believe the attorney withdrew up to £166,000 above the likely needs of the deceased. I advised the executors that this was a debt due to the estate and we declared it as such to HMRC and paid the tax on it. This was a very large estate and there were plenty of funds to deal with it in this way.

The £166,000 was withheld from the distribution of the attorney’s share of the estate. She has sent us information as to where the money was spent (landscaping the garden, repairing the barn etc) but not why it was thought appropriate for the deceased to pay.

In our case I don’t believe the deceased had the capacity to approve the expenditure at the time it was incurred. Unless you believe that your deceased did have such capacity, and intended to make the gifts,they can’t be valid gifts since the EPA doesn’t give power to make gifts. Accordingly, the withdrawals are simply improperly made and no matter the time which has ensued, are due back to the estate. HMRC ask whether a power of attorney has been used for exactly this reason.

Amanda Freeman

This seems to happening more often with Lay Attorneys (sometimes quite innocently).

I agree the Attorneys had no authority to make the “gifts” and therefore technically should be brought back into account. If the recipients of the “gifts” are one and the same as those that share the residuary estate, no one is financially disadvantaged if the Executors ratify the gifts and declare them for IHT. If the residuary beneficiaries are different to those that received the “gifts” then subject to the Executors completing their enquiries, they should be notified and potentially seek independent advice themselves.

Justin Wallace
Brewer Harding & Rowe