I have an estate where one of the assets included was the winter fuel allowance, which was £300 in 2021 when the deceased died. The estate was liable to tax.
I have written two letters and have telephoned DWP but after hanging on the phone for some time, I failed to get to speak with anybody. Consequently the £300 has not been paid to the estate. I am now about to submit a corrective account, and I would like to know what others feel if I was to include this asset as having a nil value, thus obtaining a refund of £120 (it is not the only item needing to be included). My feeling is that already my costs for chasing after this have eaten well into the net amount (after tax) of £180. Of course, the possibility is that after I have completed the administration, payment will turn up and with there being nine residuary beneficiaries, the cost of accounting to them would probably be greater than £300. I will suggest to them that we donate it to charity.
The estate is made up of assets held by the deceased (or to which he/she was entitled) at death. You cannot deduct the costs of administration, so I’m afraid your £300 remains an asset which increases the value of the estate.
I agree with Julian that if there is an entitlement to the WFP it is an asset at the date of death reportable for IHT which is then the responsibility of the Executors to collect in. If the executor makes a commercial decision that it is not worth pursuing that is an administrative decision which does not change the position at death
Hi Julian,
I am not proposing to deduct administration costs, but merely stating that the £300 due to the estate has not been received despite all reasonable efforts having been made, and I would intend elaborating on point to HMRC Inheritance Tax.
What we need is a “reverse GAAR” to give lawful statutory powers to HMRC to override the strict law when the taxpayer has carried out a reasonable act, or a reasonable state of affairs subsists as in Patrick’s case, but the law’s strict application would result in an outcome that is not reasonable.
This would have been useful in the case of Mr Lobler (2013) UKFTT 141. He invested $1.4m in a series of insurance bonds (i.e policy wrappers) and made partial withdrawals of $1.3m. Because he did so by partial, as opposed to total, surrenders that amount was taxable in full as income i.e. $560,000. The Tribunal said: “He made no profit or gain as that term is commonly or commercially understood and yet he becomes liable to pay tax which exhausts his life savings and may bankrupt him. That is an outrageously unfair result…The appeal takes place at a time when there is great media and political 20 comment about a fair tax system. That interest focuses on the avoidance of tax by those who have substantial income, but to our minds it is more repugnant to common fairness to extract tax in Mr Lobler’s circumstances than to permit other taxpayers to avoid tax on undoubted income”. On appeal (2015) UKUT 152 rectification of Mr Lobler’s surrenders was allowed on the grounds of mistake. It was not found necessary to consider Judicial Review. Rectification is a discretionary remedy so uncertain of availability. It also introduces an element of discretion, of the Tribunal rather than HMRC, which as to tax is arguably close to unconstitutional. Most prefer to be taxed by law not untaxed by discretion or HMRC concession. The law indeed was later changed to prevent a recurrence.
Though I do not have a reputation for commiserating with HMRC they were in an acute dilemma, especially given the torrid ride that Dame Margaret Hodge’s PAC was giving them at the same time for sweetheart deals with big corporates. Was it Wednesbury unreasonable for them not to amend Mr Lobler’s return, given the huge numbers. and if they had could that have been challenged on the same basis e.g. by the Good Law Project or similar.
It is probably asking for the moon for a “reverse Ramsay” right though apt in Lobler’s case. A statutory reverse GAAR would not be open to JR in principle; no statute properly enacted is, only its unreasonable positive or negative application to given facts. It would also avoid HMRC’s exposure to, and taxpayer disgruntlement with, HMRC’s making ultra vires extra-statutory concessions (ex parte Wilkinson (2005) UKHL 30). It would allow HMRC to tell Patrick to forget the £300 on the grounds that given the related costs the outcome of not doing so was not reasonable whereas doing so patently was. I do not ignore the fact that HMRC might have, might even claim, an inherent jurisdiction to do this under their general care and management powers but would it not be better if they could make a statutory based decision appealably by either party?
What is the objection to the GAAR being reciprocal? Well more or less, like the different rates of interest on late paid tax and repayments.
As usual, Jack, you provide a very interesting view on matters such as this. As others may realise, what I am trying to demonstrate is that on the one hand, you have a government department, which, being dilatory in carrying out its duties, does not pay the debt owed to the estate, whereas on the other hand, HMRC takes the line that you must nevertheless pay tax on that asset even though you have taken reasonable steps to recover it, and to take any further steps would result in a loss to the estate because of costs.
Unfortunately, I do not think that pursuing the matter based on the following extract from HMRC’s manual would help even though it should!
“# IHTM19010 - Capital debts due to the estate: introduction
The Law says that if the deceased had any debts owing to them at the date of death it must be assumed that the debt (and any interest repayable on it) will be repaid in full. On this basis the full value of any capital debt outstanding, together with any interest due at the date of the deceased’s death, must be included in the Inheritance Tax account (IHTM10021), as an asset of the estate (IHTM04029)
But, if it is impossible or not reasonably possible for the money to have been repaid, a reduced figure may be included in the account. If a reduced figure is included in the account, the taxpayer or agent must also explain why a reduced figure has been shown and how it has been calculated. They must provide any evidence they have to support the reduced amount.”
Given the amount and the circumstances HMRC might agree to exclude it if the right to it is not pursued (entirely justifiable to clients on cost-effectiveness grounds). As I hinted they may accept that they have limited authority to do that.
HMRC has confirmed that the concession for trusts in receipt of small amounts of interest income has been extended to include the 2021/22 and 2022/23 tax years. Under the arrangement, trustees and personal representatives are not required to submit tax returns or make payments under informal arrangements where the only source of income is savings interest and the tax liability is less than £100. (Trusts and estates Newsletter May 2021).
They are obviously not troubled by Wilkinson in offering this.
There are times when the distinction between an asset’s taxable “market value” and the non-deductible “administrative expenses” in realising the value appears very grey and unprincipled, and I sympathise with Patrick’s view though I’m not sure HMRC would.
I wonder if there is any prospect of arguing that the true market value of the debt due from DWP is in fact less than £300 and possibly nil. I may perhaps have detached myself from the realities of (sometimes unprincipled) tax law but in real life, the market value of a thing is based on what a willing buyer would pay, and will necessarily take account of the costs and risks involved in realising the asset. If all debts (even immediately due debts) had a value equal to their repayment value, there would be no debt re-sale industry.
I expect HMRC would assume that where a debt is due immediately from a solvent debtor (e.g. the DWP) then the market value must equal the face value, but I suspect no open-market buyer would pay £300 to acquire the rights under this debt.
It’s not entirely impossible that at some point the DWP will realise they haven’t dealt with it and the £300 will be received. From personal experience we had that happen where the executors gave up on an arrears of state pension or AA only for it to be paid some months (around 16 from memory) later
The issue of the “open market value” of the DWP’s debt is intriguing. As Danckwerts J said in re Holt we “must enter into into a dim world peopled by indeterminate spirits of fictitious or unborn sales” (SVM113050). The sale is indeed a hypothetical transaction but the asset is real and valued as is. Lord Reid in Buccleuch said that even a “small expense in minor cleaning or repair” which might considerably increase the price cannot be presumed. There are some things that the hypothetical willing seller can be expected to do as regards grouping and dividing but only as regards IHT (death and “loss to donor” lifetime gifts) as in A-G for Ceylon v Mackie (SVM113090).
One attribute of the real asset that must be ignored is its being “inherently unassignable” per Lord Hoffman in IRC v Gray (SVM 113020). But the hypothetical willing purchaser only gets to “stand in the vendor’s shoes”, most commonly as regards restrictions on share transfers which he will be subject to after acquisition (SVM113040).
Is the DWP debt “inherently unassignable”? It apparently does not matter but the price will be affected by what rights the purchaser can obtain. It probably is not but no doubt DWP will only pay the creditor or his PRs. It is usually feasible for a vendor to effect an equitable assignment (not a legal one under s136 LPA ; notice to the debtor would be nugatory if DWP could not lawfully pay the assignee direct) or declaration of trust but does this fall foul of what Lord Reid said above? Is it to be supposed that this might be hypothetically expected of the vendor? Surely not save in IHT cases where the whole estate is to be valued. Would this degree of co-operation by the vendor be merely the essential means of conveying title pursuant to the concluded sale rather than an improper advance titivation of its subject-matter? I suspect that these uncertainties might substantially reduce what a hypothetical purchaser would pay, but perhaps not much if the perfecting of his title does not affect the issue or indeed is to be even expected.
While not strictly relevant to the query Lord Hoffmann did not refer to an asset which is forfeited if an attempt is made to transfer it.
I was once embarrassed by advising a client that pre-emption provisions could be sidestepped by a declaration of trust only to be passed a copy of the Articles which applied forfeiture. In that case the price for the hypothetical sale, if it still has legs, would surely be a peppercorn as no one would want to stand in the vendor’s shoes if he acquired no shoes at all.
Just to bring this to a conclusion, lo and behold, a claim form arrived yesterday from DWP, approximately one year after I originally wrote to them. I had just finished preparing the corrective account and a covering letter which I have now scrapped. As a result I will never know if HMRC would have accepted my claim but I suppose there will always be a next time!