Deceased Taxpayer’s Tax Affairs Not Up To Date – Time Limits & Penalties
Where a deceased individual’s tax affairs are not up to date, the executors have a duty to ensure that the discrepancies are reported to HM Revenue and Customs – but what are HM Revenue and Customs powers in this area?
1. Time Limit for HMRC to Raise an Assessment
The ordinary time limit for HM Revenue and Customs to issue an assessment is 4 years from the end of the year to which the return relates. However, where the loss of tax has been brought about deliberately or carelessly by the deceased, the time limit is extended to six years.
Therefore in the majority of cases, HM Revenue and Customs are likely to request that tax returns are made for the previous 4 tax years.
Furthermore, it is important to note that in the case of a deceased person, an assessment cannot made more than 4 years after the end of the tax year in which the taxpayer died (i.e. where the taxpayer died in 2010/11, an assessment may not be made after 5 April 2015).
Personal Representatives that have received a request to complete tax returns for a period prior to the tax year of death or a discovery assessment should always check to ensure that HM Revenue and Customs are within the statutory time limits.
Where tax was underpaid by the deceased, late payment interest will run from the due date until the date of payment (currently at the rate of 3%).
Therefore, where the Personal Representatives believe that tax is likely to be due they could consider making a payment on account in order to reduce the late payment interest due.
Historically, HM Revenue and Customs have levied penalties on the Personal Representatives where the deceased’s tax affairs were not up to date.
However, HM Revenue and Customs current practice accepts that applying penalties to the Personal Representatives breaches Article 6 of the Human Rights Act 1998 which states that everyone has a right to a free trial in respect of criminal charges (note – for the purposes of EU law, “civil penalties” that are calculated as a percentage of the tax due are classified as criminal and not civil charges).
Automatic penalties (ie penalties of a fixed amount rather than a percentage of the tax at stake) such as an automatic late filing penalties do not strictly breach Article 6. However, HMRC’s guidance suggests that in many cases it should be possible to appeal the penalties. The basis of the appeal will depend on whether the deceased died before or after the due date for submitting the return.
Therefore the personal representatives should not normally be liable to penalties in respect of any irregularities in the deceased’s tax affairs.
4. Going Forwards
The Personal Representatives are responsible for dealing with the deceased’s tax affairs for the year of death and for the estate’s tax affairs throughout the period of administration (either through a tax return or the informal information process for straightforward estates).
Where these obligations are not met, the personal representatives may be personally liable for the debts of the estate including any tax, interest and penalties.