Benjamin Franklin told us that in this world nothing is certain but death and taxes. The question then is — does dying get you off the hook?
Sadly the answer is No. Just because you die your tax affairs don’t close down. This is especially important if you die with something awry. Those left behind will have a mess to clear up.
Since our firm helps people who have been selected for tax investigation, we see people when they are at their lowest ebb. Worn down by worry and HMRC’s questioning they can become incredibly stressed.
Sometimes they have health problems and say that if they get ‘called upstairs’ then that would be a welcome end to the matter. We have to tell them this is not the case. A tax investigation can continue long after you have died.
Perhaps more worryingly a tax investigation can be started after death. So anyone who thinks their premature death will solve their tax worries is just plain wrong.
There are a number of scenarios where post-death tax administration can be something to think about.
Take the example of someone with hidden savings derived from their business. Savings on which they have not paid the right tax since they did not declare that part of their business income.
If they die then someone will have the job of tidying up their affairs. Typically an executor or personal representative.
This person may come across the savings. The money (or property) will form part of the value of the estate to be declared for inheritance tax and probate purposes.
If the executor has reason to believe the right tax was not paid on it then there is a duty to inform HM Revenue & Customs.
HMRC will then undertake some form of enquiry and ultimately want some money to make up for the tax they were denied. Interest and penalties may be added. This could make for quite a dent in the estate.
Staying with the same example what if the executor does not put two-and-two together and realise tax may have been evaded?
The account could yet come to the Revenue’s attention — leading HMRC to launch an investigation into the lifetime tax affairs of the deceased.
Sometimes HMRC examines the figures submitted for inheritance tax purposes to see if they seem logical for the person who died. If the person has an unusually large amount of money or property this can lead to a tax investigation.
The third scenario involves a person whose tax affairs are a mess on the day they die. They might have large tax bills based on the tax return they recently submitted. Or they could be in the middle of a tax investigation. Either way their death will not close anything down. Tax debts will be a liability of the estate, so if there are assets to that value then the tax-man will probably get his money.
As for a tax investigation (now called a tax enquiry so as not to scare the horses) then all carries on as before. Of course it may be harder to provide the answers the Inspector is seeking, but the executor(s) will have to try.
Let’s now consider the position where, sometime after death, HMRC suspects that they have not been paid the tax they should have been.
If they believe this is due to the “fraudulent or negligent conduct” of the deceased then they can raise a tax assessment.
The presence of the word negligent is important here. This means HMRC can get their tax if not enough was paid due to negligence. So there does not have to be a person guilty of hiding money from the tax-man.
Thankfully HMRCs powers to raise a tax assessment on the tax affairs of a dead person are time-limited. After a period it becomes too late for HMRC to get the tax.
The time limit is set in stone but is a bit complicated to work out. The definition is three years from January 31 following the year of assessment in which the person died.
Let’s make that easier to understand. Take the date of death. Work through to the end of that tax year — April 5. Then work through to January 31 after that. Three years from then is the last day HMRC can assess tax for the pre-death period.
A couple of examples will help.
John dies May 20, 2009. Tax year ends April 5, 2010. Three years from following January 31, 2011 makes for January 31, 2014.
So Mr Tax-man could come after the tax anytime up to January 2014 — almost five years after John’s death.
Jane died February 1, 2006. Tax year ended April 5, 2006. Three years from January 31, 2007 is January 31, 2010. So Jane’s tax affairs could still be opened up if HMRC suspected fraudulent or negligent conduct. Come February 2010 if HMRC hasn’t got its act together then the matter is as dead as she is.
Finally, assuming the tax people are raising these tax bills on time, how far back can they go? They can go back six years before death.
In John’s case his date of death is predicted in 2009/10. HMRC have until January 31, 2014 to raise tax assessments from 2003/04 to 2009/10.
Jane died back in 2005/06. Tax assessments made by January 31, 2010 could go back as far as 1999/2000.
Unless the dead person was a director HMRC cannot go back further, unless the personal representatives voluntarily want to pay that older tax.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.huston.co.uk or 028 9080 6080