HMRC steps up its investigations on inheritance tax: What it means for clients

The Telegraph recently reported that HMRC is “targeting bereaved families with a raid on inheritance tax after it clawed back a record £326m through investigations last year”. This will be a worry to many families, given that Inheritance Tax (IHT) is arguably no longer just a tax on the super wealthy.

With house prices having increased so much over the years, many estates comfortably exceed the tax-free nil rate band, which has been fixed at £325,000 since 2009/10 and will continue to be fixed until at least April 2028. Some families may be helped by the additional residence nil rate band, if the conditions are met, but this only provides an additional £175,000 allowance (which is also fixed), or a maximum of £350,000 for married couples or civil partners. The benefit of this additional allowance is in any event gradually withdrawn for estates exceeding a value of £2m.

Estates with a total asset value of over £2m have been identified as those which will attract more scrutiny from a dedicated investigations team at HMRC. The tax authorities are under a lot of pressure at the moment to tackle tax avoidance. However, in many cases, it is likely that families have not knowingly misled HMRC or withheld information. More probable is that when dealing with the administration of an estate and the mammoth task of fact-finding in order to complete the IHT papers, they slip up, or at least struggle to report values with accuracy or complete confidence. This all points to the need for HNW clients to take expert advice in relation to the probate process.

A particular area of difficulty, which is flagged in the Telegraph article, is gifts made within seven years of death. The level of such gifts can have a significant bearing on the IHT payable, but it is often a difficult area for personal representatives to tackle. In most probate matters we deal with, we find that the deceased did not keep clear records of gifts made. To conduct a thorough analysis essentially relies on someone recalling that gifts were made, alongside an exercise of trawling through the deceased’s bank statements to try to identify any gifts.

Another area it is easy for personal representatives to fall down on, particularly when they have not instructed a solicitor to assist with the estate, is valuing assets. HMRC will look very closely at property values. We therefore recommend a RICS valuation rather than relying on estate agent appraisals.

In addition, it is essential to show that similar care has been taken to value personal chattels such as paintings and jewellery. It is all too easy for families to insert an approximate total figure for chattels on the relevant IHT form. If, however, there is any question as to whether an item might be of value (i.e. over £1,500), it is advisable for that item to be individually valued by someone appropriately qualified.

There is little that can be done about HMRC looking at estates more closely with a view to recovering more IHT. However, advisers in the wills and probate area should be warning clients of the risk of HMRC investigation and encouraging them to take best practice steps to mitigate against a future swoop or worse a fine and unplanned for liability. These steps include:

• Ensuring that, where possible, an accurate written record is kept of any gifts made during lifetime
• Having a valid, professionally drafted will in place which is structured so as to take advantage of any IHT exemptions, makes wishes completely clear, and appoints appropriate people as executors
• Ensuring executors are encouraged by the family to take legal advice when dealing with the administration of an estate. They can then show to HMRC that considerable care has been taken when preparing the IHT papers
• Nevertheless, executors should always read the declaration they will have to make in the IHT return, understand their responsibilities and only submit the IHT return when they are confident they have satisfied their obligations
• Once the value of the estate has been ascertained and all IHT has been paid, an application to HMRC should be made for a clearance certificate using form IHT30. Clearance from HMRC confirms that no further tax is due, albeit it is important to note that this is subject to certain conditions, so it does not completely guarantee that the estate will not have to pay more tax later on

Given that IHT is increasingly a target area for HMRC, there is a responsibility on us as advisers in the wills and probate area to ensure that our clients are not unwittingly the subject of a future investigation.

By Stephanie Mooney, a Senior Associate in the Private Client team at law firm Kingsley Napley LLP