In these currently harsh economic times, it is clear that everyone is having to look at their own housekeeping and ensure their finances are suitably under control. Where necessary, things need to be re-arranged so that more disposable income is available.
HMRC is no exception to this trend and they are increasingly targeting the estates of wealthy deceased individuals in order to double-check whether there may, in fact, be a greater Inheritance Tax (IHT) burden on those estates than that originally calculated by the executors or their advisers. It has been reported that £326 million was collected by HMRC between March 2021 and March 2022 which was specifically as a result of targeted investigations.
Probate practitioners will certainly agree that the incidence of compliance checks instigated by HMRC has been on the rise in recent years, and this is set to continue on a heightened scale. It is therefore important to consider how best to minimise the likelihood that such checks are put in place.
Two of the areas which HMRC are increasingly focusing on are lifetime gifting and also the valuation of personal possessions.
In considering lifetime gifting, HMRC is very aware that it is for executors to make appropriate enquiries with the surviving members of the deceased’s immediate family and others. With this in mind, executors must ensure that they ask the right questions to the right people in the right way. In addition, it may well be prudent for them to obtain bank statements going back seven years so that they identify potential lifetime gifts themselves. Certainly, professional executors should be doing this as a matter of course.
With regard to personal possessions, HMRC know that it is difficult for executors to have full knowledge of personal possessions belonging to the deceased. This can be for a number of practical reasons such as not knowing which personal possessions did actually belong to the deceased or whether, perhaps, they were jointly owned with another person.
Consequently, HMRC are increasingly raising queries in this regard as they are alert to the fact that some personal possessions of value may slip through the net and not be disclosed. Again, executors need to make appropriate enquiries and also call upon the expertise of suitably qualified valuers where they judge it necessary. Of course making that call can be difficult, but it is advisable for executors to err on the side of caution.
That said, executors should be prepared to challenge valuers in order to verify that values proposed (whether for personal possessions or property) were realistically obtainable at the date of death. Executors should personally visit the deceased’s property as soon as possible after the death in order to take photographs so as to be able to compile a full and complete inventory. Of course, to the unpractised eye of an executor, it is difficult to know if an item is of any real value, but they should proceed cautiously so that if HMRC were to raise any queries they can at least point to the steps which they have taken. Keeping a contemporaneous record of those steps is vital.
As a general point, executors should bear in mind that an Inheritance Tax Account which is delivered to HMRC in a timely fashion and is well-presented with full, complete, and well-considered information will go a long way to reducing the risk of enquiries. In particular, it is worth remembering that values of assets can be marked as provisional and then confirmed at a later stage. This is preferable to rushing to include values which may not actually be accurate but presented as final. It goes without saying that care needs to be taken to avoid having any typographical errors, spelling mistakes, calculation flaws, or inconsistences in the Inheritance Tax Account which is submitted. Thorough proof-reading is crucial and will help to ensure that HMRC do not have cause to single out the Account for closer scrutiny.
Should executors find themselves subject to enquiries from HMRC, it is very important to enter into a prompt and transparent dialogue with them. HMRC are always at pains to emphasise that, whilst their role is to collect the right amount of tax due, they do approach cases with sensitivity and this is generally the case.
Of course, the fact that HMRC are increasingly looking to grow the IHT take is something for everyone to be aware of. Although there are some people who are comfortable with Inheritance Tax and see it as the way of contributing towards Government coffers to enable the country to run, others prefer to have control over the ultimate destination of their assets and paying significant Inheritance Tax (which is, after all, a tax on death) is not part of their agenda. For those people, looking at ways of reducing the Inheritance Tax liability on death prior to death is paramount. There are still a wide range of legitimate steps which individuals can take in order to mitigate the Inheritance Tax bill on death and these range from the simple option of making a gift and then (hopefully) surviving the requisite period of seven years to more complicated arrangements involving the regular gifting of surplus income and discounted gift trusts. There are also other rarely used exemptions allowed for in the Inheritance Tax Act 1984 such as the provision of maintenance or education for certain family members.
As always, individuals and executors should not hesitate to take professional advice on these sorts of matters as doing so will undoubtedly be more cost-effective in the long run.
Stuart Crippin, Partner, Seddons