HMRC get tough on Inheritance Tax

HMRC get tough on Inheritance Tax

Compared to the normal tax investigations that come past my desk on a daily basis it is rare to see in-depth investigations arising on a routine basis from inheritance tax returns.

It is now shown that investigations into those bereaved families have increased greatly over the last year. These errors may be because families misunderstand the complex IHT rules or are they actually trying to avoid paying the full amount of inheritance tax due. Whilst I would always advocate using a solicitor, people may balk at this as this can be costly. However, it can be far more costly to deal with HMRC when they start making enquiries into the assets declared.

Quite simply put, the first £325,000 of someone’s assets can be bequeathed tax-free above this level all assets are taxed at 40% and this new rate band of £325,000 has been frozen since 2009 and is now set not to rise in the near future thus bringing in many more people into the inheritance tax net.

There is of course an additional allowance of £175,000 when the family home is left to the direct descendants such as a child or a grandchild. Also, spouses and civil partners do you not generally have to pay inheritance tax on any assets transferred to them on death.

This still leaves many thousands of people facing what can be a large bill.

HMRC use its database called ‘Connect’ to access a huge amount of personal information about the deceased and the family. HMRC could have access to all of your property details, bank accounts, and insurance policies and can build a pretty clear picture of the family finances from this. If they believe the inheritance tax returns do not match what they hold on to their system (and what is basically in the public domain) they can open an investigation.

The timeframe for raising such an investigation is much shorter than that for a tax investigation and you would normally expect to receive a letter within a few months of filing and paying your inheritance tax. You are not than sitting around for a year wondering whether the brown envelope will land on your mat. The letter may query valuations or assets omitted. Sometimes these queries are easily resolved when HMRC may believe there is a large amount of funds held in a bank account, but this could have been spent away latterly by the deceased. Likewise, assets may have reduced in value.

As most people know gifts can be given to family or friends to potentially reduce the inheritance tax bill, but these gifts are normally only tax-free if handed out more than seven years prior to the death.

It is therefore imperative that you will keep a record of gifts as given. Insurance policies very often specify valuable items of jewellery and HMRC will now be looking out for these on the inheritance tax returns and this is one particular area that can easily be forgotten.

With tax any errors can be subject to penalties which could be up to 100% of the tax found to be due. It is therefore incumbent upon us all to keep our eye on the family heirlooms and bring everything into account if you are dealing with the inheritance tax return.