HMRC investigations- what are they and why are they on the rise?
Posted on 24th April 2023 at 11:41
The HMRC are responsible for assessing all taxable estates and considering whether the correct information has been submitted, and tax paid.
According to reports in the Financial Times and The Telegraph, Inheritance Tax investigations brought in an extra £326 million in the year to March 2022. This was an increase of 28% on the previous 12-month period.
It has recently been reported that the HMRC has taken approximately £700 million in inheritance tax payments over the last 5 years from 2100 families following in depth investigations into the estate and reporting. This is largely down to the increase of asset values, freezing of inheritance tax exemptions since 2009, and ‘simplification’ of probate processes resulting in more families attempting to deal with complex rules and applications themselves.
The HMRC take in inheritance tax is higher than it has ever been with The Office for Budget Responsibility forecasting the HMRC will generate £7.2 billion in inheritance tax, this year alone. It is clear that inheritance tax is no longer a tax simply for ‘high net worth’ individuals.
The current inheritance tax threshold for an individual is £325,000, rising to £500,000 if the deceased has a residential property which is left to a direct descendant.
Some of the families that afoul of HMRC regulations had attempted to utilise lifetime gifting to avoid the 40% rate of inheritance tax on death but did not survive 7 years from making the gift.
It is widely understood that if a lifetime gift is made, as long as the donor lives 7 years from making this gift, the sum is outside of their estate for inheritance tax purposes.
However, it is less understood that if the donor continues to derive a benefit from the asset gifted, then it is included in their estate for inheritance tax purposes. This is known as the ‘gift with reservation of benefit rules’ and applies to gifts made following 1986.
A common example is where a parent gifts their property to their children but continues to live in the property. In order to not fall foul of the gift with reservation rules, the parent must pay a market rent to the children, which most find undesirable.
There is an argument that the 7 year rule is too long, and makes recorded keeping too difficult for families but there is no indication that this rule is to be amended.
More complex rules can apply to determine whether a gift is a potentially exempt transfer, chargeable lifetime transfer or a gift from income. Taper relief, where a lower rate of inheritance tax applies, can also apply. It remains important to take legal advice from a specialist in the area.
As the effect of freezing exemptions and increasing value of assets affects more and more families, more families are considering gifting cash and assets to sidestep the death tax as well as assisting younger generations to get a foot onto the housing ladder or set themselves up in life.
We can therefore only expect to see more families and individuals failing to take the all-important legal advice and undertake appropriate estate planning measures resulting in unintended inheritance tax consequences.
The HMRC has a dedicated taskforce that targets wealthy estates and individuals. ‘Wealthy’ estates/individuals are those with an annual income exceeding £200,000 or holding assets of over £2 million.
Investigations can be opened where the HMRC believes an honest mistake has been made, or a return has been made fraudulently or dishonestly, deliberately.
What are the HMRC looking out for?
Amongst other things, the HMRC keep close eye on the following:-
• Property values
• Antiques and artwork
• Lifetime gifting.
How log do investigations last?
Unfortunately, the answer to this question is ‘how long is a piece of string’ with many investigations dragging into months and even years. The length of time it takes to close an investigations can depend on the circumstances and the cooperation of all of the involved parties.
Powell Eddison can assist you with all of your estate planning requirements to include:-
• Deed of variation
• Taxable estate and HMRC compliance checks
At Powell Eddison our team of specialists can also provide advice about Lasting Powers of Attorney, Trusts and estate administration and more.
Contact us on 01423 564551 or email us at firstname.lastname@example.org to arrange your free initial, no-obligation consultation with a specialist.
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