HMRC squeezes more inheritance tax from middle classes

HM Revenue & Customs has announced that it will be investigating families who use the seven-year gift rule to reduce their Inheritance Tax bill. This comes at a time when the international trend is towards dropping estate taxes rather than raising them and shows that the Treasury is looking to recover yet more from Inheritance Tax, despite the Government’s claims to the contrary.

HMRC will be examining Forms IHT200 received on death. IHT200 is the Inheritance Tax Return which has to be filed by Personal Representatives before Probate can be granted.

It is difficult to estimate how much more tax will be collected as a result of this drive, but it is unlikely to be popular with the middle class families who are most likely to be affected.

HMRC will be looking at aspects of estates which they know can give rise to lifetime transfers and they intend to collect penalties if there has been negligence in completing the IHT200. The non-exhaustive list they give of transfers includes:

Joint assets – Gifts can arise on a transfer into joint names, or where a joint owner receives the benefit of withdrawal from accounts funded wholly by the deceased. Where information is unclear or incomplete, HMRC will seek an explanation of what has occurred or ask for further information. This will increase the expense and inconvenience for the Personal Representatives, and records will have to be kept for far longer than would normally be the case.

Loans – It has always been the case that gifts can arise on the forgiveness of a debt or part of a debt but HMRC have made it clear that they will now be looking carefully at loans.

Movement of funds between multiple bank accounts – This is another area where HMRC will be raising enquiries. The HMRC say that this can lead to gifts being overlooked, although this seems unlikely.

Inheritance – HMRC say that gifts can arise if there have been re-distributions of property inherited by the deceased. It is unlikely that these will lead to increased Inheritance Tax but HMRC are clearly concerned that there has been abuse in this area.

Business relief – HMRC explain that transfers from a business or partnership interest will not necessarily qualify for business relief. Mistakes in this area are only likely to be made where professional advice has not been sought, e.g. in the case of smaller businesses or partnerships.

Rights under Pension Schemes – HMRC say that a gift may arise if acts or omissions by a member of a pension scheme have the effect of increasing the value of benefits passing outside the member’s estate at the expense of his own estate. This may be used as an excuse for an investigation in millions of cases, as many people may die without drawing down their pension and it may be virtually impossible to prove the motivation (which could be anything from inertia to trying to ensure that any annuity will be as high as possible).

HMRC claim that the increased scrutiny is not a change to Inheritance Tax or the way in which it is administered, nor has it anything to do with revenue raising. However, it is difficult to see that it is anything else. Investigations under the new policy start in only six months, from 31 March 2008.

Catriona Syed is a partner at Charles Russell