HMRC normally investigates around 5,500 IHT cases every year, around 25% of the estates for which IHT is payable, recovering an average of £50,000 extra tax each time.The complexity of IHT means that extra tax will often be due just because mistakes have been made. There can also be a temptation to use low valuations so that assets are covered by the available nil rate bands. HMRC, not surprisingly, can be expected to look quite closely at such estates.
Common problem areas are:
- Business relief – Some business activities are borderline and holding non-business assets within a company may mean relief is not available.
- Agricultural relief – This is only available if land and property is used for agricultural purposes, so HMRC may query whether there is active use, especially if land is just rented out under a grazing licence.
- Pension transfers – A particularly confusing area of tax, pension transfers are normally not subject to IHT. However HMRC will look at any transfer made within two years of death to see if this was done to avoid IHT. If so, the pension will be included as part of the deceased’s estate.
- Lifetime gifts – Gifts made to individuals within seven years of death can easily be overlooked, and whether gifts are exempt under the normal expenditure out of income rule can be unclear given the lack of a statutory definition.
Given how much the Covid-19 crisis has cost the government, expect to see HMRC being quite aggressive once compliance work resumes.
There have been calls to simplify IHT and the Office for Tax Simplification published two reports into the issue last year. This now seems unlikely to be high on the Chancellor’s to do list when it comes to the next Budget.
Find out how to work out and report the value of an estate to HMRC here.