Fresh Inheritance Tax Clampdown

Thursday 4 September 2008

Fresh inheritance tax clampdown to target gifts made prior to death

HMRC to collate information on taxpayers from sources other than IHT returns
HMRC to ignore 60-day limit on challenging estates

HM Revenue & Customs has unveiled plans for a new inheritance tax (IHT) clampdown, aimed at identifying where taxpayers may have made gifts prior to death which should be included in their estates for IHT purposes, says Dixon Wilson, the accountancy firm specialising in high net worth individuals.

Many gifts made by taxpayers within seven years of their death are considered to be within their estates for IHT purposes. After seven years gifts are no longer potentially liable for IHT. This rule is to prevent taxpayers getting around IHT by giving away assets while on their deathbeds or in advanced old age.

According to an announcement by HMRC, it will for the first time begin comparing information provided on IHT returns with information provided to HMRC during the lifetime of the deceased, as well as information about the deceased from other sources.

Dixon Wilson points out that HMRC will be ignoring its previous commitment to only challenge estates within 60 days of giving clearance that they are below the IHT threshold. The purpose of the 60 day clearance rule is to give taxpayers peace of mind, so that they do not face unexpected tax bills.

Dixon Wilson says HMRC is likely to pay particular attention to returns of capital gains in the years prior to taxpayers’ deaths in order to identify when large capital gains have been crystallised that no longer appear to be within taxpayers’ estates on their death.

Helen Clark, Partner, at Dixon Wilson, comments: “The Government has a growing black hole in its finances as revenues from other taxes shrink. Squeezing bereaved families even harder for IHT is bound to cause resentment, particularly as assets which have been gifted away may not be available to pay an enlarged IHT bill.”

“HMRC normally only challenges estates declared near to the value of the nil-rate band if it suspects property has been under valued, so this new initiative is a fairly significant departure.”

“By looking at returns of capital gains and other sources of information, it will be much easier for the taxman to identify if cash and assets have been gifted away prior to taxpayers’ deaths.”

She adds: “The problem is that gifts made prior to death are not recorded at that point in time because they may not be taxable until many years later. This means that when completing IHT forms you are relying on beneficiaries’ memories, which over a seven year period can be fallible.”

Dixon Wilson warns that waiving the 60 day limit effectively abolishes any certainty that taxpayers have with regard to inheritance tax. HMRC will be able to use information from sources other than IHT returns to challenge estates years after taxpayers’ deaths.

Helen Clark of Dixon Wilson says: “The purpose of the 60 day limit is to give taxpayers peace of mind, but this new compliance campaign sweeps all that away. It’s worrying from beneficiaries’ point of view to think that HMRC could be pouring over old records and seeking to tax their inheritance many years later.”