Confusing IHT Rules Trigger HMRC To Investigate 23% Of All Estates
23% of all estates liable to pay inheritance tax are investigated by HM Revenue and Customs.
According to a recent Freedom of Information request, made by financial planners Quilters, 5,000 of the 22,000 estates liable for inheritance tax last year were forced to endure the inconvenience and indignity of a further investigation by HMRC.
The request reinforces the suggestions made by the Office for Tax Simplification (OTS) to create a significantly reduced system of complexity.
Currently, only one in twenty estates are liable to pay inheritance tax , however, it is thought that half of all deceased estates complete the complex documentation accompanying the probate process.
In a recent report the OTS claimed inheritance rules involving inheritance gift giving before death could reduce from seven to five years in addition to a number of changes which could simplify gift giving complexities currently making it difficult for executors to keep track of.
Currently, any estate issuing gifts within seven years of a person’s death are liable to be included in any inheritance tax bill with a sliding scale being imposed between three and seven years of the gift being given and the death of the donor.
According to changes suggested by the Office for Tax Simplification (OTS), the seven-year standard offers a number of problems to executors as bank statements can be backdated by a maximum of only six years.
To ease the administrative headache on executors, the OTS have suggested reducing the exemption time frame from seven to five years for all gifted assets exempt from inheritance tax.
Whilst executors will benefit massively by making it easier to track potential liabilities and IHT contributions under the proposed system, losses to IHT contributions would be negligible. The report claims that a mere £7 million of the £4.38 billion inheritance tax receipts total from 2015/16 was accrued from gifts made over five years prior to the donors’ death.
Similarly, the OTS believe that this change will also help in minimising the administrative tasks within HM Revenue and Customs as documents will be more accurate, reducing the number of investigations.
The changes also look at the structure of the system used to track exempt gifts from IHT. The recommendations highlight that a myriad of ways to make gifts exempt from IHT are confusing and outdated.
The system still uses the first gift allowance of £3,000 to be exempt from IHT; a rule created in the 1980s. Based on inflation rates, this figure should exceed £11,900 in the current market.
Additionally, random and unlimited gift exemptions of £250 can make it difficult for both the donor and executor to keep track of.
Gordon Andrews, Tax and Financial Planning Expert at Quilter said:
“Over the past number of years politicians have been keen to show they are cracking down on tax-dodgers and inheritance tax is one of the departments that HMRC has been throwing its resources at.
“More often than not people aren’t deliberately trying to defraud HMRC and given the current complexity of the system it’s really no surprise if things go awry.
“It can be hard to pinpoint those who intentionally don’t pay any inheritance tax and those who misunderstood the system believing there was no tax to pay.”
What changes need to be made to the inheritance tax system? Do so many estates need investigating?