Investigations into inheritance tax (IHT) are increasing and those inheriting properties need to make sure that their inheritance tax accounts are perfectly in order.
The number of investigations increased by 8% since the introduction of the Residence Nil-Rate Band (RNRB), with the total reaching 5,537 in 2019/19 compared to 5,138 in 2016/17.
The RNRB allows homeowners to enjoy an allowance of £150,000 (2019/20 – increasing to £175,000 for 2020/2021) on top of the basic inheritance tax threshold of £325,000 where the property is left to a direct descendant. If a spouse leaves the property to their husband/wife, the spouse exemption applies, leaving the RNRB intact and available for the second death. In other words, a couple can leave up to £950,000 to their children or grandchildren free from inheritance tax with some estate planning (increasing to £1 million in the 2020/21 tax year).
However, the RNRB rules are a little complex, particularly if the couple downsize prior to death.
HMRC will investigate where it suspects someone has given away more than they are allowed to, or that the property has been declared at less than its true value. However, experts think discrepancies will often result from the complexity of the rules rather than a deliberate attempt to defraud HMRC.
Any amount passed on which exceeds the basic £325,000 threshold and the new RNRB may be subject to inheritance tax at 40%. However in addition to the RNRB there are other allowances and exemptions that can be used, such as those relating to business property. A recent review of the system by the Office of Tax Simplification revealed that the RNRB rules together with those concerning lifetime gifts and gifting businesses/farms caused the greatest confusion.
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There are other rules that can be difficult for executors to understand – an example is those relating to pension transfers during a person’s lifetime. A person might decide to transfer to another pension provider – perhaps because:
- The new provider offers lower management costs.
- The new provider offers more or better investment options.
- The new provider offers the person a greater degree of control over their investments.
- The person is offered a flexible drawdown arrangement.
- The person wants to bring a number of pensions together (perhaps from different workplaces) into one place.
All of the above are very legitimate reasons to move a pension that have nothing to do with inheritance tax evasion.
However, a number of respondents to the OTS consultation have reported that if such a transfer is made within two years of the person’s death, HMRC consider, in certain circumstances, that there has been a transfer of value. They therefore require that the taxpayer demonstrate the transfer was made without the intention to confer a gratuitous benefit. The OTS provide an example: a person with a final salary pension scheme may transfer it to a personal pension scheme so that their beneficiaries will receive a substantial benefit that they would not have had, if the pension had remained in the final salary scheme. The difficulty arises because at the time the transfer is initiated, there can be no certainty as to whether a transfer will be considered to be creating a gratuitous benefit and financial advisors cannot therefore fully advise as to whether the transaction will cause an additional IHT liability or not.
HMRC have responded: “The majority of people pay the correct IHT. Investigations are opened into the small proportion of cases where compliance issues have been detected.” (The Times, July 21 2019)
If you would like to speak to one of our Later Life Planning team about this or any other estate planning issue, please call us on Southport 01704 532890 / Liverpool 0151 928 6544 or complete a Free Online Enquiry and we will get in touch.