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HMRC pause on Inheritance Tax investigations gives taxpayers opportunity to get affairs in order, says lawyers

  • HMRC launched another 5,347 Inheritance Tax investigations last year
  • Truce on tax investigations only temporary

HMRC’s suspension of its Inheritance Tax investigations during the coronavirus crisis gives taxpayers a unique opportunity to get their affairs in order, says Pinsent Masons, the multinational law firm.

According to Pinsent Masons, HMRC launched 5,347 IHT investigations last year*, generating £259m in extra tax. 27,283 IHT investigations have been launched in the last five years, with a total yield of £1.3bn.

Pinsent Masons warns the suspension of tax investigations is only temporary and HMRC is likely to be more aggressive once its compliance work resumes. HMRC will be looking for ways to increase its compliance revenues to cover rising coronavirus-driven public spending.

The law firm adds that HMRC dramatically increased the number of tax investigations it opened in the aftermath of the 2008 financial crisis as it tried to close the gap in the public finances.

Investigations that are more likely to result in HMRC collecting a large amount of extra tax will be top of its list, such as investigations into Inheritance Tax and High Net Worths.

Individuals who use the short period of suspension of tax investigations to get their Inheritance Tax (IHT) affairs in order can help reduce the risk of being investigated when HMRC resumes its compliance work after the crisis.

Pinsent Masons says when taxpayers are reviewing their IHT affairs, there are some common mistakes they need to be aware of which act as ‘red flags’ to HMRC and can trigger investigations.

One common problem involves taxpayers making invalid claims for IHT reliefs. The claiming of Agricultural Property Relief (APR), which gives 100% relief on the passing down of farm land, in particular has attracted HMRC’s attention. HMRC believes some individuals may be misrepresenting land and property in the countryside as active “agricultural” land and property.

APR cost the Government £365m last year** and HMRC is increasingly challenging those claiming the relief to ensure the claims are legitimate. Farmers who rent their land under grazing licenses are being scrutinised by HMRC to see what role they play in the agricultural activity.

Another common mistake relates to pension transfers, which are usually exempt from IHT but not if that individual dies within two years of making a transfer. In this case the pension may be classed an asset and therefore subject to IHT.

Pinsent Masons adds HMRC may also look more closely into the affairs of individuals who have valued their assets just below the Nil Rate Band. If HMRC finds tax has been underpaid it can issue a penalty worth up to 100% of the tax owed, depending on why it believes tax was underpaid.

 

The number if IHT investigations launched last year represents 11%*** of the number of estates with a net capital value above the Nil Rate Band (50,900), which is the level at which tax liabilities arise.

 

Steven Porter, Partner at Pinsent Masons, says: “It looks like taxpayers will get a short breather from HMRC for the next few weeks as the coronavirus crisis continues to unfold. This provides taxpayers with time to review their affairs and ensure they have not made any of the common mistakes which typically trigger inquiries.”

“Taxpayers should be well prepared as this truce on IHT investigations is only temporary and HMRC are likely to take a more aggressive approach when they resume this work.”

“IHT rules are complex and it can be easy to make mistakes which can quickly lead to investigations. It is therefore important taxpayers are aware of the common pitfalls.”

“There were many calling for a simplification of the rules surrounding IHT – this did not make the March 2020 Budget and given the current environment, will likely not be high on the government’s agenda. For now, taxpayers will have to manage.”

 

*1 April 2019 to 28 February 2020, latest available

**HMRC data, 2018/19

**Refers to year 2016/17, latest available

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