HMRC’s inheritance tax investigations hit four year high – but what reliefs may be available to an estate to reduce any inheritance tax liability

According to a recent article, HMRC have seen a record high of £274million in respect of inheritance tax claimed from over 5,000 investigations undertaken in the 2019-20 tax year. For clarity, an investigation by HMRC is undertaken to ensure that all assets have been accounted for when completing the relevant tax paperwork to apply for the Grant of Representation.

The duty to ensure that correct tax is paid lies with the executor appointed within the Will or the administrators of the estate if no Will was prepared. When acting as an executor or administrator, you will need to account to HMRC for all assets within the estate, all debts/liabilities which are being deducted and any exemptions or reliefs that are being applied to reduce the inheritance tax liability.

There are many pitfalls for the unwary executor/administrator when dealing with Inheritance Tax (IHT), they range from not applying a relief correctly to estimates being passed off as date of death valuations.

The valuation of any asset is done at the date of death on its open market value between an unconnected buyer and seller, and one of the most common areas of investigation are valuations of property, investments and, increasingly, chattels.  A vague low value estimate, especially of property or works of art, will stand out when an IHT return is reviewed and trigger an investigation.

As far as reliefs are concerned these need to be used correctly as the wrong nil rate band calculation being used or negligently applying a charity exemption could lead to a rather expensive additional IHT liability for the beneficiaries of the estate and they may well take action against the executor or administrator for the costs of this, such as interest and penalties, if it was personal representative negligence that lead to the incurring of these costs.

The most common forms of exemption/reliefs are as follows:

• Spousal exemption – anything passing to a spouse or civil partner is completely tax exempt, including those based in other tax domiciles;
• Charity exemption – again, anything passing to a charity is tax exempt as well, although watch out that the charity is in fact a charity and if based abroad qualifies as one in this country;
• Annual allowance – this relates to gifts and currently stands at £3,000 per annum. This does not apply to gifts made where the donor continues to benefit from the asset being given away or gifts are made out of surplus annual income;
• Nil Rate Band – each individual currently has a nil rate band of £325,000 which is free from inheritance tax;
• Transferrable Nil Rate Band – the survivor of a marriage or civil partnership can claim up to double their own nil rate band if they receive their spouse or partner’s entire estate under the spouse exemption mentioned above. The availability of this can be limited if the first to die gave money to non-exempt beneficiaries, such as children and other relatives, on their death at the same time or instead of their surviving spouse or partner.
• Residence Nil Rate Band – currently set at £175,000 and available where the deceased left their property to direct descendants (again, this can be transferred from deceased’s spouse of civil partner’s estate if unused and available but the surviving spouse must give a property to their children). It is not available to people who leave their estates to nephews/nieces even if they are akin to direct descendants because they have no children of their own.  Also its transferability is restricted, unlike the standard nil rate band, so that if there are no surviving children or grandchildren on the second death or the survivor leaves their estate to someone other than their children or most likely step children there is no residence nil rate band to double up.

There are however some other obscure reliefs that may be available which some may not be aware of when calculating the inheritance tax liability of an estate. A few of these are provided below.

Quick Successive Relief (also known as QSR)

This relief is available where a deceased has inherited from another estate within a short period of time before their death. In order for the tax relief to be claimed, the two deaths must be within 5 years of one another and inheritance tax must have been paid on the asset when the first person passed away.

Depending on how long the individual survived, will depend on the relief available. For example, if the deaths are within a year of one another then 100% relief from inheritance tax on that proportion of the estate is received. If however, they survived three and a half years, then the relief is reduced to 40%.

Business Property Relief

This relief is very simple on the face of it.  If you own a business or have shares in a company and have done so for 2 years or more you can leave up to 100% of this tax free to a beneficiary in your Will.  The reality is not that simple.  There are several conditions and the most important of these is that the company that you own shares in or business you run must have been trading for most if not all of the period of the deceased’s ownership.

The trading requirement is the most contested aspect of this relief.  For the purposes of claiming this relief a company or business must be trading rather than just holding investments.  The most common example of this distinction is property owning companies that rent out office space.  The company is trading in a literal sense of the word but for IHT purposes is just earning investment income and therefore BPR is not available or restricted to the pure trading aspects of the business, if there are any.

Agricultural Property Relief

Like BPR above this is another seemingly straightforward relief.  The relief works by making farms, the houses, buildings and farmland, i.e. agricultural land, tax free.  What qualifies as farming to the lay person does not always mean that HMRC regard the farm or its activities as qualifying for APR.

It works by relieving the entire agricultural value of farm land and farmhouses from tax.  Importantly it does not exempt the market value of the land and house being relieved and this might be more than its agricultural value, so caution has to be paid as how it is valued and a professional valuation is essential when attempting to claim this relief as trying to claim the whole value of the land may end up with an investigation and more tax being paid than was bargained for.

This like BPR is a very heavily litigated area with the main thrust of disputes between estates and HMRC coming from whether a farmhouse is actually one at all.  The other pitfall with this relief is hope value and this comes from where the farmland has development potential and this can also be a taxable asset so when asking for a valuation is best to make sure the surveyor carrying out the valuation investigates its planning potential.

It is important to note that administering an estate and calculating an inheritance tax liability can be complex depending on the assets within the estate and what exemptions or reliefs are to be claimed. As such, we do advise that you seek specialist advice in these circumstances to ensure that should an investigation by HMRC be issued, all necessary steps have taken to finalise the inheritance tax account with HMRC prior to the estate being distributed. If the estate has been distributed and an investigation is issued by HMRC, this may leave the executor or administrator in a position where they have insufficient funds to settle any additional tax as the estate has already been distributed.

If you require advice in relation to the administration of an estate contact our expert Private Client team on 01908 660966 / 01604 828282 or email PrivateClient@franklins-sols.co.uk.