Death, Taxes and Penalties - Greater Pressure on recording and evidence
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4th May 2010
There are many
who consider that the rate of 40% Inheritance Tax (IHT) is very punishing,
especially those who consider the tax unfair as for many it is seen to be taxing
retained earnings twice. It is therefore important to beware of the relatively
new penalty regime which could add further to the liability.
based penalty regime was introduced by Schedule 24 FA 2007 from 1 April 2008.
It was believed to be HMRC showing that they wanted to punish those who do not
comply with heavy penalties for non-disclosure. Schedule 40 FA 2008 extended
the behaviour based penalty regime introduced in Schedule 24 to IHT.
At a practical
level the HMRC approach to IHT enquiries has moved from “benign to battling”. It
has been said that the only two certainties in life are death and taxes and the
penalty on incorrect disclosure is still uncertain but enquiries into farming
estates is certain post 1 April 2009.
A case heard by
the Tax Tribunals last year (G D Cairns) also serves a warning to others.
The executor estimated the value of a property which was almost derelict and did
not obtain a professional valuation. It was in any event to be sold as quickly
as possible. As it turned out, it sold for much more than the executor’s
estimate of value and so the executor immediately declared the higher amount to
HMRC and paid the additional tax. Even so, HMRC issued a penalty for negligent
conduct in view of the substantial initial under declaration. The Tax Tribunal
upheld an appeal against the penalty, but others may not be so fortunate – with
penalties everything depends on all the facts of the particular case.
Areas of Review
Areas of the IHT
account that HMRC have been known to look closely at following the submission of
IHT 400 are as follows:
Under valuations where there are no IHT reliefs available;
Over valuations where there are reliefs and the high value could benefit
tax relief in the future, e.g. base costs for Capital Gains Tax (CGT);
Incorrect claims for reliefs, e.g. Business Property Relief (BPR) where
there is no business carried on for gain, where there is an investment business
not a trading business (IHTA 1984 s.105(3));
Omitted assets at date of death;
Omitted lifetime transfers.
In practice it is
less likely that an asset held at death is omitted by the Personal
Representative than a lifetime transfer. All assets must be ascertained at date
of death and included in the Estate Accounts and distributed, whereas correctly
recording the lifetime transfer will depend on the gathering of historic
information and good record keeping.
The penalties are
shown as a percentage of “Potential Lost Revenue” (PLR) – that is potential lost
Representative (PR’s) Behaviour giving rise to error
prompted by HMRC
Misinterpretation or mistake
take reasonable care
Deliberate overclaim or understatement
Deliberate understatement aggravated by concealment
HMRC have issued
guidance aimed at helping taxpayers avoid a penalty for failing to take
reasonable care with their tax affairs. HMRC are able to charge a penalty on a
third party from 1 April 2010. This position will only apply if a third party
deliberately withholds information from or deliberately supplies false
information to another person who has to complete a return or send HMRC a
document. In order to apply the penalty HMRC have to be able to show that the
third party intended to cause the other person’s return to be inaccurate.
What is helpful
behaviour by PRs?
The question has
to be asked – what is helpful behaviour for PRs? HMRC evaluate what is helpful
behaviour by how much the PR’s behaviour involves “telling” “helping” and
“giving”. In the same way HMRC officers are encouraged to build a picture of
the deceased when investigating the IHT accounts, the PRs are expected to carry
out checks and look for mismatches. This responsibility puts a lot of pressure
ensuring that the deceased’s tax return corresponds with the IHT return, i.e.
income from property to match property held should be a routine check by the PR
or their agent.
whereby a PR can win HMRC support is by paying significant (and relevant)
payments on account of any anticipated extra tax liability. This can be seen by
HMRC as an important sign of willingness to co-operate and can cause penalties
to be reduced. Once an omission is found by a PR it is suggested not just to
disclose part of the missing information – disclose the whole amount and as much
relevant information as possible.
(APR) and Business Property Relief (BPR)
anticipate that APR and BPR claims will be queried. HMRC instructions are not
to waste resources where there is little tax involved. The tax advisor should
therefore agree a strategy with the client. There has been a number of recent
Special Commissioners (1st Tier Tribunal) cases on the question of
s.105(3) IHTA 1984 and the existence of an investment business.
It could be that
a business that was a strong trading activity has moved more and more towards
investment business as the tax payer became older. A prime example of this
investment angle is a farm which “lets out” more and more of the buildings, land
and property previously used for the farm trade. Diversifying into rental
income activity from the previous trading activity will obviously create
concerns under s.105(3) IHTA 1984. Clearly the penalty system will cause
problems to the Estates of farmers and landowners. A constant review of
compliance and available evidence will be important during the life of the
practical steps to take by owners of substantial estates are both good lifetime
record keeping and IHT relief compliance review. At the very least if IHT
reliefs such as BPR and APR are to be claimed then constant compliance checks
should be undertaken. Lifetime transfers and loans should be well recorded.
After death there should be robust checks between income tax and IHT recording
prior to submission of the form IHT 400 to HMRC.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email; firstname.lastname@example.org,
F.C.A. is the author of Tax Planning for Farm and Land Diversification
ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. The third edition of
Tax Planning For Farm and Land Diversification will be published
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Article Published/Sorted/Amended on Scopulus 2010-05-04 17:38:51 in Tax Articles