November 2007

Inheritance tax

Rank and file: filling out the forms correctly

As individual tax payers we are all well versed in the dates by which individual or trust tax returns must be filed. However, what about inheritance tax (IHT) compliance? This is an entirely separate topic with its own rules and its own dates.

The relevant times when clients will need to consider IHT compliance are following a death and in respect of discretionary settlements. Remember that after Finance Act 2006 all new settlements are treated as if they were discretionary settlements even though for trust law purposes they may not be.

Death

IHT is payable by the end of six months following the end of the month in which the death occurred. After that time interest is chargeable. It will be chargeable on the whole of the personal estate and on those assets where tax is payable by ten annual instalments.

Please remember that the amount of detail that HMRC now requires is far greater than it used to be. There is a core account (IHT 200) and there are supplementary sheets, each one dealing with a different class of asset. Where the client's estate has more than one type of asset the adviser must make sure that together with the core form they fill in supplementary forms. The reason for this is because HMRC must consider that in the past the tax payers have not been disclosing matters fully and have effectively been evading IHT by non-disclosure.

What this means in practice is that it will take much longer to obtain the Grant of Probate if there is a will or the Grant of Administration if there is an intestacy. The idea is that the whole estate administration should take no longer because, in the old days HMRC used to ask all the questions during the course of the administration period and which are now required to be supplied on the application for the grant. That is often not the way it is perceived by clients because they cannot deal with assets until the grant is obtained and the time taken to obtain the grant is now much longer.

Remember that certain kinds of assets, e.g. particularly property assets, do not require the full amount of IHT to be paid on the application for probate but one tenth of the tax is payable at the end of the six months after the date of death. In the event that the property is sold within the ten year period the whole of the balance of the IHT then becomes payable together with interest. Interest is chargeable for the full outstanding balance.

Remember also that the basis upon which IHT is payable is the open market value of the asset in accordance with the provisions of section 161 Inheritance Tax Act 1984. There is no such thing as a "Probate valuation" which tends to have a metaphorical "nudge, nudge, wink, wink" aspect to it. In complex estates I always require the valuer, whether of property or taxable shares or personal effects, to certify that they have carried out the valuation in accordance with the relevant section of the Act. This concentrates the mind of the valuer and also shows HMRC the basis of the valuation.

What about those assets where there is no IHT payable; particularly assets where business property relief or agricultural property relief is claimed? You have to supply full details of the company, together with copies of the accounts and an explanation as to why you consider the shares or agricultural land should have the benefit of the 100% exemption. Be prepared to be cross examined by HMRC if they do not consider that the claim is justified.

At the moment we are going through a difficult time with HMRC where some of their officials seem to think that if you make a claim which turns out to be incorrect or conceded that is tantamount to a return which is untruthful and a penalty will be imposed as well as any arrears of tax and interest. In my view this is an incorrect statement of the position. A genuine mistake is not fraud so there is no reason why the tax payer should be penalised for fraudulent conduct if what has happened is a genuine professional disagreement and the tax payer concedes the argument to HMRC, possibly because of the cost of pursuing the argument rather than because the tax payer considers the view of HMRC to be correct in law.

IHT 200, the core account, must be filed with HMRC within 12 months of death. After that there is a fine of £200 and a further fine if the form is not filed within two years of up to £3000.

Settlements

From 22 March 2006 any new settlement is treated for tax purposes as a discretionary settlement i.e. relevant property, irrespective of the nature of the settlement in trust law. This means that every new settlement after that date is treated as a discretionary settlement and an IHT return is required. In addition to the return on the establishment of the settlement, the settlement will become liable to the ten year anniversary charge and an exit charge of capital is distributed to beneficiaries or to another settlement.

HMRC consider that a return does not need to be made where the transfer is a chargeable transfer but it is wholly covered by the excepted returns regime or by exemptions. However, where APR/BPR exemption is in point the tax payer is required to deliver an account in full so the extent of the relief can be negotiated. Form D32 is required in addition to the core form IHT 100 (see below).

There are certain exceptions for filing an account because HMRC would be overloaded with work following the changes in the taxation of trusts in 2006. Historically a transferor did not need to deliver an account where the chargeable transfer does not exceed £10,000 in any one year and the cumulative total of chargeable transfers did not exceed £40,000. It is proposed to increase these amounts possibly up to £200,000 - this must be the result of FA 2006 and the fact that every new trust is a discretionary trust for IHT purposes. Without an increase in the threshold for filing returns, when a settlement is established HMRC will be overwhelmed with IHT returns all of which will have to be processed and most of which will lead to no IHT revenue; i.e. all cost and no tax take!

Similarly, where a trust terminates then no account is required where the value is wholly covered by exemptions available to the life tenant and where the life tenant gives notice to the trustees that the exemptions are available.

As with the death return, there is a core return for settlements - IHT 100.

Note the following supplementary forms.

- IHT 100a - lifetime gifts. This form seeks information about the transfer and additional information so HMRC can establish the loss to the transferor's estate as opposed to the value of the property given away. The taxable basis for IHT is the loss to the estate which is not necessarily the value given away though often the two are the same.

- Form 100b is required where an interest in possession comes to an end.

- Form 100c identifies assets ceasing to be relevant property and collects other information that HMRC require to work out the rate of tax. It focuses on the value of the property when the settlement was created; the value of any property in a related settlement; the value of any additions to the settlement and the value of any other chargeable transfers made by the transferor in the seven years prior to making the settlement in question.

- Form 100d identifies assets subject to the ten year charge and again collects the information that HMRC requires to work out the IHT liability. Unlike the return on death there is no statutory provision allowing the use of the provisional estimate when delivering a trust return.

One bone of contention between tax payers and HMRC is the question of income which has suffered income tax but which has not been distributed. Has it been accumulated and capitalised and so be liable to the ten yearly charge or is it retained income which has kept its nature as income and so not subject to the ten yearly charge?

The time limit for the delivery of the IHT 100 and supporting forms is 12 months after the end of the month in which the event occurred (interest being due six months after the end of the month in which the event occurred - unless the event occurred between 6 April and 30 September inclusive when the due date is 1 May in the following year.

Penalties

IHT penalty rules apply. £100 if the account is delivered between 12 and 18 months after the event, £200 if that period extends beyond 18 but not more than 24 months and up to £3,000 if the return is delivered more than two years after the event.

Other IHT penalty provisions apply; e.g. s247 penalty for negligent or fraudulent delivery of an incorrect account and s248 penalty for failing to notify HMRC within a reasonable time (considered to be six months) in which notification is required to correct an incorrect account delivered without fraud or negligence.

HMRC publish a booklet with guidance and instructions for completing the relevant forms:-

- For death IHT 215, 45 pages long

- For settlements IHT 110, 78 pages long

- HMRC Help Line and Telephone No. for IHT 0845 30 20 900

Geoffrey Shindler
Partner
Lane-Smith and Shindler