A good time for inheritance tax planning
Most trusted advisers would recommend early planning as the key to managing inheritance tax (IHT), and the current environment makes preparedness even more important.
As has been well documented, the government has supplied a much needed injection of public funds to support individuals and all types of businesses during the coronavirus pandemic. This will almost inevitably need to be funded by increased taxes once the situation stabilises. However, while HMRC resources have briefly been diverted from compliance activity to support the government in igniting and managing business- support measures, we expect enquiries and investigations to be an important part of the government’s strategy to raise revenues in the coming years.
Due to the complexity of IHT and the wide availability of reliefs, we expect IHT enquiries to be a key component of this approach. We would therefore recommend an IHT health check and we have summarised some tips to get you started:
- What’s the value?
As many taxpayers are finding their asset values suppressed, this can be an opportune moment to make gifts as part of succession planning. However, determining an acceptable value for assets should not be taken lightly, especially if the asset is valued at or just below a threshold to qualify for an exemption such as the nil rate band. Prudent valuations are advisable given the heightened penalties (up to 100%) which can be levied by HMRC for inaccuracies.
- Immediate IHT relief but care needed
One of the most generous – and often overlooked – IHT reliefs and exemptions is the immediate exemption for ‘normal expenditure out of income’. Broadly speaking, a gift made from post-tax income, which is made habitually and leaves someone with enough income to maintain their standard of living, is immediately tax free. The difficulty can come in evidencing to HMRC that conditions have been met. For instance, demonstrating income and expenditure levels is best done at the time of making the gift rather than retrospectively, and making a gift ‘habitual’ raises interesting questions about how regularly gifts need to be made to qualify. We will be happy to share our insights on best practice with you.
- Post-death IHT relief
Sensible lifetime IHT planning can involve gifting assets which are expected to increase in value, as the amount potentially subject to tax is frozen at the date the gift is made. However, in the current economic downturn, it is perhaps more relevant to consider the scenario where assets at the date of death have fallen in value since the gift was made. To avoid recipients paying IHT on an amount which is higher than the value at the date of death, a ‘fall in value’ claim can be made by a donee or a trustee to reduce the IHT payable on a lifetime gift. While this relief is potentially very valuable - increasingly so in the current environment - the calculation of the relief and the process for making a claim can be complex, making it likely to come under scrutiny by HMRC.
- Landowners beware
Agricultural Property Relief (APR) can reduce the value transferred when assets such as farmland and farm buildings are gifted either during lifetime or on death. Agricultural property means either land or buildings used for the purposes of farming in the UK, the Channel Islands, the Isle of Man or an EEA state. Statistics from HMRC show that APR saved taxpayers £365 million of IHT in 2018/19. The significant cost to the government, and its belief that the relief can be misused, mean this is another area potentially in HMRC’s sights. It is therefore important to consider carefully whether the land and property believed to qualify for APR meets the necessary conditions in an ever-evolving environment.
If you would like more detailed guidance on any of the issues raised in this Insight, please do not hesitate to get in touch with the Tax team. We will be delighted to help.