Mistakes on how the Inheritance Tax (IHT) rules work are costing families dearly when proper planning could save them thousands, according to tax specialists at national audit, tax, advisory and consulting firm Crowe UK.
Nick Latimer, tax partner in Crowe’s Cheltenham office, said recent HMRC figures revealed that the government has raised more than £336 million from inheritance tax “gifts” that failed.
The news comes as the UK waits to see the fiscal policy of a new Prime Minister and his new team unveiled, with wealth taxes expected to be a focus for further change.
Latimer said: “The latest figures show that between 2021 and 2026 nearly 2,500 gifts worth £840 million were considered to have a ‘reservation of benefit’.
“That means that HMRC has ruled that the person making the gift had continued to retain some use of the asset after being given away. The gifts, with an average value of £338,840, therefore remained subject to IHT, resulting in an estimated total tax take of £336 million.”
He added that these figures did not take into account the estates of individuals who have died in the last tax year.
“When a death occurs, there is then up to six months to pay the inheritance tax.”
He explained that there is a £325,000 nil rate threshold for IHT, as well as other reliefs and exemptions, but thereafter IHT is paid at a rate of 40% on anything remaining in the estate, gifts made in the last 7 years, and gifts of assets on which a benefit has been reserved.
“Gifts that are made more than seven years before death are not included in the death estate calculations, and many people are aware of this and choose to give away assets before they die.
“But where they then go wrong is continuing to make use of the asset – known as a ‘reservation of benefit’ – and there are strict HMRC rules governing this.
“One example would be continuing to live in a home after it has been transferred to children without paying rent for its occupation, or perhaps retaining valuable assets such as artwork or jewellery that have been given away in the family home. It’s not enough to give away cash to your children to enable them to buy an asset which you enjoy as there are further anti-avoidance clauses in the tax legislation that can catch such arrangements.”
Red flags for the taxman could even include frequent visits to a former residence to look after grandchildren.
“Jewellery or cars can be given away, but you cannot carry on wearing or using the asset. A gift of jewellery can also give rise to capital gains tax.”
Another common error the taxman can jump on is where shares are given away – often part of succession planning.
Latimer said: “Where shares have been given to someone else, then dividends must be paid to that person, and the same is true for savings accounts put into an heir’s name where the interest must be paid to that individual.”
He said it was the job of the estate’s executors to tell HMRC whether IHT is due, and how much.
“However, if not convinced by the figures or the explanations, HMRC can look deeper and investigators can trawl through bank statements, the Land Registry, insurance policies and utility bills. Interviews with investigators can include home visits,” he pointed out.
“Just because seven years is ‘up’, it does not mean you can quietly fail to pay rent or undertake regular rent reviews.”
He stressed that in many cases, an HMRC investigation into alleged underpaid IHT could have been avoided with professional planning – plus an ongoing understanding of the rules going forward.
For further information or to discuss your specific circumstances, contact nick.latimer@crowe.co.uk or call 01242 234421.
