In today’s Scotsman (Monday 30 October 2023) Lynsey Kerr highlights some of the complexities around Inheritance Tax, why more people may be liable to pay it and how to mitigate the risks of making mistakes or getting caught out when dealing with an estate which has an IHT element.
Inheritance Tax (IHT) can be complex to calculate and is often unpopular. A fact that is becoming pretty straightforward, though, is that investigations into peoples’ liability to pay are increasing, alongside action to pursue any payments owed.
In the 2021/22 financial year, the amount of IHT clawed back was £326m - up from £254m in the previous 12 months, a rise of about 20%. If that level of scrutiny continues, then we can expect to see that number to have risen again when figures for 2022/23 are shared in the not too distant future. Since 2019, more than 13,000 people across the UK have been the subject of investigations and clawbacks by Her Majesty’s Revenue and Customs (HMRC). That’s a figure which sits on top of those standard IHT bills.
The question is ‘why?’ and the less than simple answer is that there are a number of factors behind the figures.
The first issue is that more people are being drawn into the IHT net. Whereas the UK Government - which retains responsibility in this area - has kept the IHT threshold at £325,000 in recent tax years, the value of property has risen over that period.
So, although there are some additional exemptions and reliefs available to those estates which qualify (such as a residence nil-rate band available of up to £175,000 and the option to transfer IHT allowances between spouses and civil partners for example), people who may have thought they were “not wealthy enough” to worry about IHT will often find this is no longer the case. Or, rather, their families may discover this too late. And, despite reports of house prices nationally falling, estate agency colleagues tell me that prices are holding firm in the areas in which Lindsays’ residential property team operate. It will be interesting to see if Chancellor Jeremy Hunt’s upcoming Autumn Statement triggers any changes in this regard.
The second issue is that it’s common for families to make errors when reporting the value of estates to HMRC - perhaps even through trying to save on legal fees. Common mistakes include underestimating property values, omitting bank accounts or investments, getting lost in the maze of IHT reliefs and exemptions, or not keeping records to the standard required by HMRC.
The third factor is, of course, that HRMC appears to be more actively challenging the figures and records provided by families, resulting in unpaid IHT being clawed back from those who inherited. Furthermore, it is worth noting that ultimately the executors themselves will be personally liable if the beneficiaries of the estate are unable to pay any additional IHT which becomes due.
Fortunately, there are two easy ways to mitigate the risks:
One is the fact that lawyers can advise you, combined with input from a financial adviser on the use of different reliefs and exemptions - including the fact that you can give items or cash with a value of up to £3,000 each tax year.
Secondly, legal advice can help executors to comply with HMRC processes when distributing the estate.
People often do not appreciate that IHT is not just about what assets people benefit from at the time of someone’s death. It can be payable if the person who made the gift dies within seven years of making it.
Not getting IHT right can prove costly for the very people for whom we want to leave a positive financial legacy.
