Despite dealing with the pandemic HM Revenue and Customs (HMRC) have had no problem opening investigations into recent deaths and ensuring that people are paying Inheritance Tax correctly.
Inheritance Tax is a tax that could be due on the value of a person’s wealth when they die if it is above certain allowances.
Law firm Pinsent Masons have confirmed that during the tax year 2020/21, 3,574 cases were opened by HMRC, investigating potential incorrect payments of Inheritance Tax. The result……an extra £254 million in revenue for HMRC!
There were some common themes as to why investigations were launched which is useful to know so you can ensure you and your loved ones are paying Inheritance Tax correctly.
The issues when paying Inheritance Tax
If you are the person in charge of dealing with the estate of a person after they have died, one of the jobs you will have is to submit an Inheritance Tax return to HMRC.
If HMRC suspect the tax return has been completed incorrectly then an investigation will be opened.
According to Pinsent Masons there were some common themes that prompted HMRC to investigate. These include:
- If an estate was valued at just below the £325,000 Nil Rate Band allowance.
- Assets not included in the submission.
- Property that appears to have been undervalued.
- Claiming for Inheritance Tax relief when it was not valid.
- Gifts made within 7 years that were not recorded and disclosed.
With the average Inheritance Tax investigation yielding around £71,000 per case this is useful income for HMRC at a time when the government needs all the money it can get to help pay for the cost of Covid-19.
Everyone is entitled to an allowance of £325,000 (called the Nil Rate Band) before Inheritance Tax is due on their estate.
More and more people are finding they are having to pay Inheritance Tax on their loved ones estates as this allowance has been frozen since 2009 and will continue to be until at least 2026.
However, since 2009 house prices and stock markets have increased massively meaning many more estates are now liable to Inheritance Tax.
What you need to do to ensure you are paying Inheritance Tax correctly
Here are three ways you can ensure your loved ones are paying Inheritance Tax correctly when you die:
- Carry out a regular review of your Wills. Ensure they are clear, reflect your up to date wishes and are making the best of the Inheritance Tax allowances available to you.
- Keep good records. Keep records of all the gifts you have made (at least in the last 7 years) and the values of everything you own.
- Ensure your loved ones have access to professional help when completing the Inheritance Tax forms. If you are unsure then it is always best to seek help from an expert to save you time, cost and hassle down the line. Especially if getting something slightly wrong means an investigation from HMRC.
When it comes to reducing your future Inheritance Tax bill many people will leave everything to their spouse on first death.
There is no Inheritance Tax due on gifts to spouse so this action will delay any Inheritance Tax until the death of the surviving spouse.
The problem with this standard approach is that you are not using your Nil Rate Band allowance at this point.
This is an issue because as we have mentioned earlier, the allowance has been frozen and will stay frozen until 2026 at the earliest.
There is a good chance that house prices and your investments will rise in value by this point. By making use of your Nil Rate Band on first death it effectively means you are allowing the value of the Nil Rate Band to grow outside of your estate.
For example, on death, if you left £325,000 into a Trust for the benefit of your spouse and children, this money could be invested and continue to grow with no further Inheritance Tax to pay if managed the right way. Instead, If you leave the £325,000 directly to your spouse and your spouse invests it, the excess over the £325,000 Nil Rate Band could be subject to Inheritance Tax in the future.
Estate planning is an essential part of our clients’ overall financial plans. We don’t just want to ensure you live a good life, we also want things organised and sorted, passing on as much wealth to the next generation rather than the tax man!
If you would like a no obligation assessment of your current position please schedule a 15-minute call.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.