Understanding Inheritance Tax: Key Factors and How Families Can Avoid Pitfalls
As the UK government grapples with economic considerations, inheritance tax (IHT) has emerged as a hot topic. With estimated receipts for the 2023/24 financial year reaching £7.6 billion, it appears that abolishing IHT in the forthcoming Spring Budget may be financially unfeasible. This article will delve into the complexities of IHT, risk factors associated with filing, and provide families with practical tips to navigate the intricacies of this tax.
Understanding Inheritance Tax (IHT)
Inheritance tax is applied to the value of a deceased’s estate, and can be as high as 40%. It is charged not only on death estates but also on chargeable lifetime transfers at a rate of 20%, and relevant property trusts at 6%. Estates valued over £3 million require an IHT return even if no tax is due, particularly if significant assets are left to a spouse or qualifying charity.
What Triggers an IHT Check?
HMRC evaluates various risk factors before auditing IHT accounts. Common triggers include:
- Omissions: Missing information can raise red flags.
- Inadequate Valuations: Discrepancies in asset valuation can prompt further investigation.
- Incorrect Claims for Reliefs or Exemptions: Mistakes here can incur severe penalties, sometimes up to 100% of the tax owed, especially if deemed deliberate.
Penalties can also include interest on underpayments, currently set at 7.75%, diminishing the estate’s net value.
Key Risk Factors and How Families Can Avoid Them
1. Be Aware of Deadlines
IHT is usually payable six months following the month of the chargeable event. However, IHT forms do not need to be filed until 12 months after the death. This mismatch in timelines can lead to costly late payment penalties and interest. Late payment penalties can be as high as £3,000, in addition to accruing interest.
2. Know the Rules for Claiming Reliefs and Exemptions
Understanding the criteria for claims such as Business Relief (BR) and Agricultural Relief (AR) is essential. These reliefs can provide up to 100% exemption from IHT. Ensure that business assets are not primarily for investment purposes, as this could limit the relief available. Additionally, be cautious with outstanding debts, as they may not always qualify for deductions against the gross estate due to complex anti-avoidance regulations.
3. Get the Valuations Right
IHT valuations utilize the ‘loss to donor’ principle, which can differ significantly from independent asset valuations. HMRC has internal valuation experts who may contest submitted valuations for unquoted shares, securities, land, and jointly owned properties. Therefore, obtaining formal IHT valuations from qualified professionals is advisable.
4. Complete All the Relevant Boxes and Supplementary Pages
Filing the appropriate IHT100 and IHT400 forms can be complicated. Unrepresented individuals may accidentally omit vital information, such as lifetime gifts made by the deceased. Taking care to fill out all sections thoroughly can prevent common mistakes.
5. Understand the Fallout of Incorrect Returns
Filing an incorrect IHT return can lead to costly repercussions. If HMRC considers the error to be careless or deliberate, they may impose severe penalties. It’s crucial that personal representatives handle IHT returns with diligence to avoid these pitfalls.
Conclusion
Navigating the labyrinth of inheritance tax can seem daunting, but being aware of the risks and understanding the filing process can significantly ease the burden on families. By being vigilant about deadlines, knowing the rules for claims, ensuring accurate asset valuations, and meticulously completing all relevant forms, families can mitigate the potential consequences of incorrect IHT filings. With strategic planning and careful consideration, it is possible to manage IHT effectively and safeguard the value of an estate for future beneficiaries.
