A fair share of Inheritance Tax?
There are indications that the squeezed middle is being squeezed further after death. The chartered accountants, UHY Hacker Young, recently announced that “last year HMRC increased the amount of extra tax it took through investigations into property valuations for inheritance tax far faster than house prices rose.” The figures are shown in Figure 1.
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UHY Hacker Young’s analysis shows that when HMRC receives an IHT return, it checks HM Land Registry records of the sales of other properties in the area and whether there have been refurbishments or extensions not taken into account. The accountants suggested “two tips to those who want to maximise the chances of their valuations being accepted. The first is to carefully document the state of the property (via photos etc) immediately after death (and certainly before any work is done to get the property ready for sale or to improve it in any way.) The second is to obtain a valuation (again, while the property is in its original state) from a professionally qualified valuer who has experience of dealing with HMRC.”
A third tip is to ensure family members who know the property are persuaded to disclose “the warts” peculiar to that property for the valuer to include in the report. For example, if a garden or adjoining road regularly floods/has water lying on it, the heating system breaks down or traffic noise is high at certain times are all factors that a valuer could miss and are likely in any event to be picked up by any subsequent purchaser.
There is a second valuation area where HMRC is also actively increasing IHT. Most professional advisers would consider that if an interest in property or land is sold by personal representatives at a loss to the probate valuation within four years of the late owner’s death, then the IHT legislation allows that lower gross sale proceeds figure to be substituted for the higher probate valuation. A repayment of IHT can then be claimed, calculated on the difference between the original probate valuation and the lower gross sale proceeds. This is not correct.
HMRC is operating an unpublished procedure whereby in cases of its choosing the relief is restricted and the personal representatives effectively will pay IHT on “sale proceeds” they have never received. The relevant legislation is contained in section 191 of the Inheritance Tax Act 1984 (the Act). HMRC is using the definition of “sale price” in this section (as set out in BOX 2) to support its interpretation of the legislation.
HMRC has a “tolerance” level of 25% i.e. if an interest in land is sold for a loss of 25% or greater from the original probate valuation, then it will ask HMRC’s District Valuer to advise on “what would have been the best price obtained at the date of sale.” This approach is not mentioned in the IHT Manual, the guide to HMRC’s staff on how to administer IHT and made publically available on the internet.
The legislative intention
What is now section 191 of the Act was originally introduced by the Finance Act 1976, following the extensive falls in property values from 1973. The aim was to give relief to estates where property was sold at a loss from the original probate valuation. In the Parliamentary debates on the 1976 Finance Bill by Standing Committee E there was a focus on the danger of a property being sold at an artificially low price to trigger the relief and then for the purchaser “under a so-called gentleman’s agreement – not legally enforceable – to transfer the property back later when the value had increased.” Elsewhere in the debate there is a reference to “there could be collusive sales between connected persons where there would not be a right to repurchase, but there would be an intention to repurchase.”
It is likely that the alternative valuation approach set out in section 191(1) of the Act was introduced to protect against this possible abuse. That alternative approach is being used by HMRC (probably incorrectly) to reduce the loss on sale relief where there are genuine arm’s length sales. There is a strong argument that in considering what was the “best consideration that could reasonably have been obtained… at the time of sale,” there should be consideration of the actual market place in existence at the time, not the notional willing purchaser scenario required for probate valuations by section 160 of the Act (see BOX 2).
A fair share of tax
The Autumn Statement on the 5th December 2013 had some focus on individuals paying their fair share of tax. The corollary of this approach is that taxation should be seen as fairly imposed and impartially collected. In the impetus to clamp down on avoidance injustices can arise.
The Duke of Buccleuch case in 1967 decided that estate duty (and thus now Inheritance Tax) should be charged on “the gross amount payable by a purchaser without deduction of any notional expenses.” Since that time expenses for selling assets have generally increased. Again there is a good argument for legislative change to allow actual expenses incurred in any sale to be a valid deduction for IHT valuation purposes where a higher or lower sale figure is to be substituted for the probate valuation.
Inheritance tax statistics
HMRC’s comments on these statistics for 2010-11 were released on 31st July 2013. It states that IHT receipts were around £3.147billion in 2012-13, having risen by 8% in 2012-13, slightly up on the 7% year on year increase observed in 2011-12. It goes on to state –
“There were 259,989 estates in 2010-11 notified for probate which is approximately 47% of all deaths. Of these 15,554 were taxpaying estates, approximately 3% of all deaths that year.”
It is this figure of 3% which is used by some commentators to suggest that IHT affects only a small proportion of the population. But the figure looks backwards and does not take into account inflation, real growth of many assets above inflation and the freezing of the nil rate band.
UHY Hacker Young’s research shows “that the government has significantly raised its estimate of the likely take from Inheritance Tax since the March budget. In the Autumn Statement the Government announced that it expects to receive £21.4bn in inheritance tax between 2013/14 and 2017/18, an increase of 16.5% compared to its estimate in March. It anticipates that this increase in IHT will arise due to house price increases and new anti-avoidance measures.”
Negotiation with HMRC
UHY Hacker Young makes the sensible point that the cost of negotiating with HMRC can exceed any tax saving. This appears to be a point appreciated by HMRC. In a recent valuation discussion where HMRC was seeking to restrict the loss on sale relief, HMRC concluded –
“We ask that the PRs re-engage with the VO (Valuation office) in the normal way to explore the possibility of agreement short of a formal action to determine the best consideration (if in excess of the actual sale price.)”
“Short of a formal action” is a clear reference to litigation: and this was after a refusal to comment on/consider the 1976 Hansard discussions on the legislation and after quoting various “authorities” – but giving no detail of why those authorities could be relevant. Most clients are terrified by the thought of litigation with HMRC. If an adviser stands up to this threat what then seems to occur is a long delay whilst the case is considered for further action: again a tactic that will unnerve clients and beneficiaries. But HMRC will not litigate a case where it feels weak and eventually will back down in these instances. In the meantime costs of professional advice increases.
The need to reduce the deficit appears to be overpowering. A Mansion Tax is the beginning of a general wealth tax. IHT is a tax that many who will be paying it regard as unjust as it taxes accrued wealth that has already suffered income and capital gains tax; if accumulated income has been taxed at 40% and what remains is taxed at another 40%, the net amount remaining is 36% of the gross income earned.
It is an added injustice to restrict reliefs without fully publicising why and how the restriction is to apply. There needs to be legislative change to ensure that IHT paying estates are fairly treated, particularly that IHT is not paid on assets or monies that do not exist and to introduce a simpler independent procedure whereby HMRC’S excesses can be challenged.
Additionally advisers need to explore with clients all possibilities, including emigration, to deal with what appears to be an escalating attack on accumulated wealth.
Acknowledgement: With thanks to Money Management, an FT publication, and Trusts & Estates Tax and Law Journal where this article was first published.
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