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Inheritance Tax - Don’t Lose on Penalties!

Inheritance Tax - Don’t Lose on Penalties!
On the merger of the Inland Revenue with Customs & Excise to form HMRC, the decision was taken to harmonise the tax penalty regime across all taxes.  The net result is that in the fullness of time inheritance tax (IHT) penalties will, for the first time, follow the same pattern as the penalties applied to other direct taxes.


Failure to make a return

At present, late IHT returns do not incur any significant penalties until more than a year has elapsed from the due date and even then the maximum penalty is £3,000.  This is set to change.  Although not yet implemented, the legislation has been passed to enable penalties of the greater of £300 or 5% of the tax due to be charged for an IHT return which is 6 months late.  After 1 year, the penalty will be the greater of £300 or 70% of the tax due on the return in cases where there has been deliberate delay but no concealment.  The 70% figure can be reduced to 20% if the return is duly made without prompting from HMRC.


These percentages are subject to a reduction for special circumstances, which HMRC say will only be given in rare cases, and there is also a reasonable excuse provision.  However the basic message is that late IHT returns will quickly collect substantial penalties once this legislation is brought into effect for inheritance tax purposes.


Errors in IHT accounts

More penalties can be raised by HMRC where there are inaccuracies in IHT returns.  These apply where the IHT liability arises on or after 1 April 2010, and given the sums which are commonly involved with inheritance tax, may amount to substantial figures. 


The error must be due to careless or deliberate conduct.  If HMRC discover the inaccuracy first, and write to prompt a disclosure about it, the minimum penalty will be 15% of the tax involved.  The best way to ensure that this penalty is not incurred is to make disclosure of errors as quickly as possible before HMRC discover the inaccuracy themselves.  In that case, so long as the initial disclosure was not deliberately inaccurate, HMRC are permitted to reduce the penalty to zero.


HMRC have recently put out a statement to allay fears that this means that every correction to an IHT return should be disclosed individually as soon as it is identified. 


Provided the corrections to a return  do not: total  more than £50,000, nor involve land or unquoted shares, and the case is not subject to a check by HMRC, notification to HMRC need only be made 18 months from the date of death or at the point when the estate is finalised.


Problem areas

Inheritance tax is full of all sorts of grey areas as to what constitutes a chargeable transfer and what does not. For example, HMRC are on record as stating that with transfers to employee benefit trusts, there can be an IHT charge, but this is disputed by experts in the field.


So one might take a decision not to make an IHT return in such circumstances contrary to HMRC’s published statement. 


If it turns out that the expert opinion on the matter is wrong, and HMRC is right, it is possible that HMRC would then seek substantial penalties under the new provisions for failure to make a return. Obviously one would vigorously resist penalties in such a situation but it will be source of further dispute.


Practical Tip :

Clearly IHT returns must be made more promptly in the future and errors should be corrected before HMRC have the chance to point them out themselves.


Malcolm Gunn