Recent research from accountancy firm UHY Hacker Young has put a spotlight on the need for good advice and tax-planning tools if Inheritance Tax (IHT) mitigation is sought.
The analysis revealed that there was a 5% rise in HMRC investigations into estates for underpayment of IHT last year – 5,400 estates, up from 5,100 in the 2016/17 tax year. To put this in context, one in four (24%) of the total estates liable for IHT were investigated by HMRC in the latest available year.
What’s more, if an investigation finds that IHT has been underpaid, the estate may have to pay all the tax owed plus a penalty, which could be up to 100% of the tax at stake in the estate.
Mark Giddens, a partner at UHY Hacker Young, commented, “HMRC are increasingly challenging the value of estates as investigating IHT returns becomes considerably more lucrative for raking in extra tax.” He goes on, “The rise in investigations means more beneficiaries and estates, who may not necessarily be cash-rich, could be hit with hefty fines.”
While the majority of investigations related to what HMRC judges to be undervaluation of property, it’s worth both advisers and their clients keeping a regular check on the legitimacy of all their tax planning around wealth transfer to the next generation. That planning could well include Business Relief (BR), a very efficient and effective method to mitigate up to 100% of IHT on the value of unquoted, BR-qualifying shares.
This government-introduced, established method of mitigating IHT is claimed retrospectively, meaning the confirmation of whether it is successful takes place only after the person’s death. The person must be holding the shares on death and have held them for at least two of the last five years.
The investee company must adhere to various rules during an investor’s holding period in order for its shares to be eligible for BR. Those rules include that the company must be carried on for gain and must not be subject to a contract for sale or being wound up. In addition, BR cannot be claimed if the company “wholly or mainly” deals in securities, stocks or shares, land or buildings or in the making or holding of investments. Then there is the exclusion of companies which only generate investment income such as residential or commercial property letting, property dealing and running serviced offices.
Some business activities are borderline: whether they will qualify for relief depends on the nature of services provided, typically these include, holiday businesses, property management, property development – if there is also substantial letting and dealing, and caravan parks – where there is letting, holidays and caravan sales. And this doesn’t include the rule that disqualifies companies that list on a recognised exchange (not AIM).
Therefore, it’s important to have the right advice about what to invest into and the right monitoring of the investment to ensure it doesn’t stray outside the regulations. This will likely lead to BR claims being rejected after death.
Professional fund managers specialising in BR-qualifying investments generally have an excellent record of selecting and monitoring companies to ensure that BR qualification is achieved. But, just as it’s important to be comfortable that any trust arrangements put in place for IHT purposes are structured correctly and meet the relevant regulatory requirements, it is absolutely a good idea to ask a BR investment manager about any HMRC tax investigations, or refused BR claims it has been subject to.
The Oxford Capital Estate Planning Service provides BR investments, with a track record of significant returns, the option for investors to change their strategies for access, growth and income within the product, as well as a record of approved BR claims (‘good’ or ‘successful deaths’) and no HMRC investigations.