There has been an increase in HMRC activity in relation to inheritance tax (IHT). Given IHT’s bespoke statutory framework, investigations can pose unique risks and challenges.
Statutory framework
Unlike other direct taxes, HMRC have no power to open an enquiry into a taxpayer’s IHT position. Instead, the legislation gives HMRC the power to make determinations and then commence proceedings for the recovery of any additional IHT which they consider to be due. Similar to other taxes though, HMRC have broad powers to check an IHT position, including ‘informal’ information requests and information notices under Schedule 36 of the Finance Act 2008.
Where an IHT account has been delivered to HMRC, they can normally only recover additional IHT within four years after the date on which payment of IHT was made or accepted (or the date on which the tax fell due). In line with other taxes, the time limits are increased to six years in the case of careless behaviour and 20 years in the case of deliberate behaviour. But if an IHT account was not delivered, HMRC may be able to look back and recover IHT up to 20 years later. There is also no time limit if the loss of tax was brought about deliberately. Additional rules apply in the case of Disclosure of Tax Avoidance Scheme (DOTAS) related failures and offshore time limits.
These time limits can be especially challenging for internationally mobile individuals. For example, internationally mobile taxpayers may have taken the view that an IHT account was not required if they were non-domiciled or not long-term resident in the UK. If HMRC disagree with that position, they have significant powers to assess for IHT on transfers, exit or death in historic years.
Given the absence of formal enquiry powers, it may also not be obvious when and if HMRC are formally challenging a position rather than merely clarifying matters. This may obscure the safeguards which are available to taxpayers in such circumstances.
For example, HMRC can use their statutory powers to issue Schedule 36 notices and compel a taxpayer to provide information. This is generally what underpins HMRC’s ‘enquiries’ into an IHT position. These notices can have significant implications for taxpayers and, in practice, can be broadly drafted.
Schedule 36 notices, however, must comply with the statutory conditions and safeguards. They must, for example, request information which is relevant and reasonably required by HMRC to determine a person’s tax liabilities. A number of recent appeals to the First-tier Tribunal have successfully challenged Schedule 36 notices on the grounds of being unnecessarily large and containing unreasonable demands – so it is important to proceed with caution if receiving such a notice. In addition, the number of Schedule 36 notices may increase in future, particularly as HMRC are currently seeking to legislate for increasing the time limits to request information where the taxpayer has died.
What next?
Taxpayers should proactively manage any challenge to their IHT affairs. For example, careful thought should be given to the best way in which to respond to HMRC’s questions. It will also be important to consider whether a request from HMRC is relevant and/or reasonably required. If not, it may be appropriate to challenge that request.
Taxpayers should also consider the lengthy time limits which can apply to IHT and whether HMRC are in time to make an IHT determination and commence proceedings to recover the tax. If this is not done as soon as possible, they may be prevented from making that argument in future.
Given the recent HMRC activity in this space, some taxpayers might also benefit from proactively reducing the risk of any future challenge by ensuring, in advance, that the IHT filing position (or no filing position, as the case may be) can stand up to an HMRC investigation if required. Whether filing an IHT return or not, identifying and capturing contemporaneous evidence or information that supports the taxpayer’s position could potentially help protect against the risk of challenge in future.
The particular uniqueness of the UK’s IHT system means that specialist tax advice should always be sort in areas of uncertainty or possible challenge. Please contact the authors or your usual KPMG contact in the UK should you want to discuss any of the topics raised.
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