Tax planning: A ‘small’ rule change with big implications

By scrapping the 60-day limit during which it can investigate a person’s estate for tax due, the Revenue has potentially left executors staring at enormous tax bills years after someone has died.

The likelihood of a change of government next year makes estate planning difficult, if not irrelevant, in the short term as the Conservatives have said they will make substantial changes to IHT allowances.

But there has been a tightening up of the IHT rules which has received very little publicity. Anyone advising clients on estate planning should be aware that changes in the way the tax man applies IHT rules could leave executors facing huge tax bills years after someone has passed away.

Gifts are being targeted

Until now, the tax man had 60 days to raise any questions about the estate account which is usually prepared by the executor of an estate. HMRC has scrapped the 60-day limit during which it can investigate a person’s estate for tax due and is targeting taxpayers who have made gifts prior to death.

Gifts made by taxpayers within seven years of death are subject to IHT. The tax man is focusing on determining whether assets have been given away within seven years of their death and not declared, in an attempt to round up as much revenue as possible.

The change could mean thousands of families face higher probate costs to ensure in-depth investigations are carried out to establish that the deceased made no gifts which exceeded IHT allowances or within seven years of death.

‘This change means it is even more important that accurate records of gifts are kept, as well as preparing an accurate estate account,’ explains Howard Burns, wills and probate partner at national law firm Lewis Hymanson Small. He advises executors to instruct professionals to deal with the winding up of an estate rather than risk being exposed to a tax claim.

Nightmare of falling house prices

With the family home being the largest asset of many estates, falling house prices and a difficult market are causing problems too. Bill Blevins of accountants and planners Blevins Franks warns that ‘beneficiaries who are left a home which is proving difficult to sell due to the current credit crisis are facing impossible demands. HMRC probate valuers are standing firm on IHT demands based on the valuation of property – even if the families cannot sell to meet the bill.’

In the current slow housing market selling the property to meet the IHT bill could take some time or executors could be forced to sell at a price lower than the property’s IHT value. This means they could be paying too much tax – although this can be claimed back. The probate valuation is based on the value of the property immediately prior to the death, although where the property is subsequently sold within four years of the death for a lower value, families may be able to make a claim for IHT ‘loss on sale’ relief.

On the general IHT planning front, as we move into the new year accountants and lawyers are advising clients of their latest thoughts on the recent pre-Budget report changes in income tax, national insurance and trust taxation. But none of these new measures are due to take effect until 2011, by which time we might well have a new government.