Personal Representatives (PRs) can anticipate that inheritance tax (IHT) Agricultural Property Relief (APR) and Business Property Relief (BPR) claims will be queried. HMRC instructions are not to waste resources where there is little tax involved. The tax adviser should therefore agree a lifetime strategy with the client for the protection of potential claims for IHT reliefs.
For IHT there is now the behaviour based penalty regime, i.e. if a claim for an IHT relief is made and it fails then there could be penalties on top of the extra IHT liability.
What Do HMRC Look At?
Areas of the IHT account that HM Revenue & Customs (HMRC) have been known to look closely at following the submission of IHT400 (the IHT Return) are as follows:
- Under-valuations where there are no IHT reliefs available;
- Over-valuations where there are reliefs and the high value could benefit tax relief in the future, e.g. base costs for Capital Gains Tax (CGT); and
- Incorrect claims for reliefs, e.g. BPR where there is no business carried on for gain, or where there is an investment business not a trading business (IHTA 1984, s 105(3)); APR restrictions to agricultural value, or where the occupation rule applies.
What Should Owners Do?
The first practical steps to take by owners of substantial estates are to ensure both good lifetime record keeping and IHT available relief compliance review. Lifetime transfers and loans should be well recorded.
With the penalty based system for IHT enquiries, tax advisers can no longer take the risk of submitting risky or weak claims for APR and BPR without being able to substantiate the basis of the claim.
One of the current areas of attack by HMRC in their attempt to deny BPR is to question commerciality. In order to achieve BPR there must not just be business but a business carried on for commercial gain. For example, in the case of equine business, there must be a profit or proof that a profit was intended. Questions will be asked by HMRC about the original business plan, the quality of books and records, correct PAYE application re staff etc. Good record keeping is not just a requirement for income tax purposes but also supports a claim for IHT relief.
It has to be said that there are three things certain in life – death, taxes and that on the question of commerciality HMRC will always ask for the original business plan. How can it ever be proven that an unprofitable business was to be of commercial design if there was no original business plan?
Practical Tip
Take tax protecting action before death; the checks on the validity of the claim for APR and BPR should be made before death – there would be plenty of time to repair penalties before death but not after death! There are strong arguments to promote the concept of the APR/BPR ’audit‘, i.e. the ’auditing‘ or checking of the availability of these reliefs by the tax adviser, the family members and generally those potential beneficiaries.
By Julie Butler
