What is part of the estate for IHT purposes?

[CovidTrialGuineaPig]

I'm hoping to get some advice here before deciding whether it's worth reengaging our solicitor to argue with HMRC. If we can do it ourselves, even better.

My dad passed away suddenly in early 2018 and our solicitor submitted our IHT 400 and we paid inheritance tax (a lot!) as appropriate.

Our solicitor advised his critical illness insurance payout may not form part of his estate as the claim was made after his death and payment also received after. So IHT was not paid on this proportion of the estate. The solicitor took advice from HMRC helpline about this.

HMRC are now saying that it does form part of his estate and thus IHT is payable. They rely on this:

• S5(1) IHTA 1984 states that a person’s estate is the aggregate of all the property to which he is beneficially entitled;
 
• In accordance with S 272 IHTA 1984 property is defined to include rights and interests of any description.

The amount of additional tax payable is about £50k (40% of the total payout).

Does anyone have any experience or could point me to any advice online? I feel so angry HMRC have taken 1.5 years to come back to us about this that I want to try and argue it even if we ultimately end up paying it.

Thank you in advance.

[Alarae]

Was the policy written into trust or was the critical illness payout owed to your dad? If the latter, it should not matter that the claim is made after death as the estate would be owed a right to the payout. The right should be valued and included in the estate, which would likely be equal to the payment due under the policy. Critical illness payments are considered income (albeit not subject to income tax), so are taxable as a general part of the estate.

I think this is what HMRC are relying on in their manuals (it's the bottom bit) www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20556

Unless it was written into trust I don't see why it would not be included in the value of the estate and thus taxable. Admittedly I will throw my hands up and say I've been on maternity leave for 2020 so my brain is slightly rusty, but I can't think of an argument against it unfortunately.

HMRC will also not take any blame for advising your solicitor, as they say you should take independent advice and anything from HMRC cannot be depended upon (its a stupid rule, but it's actually been litigated and HMRC (in most circumstances) hold no responsibility for advice provided from their helpline).

It might be worthwhile a short meeting with a private client tax advisor to see if there is any likelihood of success, as even if you have to pay a little for them to argue with HMRC, if its cheaper than the potential IHT bill it would be worth it.

[Collaborate]

For the sake of £50k I wouldn't hesitate to pay for professional advice if I were you.

[RedHelenB]

I agree with Collaborate, for that sum of money its worth taking it further.

[CovidTrialGuineaPig]

Thanks. From my reading it does seem to need to be written into trust which I don't think it was so I think we may be liable to pay, however I agree that a brief meeting might be useful.

Do you think we should re engage our old solicitor as he has the background or could we speak to anyone? (my brother seemed to use the most expensive one in London although he was efficient!) I live in the midlands where rates are naturally cheaper.

[Winebottle]

I'd look for another one. They don't really require any background, probably just need to look at the policy to determine if it is an asset of the estate or someone else.

This is a straightforward issue for someone who deals with these things professionally. If they need to rely on a HMRC call centre worker for advice, they don't know what they are doing.

[Arewethereyet21]

What that section of the IHT manual is saying is that even if it was written in trust an IHT charge will arise in some circumstances.

Where life assurance has a critical illness component and the life assured wants to write the death benefit into trust the critical illness benefit can be carved out (referred to there as the retained benefits). This is because critical illness is really designed for use during lifetime if you can’t work so you need to make sure you can access it rather than the beneficiaries of the death benefit under a trust.

If someone has done that but has decided not to claim on the critical illness, instead leaving the trustees to claim on the death benefit on their death (which falls outwith the estate and therefore escapes IHT) HMRC may claim that this was done deliberately to avoid IHT and that therefore the person neglected to claim the critical illness causing a loss to their estate which is deemed to be a transfer of value in terms of the IHT Act. I would imagine that a key feature here will be whether or not the critical illness claim was eligible to be paid and that will depend on the terms of payment under the policy.

For £50k it’s worth having a solicitor look at this for you further but you can use someone more local to you rather than in London - just make sure that IHT is their specialist area - looking for a STEP member will assist with this.

[Londonmummy66]

It is worth having someone look at it. London lawyers tend to be more expensive (higher overheads). You could look to see if there is a solicitor member of the Society of Trust and Estate Practitioners (STEP) in your area that specialises in probate - should be competent and probably a bit cheaper than the big London firms. However, bear in mind that higher rates may reflect more experience. If they've dealt with it before they won't need to spend hours researching and therefore may cost less despite looking expensive.

[CovidTrialGuineaPig]

Thanks all.