Government looking at inheritance tax

[HarryVanderspeigle]

It says on the news today that the treasury are looking at reforms. Potentially looking at increasing the seven year rule, or a lifetime gift allowance. I don't really see how that would work as we all know that wealthier people will spend more on their children for things like weddings, university expenses, getting on the property ladder etc. But if it is to be reformed, how would you do it?

I often wonder if the objection is because 40% is so high. Would it actually raise more if it became 20% on estates over £100k? I can't see them putting the percentage up and we all know that very rich people find loopholes anyway.

enlarging homes ( thus making them more unaffordable)

should definately be taxed at point of sale

And it has been at £325,000 since 2009. Even in my neck of the woods, the NW house prices, food prices council tax have doubled since then. The threshold needs increasing. Going by the BoE inflation calculator it should br £562,000 now.

Tax by stealth

No. I am never going to inherit a single penny. And I honestly don’t give a shiny shite what other people do or do not inherit. If they do, good for them, no one ever said life was “fair”. I am not entitled to anything from anyone, if I want something, I work for it.
And before anyone starts, yes I think there should be far more support for people who are genuinely unable to do that.
But I think it is wrong that my estate, the bulk of which IS from earned income which has already been taxed at a higher rate, will be taxed again on my death. Can you really not see how that is a massive disincentive to work and save?

Gifts out of income are exempt whatever it's spent on. Also, buying presents is entirely allowable as long as it's not taking the piss. Buying their son's family a big TV for Christmas is perfectly fine, buying them a brand new expensive family car, maybe not so much. Paying for a family holiday they're going on with them is also fine! I've been an accountant for over 40 years. I know what HMRC will challenge and what they won't. It really is only the most extreme cases of "avoidance" that get their attention. They don't do random "kite flying" just in case there's something potentially liable to IHT - they've not got the staff to do it, so concentrate on the most likely high value cases they think they can win. School fees are also pretty much allowable unless maybe it's a ridiculously expensive private school.

Also "gifts out of income" exemption which has no 7 year limit/threshold. So basically any "surplus" between income and her regular living needs/costs can be gifted and fully exempt even if she died within 7 years. Just be careful not to start depleting savings to do it as then HMRC can argue they're gifts from savings rather than gifts from income. Basically as long as the estate doesn't fall, you're usually home and dry. It's a way of stopping the estate getting bigger.

Just means that you're better making lots of small gifts rather than saving up and making infrequent large gifts.

Yes. My dm used some of her annual excess income to pay towards DD’s school fees.

So how do HMRC know if i give 7k pa to my DD for a few years? or 20k in one go? Does the bank report this withdrawal of money? how do they know i didn't blow it on holidays or cars?

Are they really looking at individual peoples bank accounts?

Yes, they can insist on checking bank accounts of the deceased, but it's pretty rare these days for relatively average/normal people. They do look at historic tax returns, i.e. if interest on savings is falling year on year suggesting a reduction in capital, or if someone has been a high earner but probate is declaring a relatively low/modest estate etc. They also have access to other government databases, such as for stamp duty, and land registry so will know if someone has, say, sold a house for a million, but then dies a couple of years later with a declared estate of only half a million etc. Or if an expensive sports car is registered to the deceased on DVLA but the car nor value isn't reflected in the probate application. Lots of ways they can piece together a "picture" of the deceased's finances in the years prior to death which may trigger an investigation/enquiry that would usually lead to an inspection of their bank transaction records for the past few years.

@taxguru I'm still very much alive & on average will live another 20 to 25years.

How do they know if i gift 7k or 20k on a regular basis

They don't unless they open an investigation/enquiry once your executors apply for probate. As I say, to trigger such an investigation, they may compare what's declared on probate with what they think they know about you over many years of various governmental databases. Someone with a relatively high income would be expected to leave a relatively high value estate - if not, then the money has gone "somewhere" which "may" trigger an investigation. Likewise, as I say, they may use DVLA or Stamp Duty databases, or declarations of interest from banks, or Passport office databases for exit/entry from the country suggesting regular holidays etc or employment/PAYE databases/SA returns for a view of declared income over several years showing upward/downward trends etc. Or any one of the few dozen other governmental databases they have access to.

https://www.thp.co.uk/hmrc-connect/

This is the same HMRC who, according to their records, believe I still work for the local council that I retired from 9 years ago? The same HMRC that, also according to their shitty records, believe I owe them income tax on £35k every year for 9 years?? You're having a larf. One day I won't fight it and will let them take me to court instead - ha, egg on face!

I know they won’t investigate everyone, but because of the 41% investigations increase, I wonder if it’s the ‘ordinary’ cases as well as the ‘extreme’ cases they’re looking into these days, and how their use of AI will be detecting possible underpayments.

Just musing on why, if HMRC can and do access bank accounts etc, they don’t use this ability to target parents, usually Fathers, who don’t pay maintenance? Who hide and lie about the money they earn, to avoid paying for their own children, which then falls to the tax payer? Why aren’t they doing that? Probably because it wouldn’t bring in headline figures of billions, but it surely would be a popular policy for a government that is currently very unpopular?

Because "it's hard" and HMRC don't like "hard" things any more. They want the easy wins, i.e. where someone has sold a house for £1m a few years ago, but then dies and probate only declares £500k. It's an "easy win" for them for IHT. Land registry is clear evidence, then they just get the bank statements and can quickly pick the big outgoing transactions as to where the money went - just a few hours of office work!

In the same way, they've been targeting buy to letters where land registry and stamp duty return shows "Fred and Mabel" have bought a second house (stamp duty flags it up), so HMRC sit on the info for a few years, and then pounce when successive tax returns don't show any rental income declared, so they get several years' of back tax plus penalties etc. They "could" act within a couple of years of Fred and Mabel buying the second home, but they sit on it and wait for longer to maximise the penalties!

It's a lot harder when it comes to the black economy of "fiddling" taxes by cash in hand work, claiming a foreign holiday was a business trip, money laundering, etc., as HMRC don't have the same kind of "clear" evidence that they have from the likes of the Land Registry, DVLA, etc. Basically for things like child maintenance avoidance etc HMRC don't have the same "slam dunk" easy evidence and actually have to do some investigative work, like the way a tiny number of benefit claimants are caught because they need investigators taking pictures/videos of say disability claimants engaging in sports etc when they claim they can't walk more than 5 yards! It's just a lot harder! And the kind of people in the black economy know how to get away with it because they talk to eachother, share knowledge, etc.

It's a lot of why those engaged in benefit fraud/tax evasion, etc don't want to "settle down", i.e. don't buy their own house, don't have "fixed" business premises such as a workshop or office, etc - it minimises "formality" and the footprint evidence - best to have as little on official databases as possible!

There are dozens of different departments with HMRC, all doing different kinds of work, and all of differing staffing levels and abilities/competences. Investigative departments will have a higher level of staff ability/competence/experience/qualifications than a purely administrative function which will probably have a room full of staff who've been there less than a year and have no prior relevant experience! I know that some HMRC staff despair at other departments within the same organisation who couldn't run a piss up in a brewery, but there are some really good departments who are on top of things. Quite simply, the muppet who cocks up your annual statements and/or can't correct them, won't be the one who does the investigative work.

I would do this too. Create a tier system similar to income tax. First 100k is free. Between 100-500k 10-20%. Increase the current threshold to 500k per person (why is it less for a single person!!??) anything above 500k is 40%

Likely the total income on this would be higher.

Alternatively why not just pay 20% on anything over 100k?

You have to declare it on death, there’s a form where you have to record gifts out of income and then add in the income

Sure if my DD were to put it down but what i'm asking is if she doesn't mention the irregular 6 7 or 8k gifts over the last 20years......

Unless the banks tell them, who knows....

I think some countries do a blanket 10% on the total inheritance

Although some have zero too

What if executors don’t know

I've been wondering about this, now with lots of people having dc pensions and using draw down, what is classed as savings and what is classed as income. Because surely a dc pension is just a tax wrapper for savings, so how will hmrc distinguish which your money is, especially if you choose to drawdown large lump sums irregularly, due to market conditions, rather than regular amounts.

I’ve no idea. I suspect that the kind of families that use this on a big scale ie school fees have accountants and advisers involved. We certainly do.

if you gift you child 5k and you die 6 years later I suspect HMRC are a little less bothered.

Could be interesting. Our adviser has said that pension withdrawals count as income.

It falls every year doesn't it by year six probably not much to pay. I always think this when people say but I don't know if I'll live for seven years, still worth doing.