Asking HMRC for Advice; Inheritance Tax – Documenting Lifetime Transfers; Stamp Duty Land Tax
The following articles appeared in Tax Insider:
By James Bailey | April 2010
James Bailey points out that free advice is not always the best advice.
This article is being written by request – apparently from time to time people tell the Tax Insider office that all the effort that goes into offering them tax advice is a waste of time, and Tax Consultants are also unnecessary, because you can simply telephone HM Revenue and Customs (HMRC) and get free advice. However, free advice is not always the best advice…
Making Use of HMRC Services
I am a great believer in getting advice from HMRC in some circumstances – for example, they operate a number of “clearance” services whereby you can set out the details of a proposed transaction for them, and they will tell you the tax consequences they believe will flow from it.
Some of these clearances are enshrined in statute – there are some quite draconian examples of anti-avoidance legislation which can also catch quite innocent commercial transactions, and there is a statutory process for obtaining HMRC’s agreement in advance that they will not wheel out their sledgehammers to crack your innocent commercial nut.
There are also other informal HMRC clearance procedures which can be useful when you are considering a transaction where the tax treatment may turn on a matter of opinion, and it is useful to know HMRC’s opinion in advance.
It is also possible to agree valuations of assets for capital gains tax purposes where these are needed to complete a tax return – much better to have the discussion before you put the return in than to hope for the best and submit it, only to have the same discussion as part of an HMRC “Aspect Enquiry” where the possibility of penalties looms if they consider your valuation was a little sloppy!
I use all these services frequently on behalf of my clients, and they are a great help in providing a better service for them. I could carp on about the delays that are sometimes involved, and the way that in some cases HMRC will use any argument they can to avoid expressing an opinion, but on the whole the service works smoothly.
I suspect, however, that the “help” the punters who contact Tax insider are referring to is the “help” you can get by ringing HMRC up while filling in your tax return, or when confronted by a tax situation that you do not understand. In some cases, no harm will result, and you may even get the right answer, but on the whole I am very nervous about this “Do it yourself” approach to tax.
HMRC’s own policy on giving advice is contained in their “Code of Practice 10”, and the following sentence from that document illustrates a major gap in their service:
“However, we will not help with tax planning, or advise on transactions designed to avoid or reduce the tax charge which might otherwise be expected to arise”.
Fair enough – but I and my fellow tax consultants certainly will give you that advice, and for surprisingly modest fees, considering the savings you may be able to make!
There is a serious point here – HMRC do their best to promote the view that there is a “correct” amount of tax that is due as a result of any particular transaction, whereas in all but the simplest of cases, there are grey areas and the way a transaction is structured can make a big difference to the resulting tax bill. As Lord Tomlin said in the House of Lords during the case of The Duke of Westminster v The Commissioners of Inland Revenue in 1936 “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be”. That remains good law and seems to me a sensible way to deal with the State’s demands for ever higher taxes, but don’t expect HMRC to help you!
By James Bailey | April 2010
Recent Budgets have declared a “clampdown on tax dodgers” with an emphasis on penalties, etc. This tax article reveals how this focus highlights the need to document lifetime transfers.
HMRC guidance introduced in 2007 applied until 31 March 2008 and set a benchmark for quality documentation for lifetime transfers and loans of “the living” in order to make the handling of the eventual and distant probate more straightforward. HMRC will scrutinise all areas of lifetime transfers.
HMRC’s theme of checking for the documentation of all estates above and below the Inheritance Tax (IHT) nil rate band is similar to the approach to record keeping of the self-employed. There was further indication of this need to document with both the transfer of the unused nil rate band and jointly owned property.
HMRC’s August 2007 IHT and Trusts Newsletter stated:“From now until 31 March 2008, when looking at forms IHT200 received on a death, we will be paying particularly close attention to lifetime transfers. Not only will we be looking at estates where a form D3 has been completed giving details of gifts or other transfers of value but we will be reviewing other aspects of estates which we know can give rise to a lifetime transfers.
These may include:
- Joint assets – gifts can arise on a transfer into joint names or where a joint owner receives the benefit of withdrawals from accounts funded wholly by the deceased;
- Loans – gifts can arise on the forgiveness of a debt or part of a debt;
- Movement of funds between multiple bank accounts – this can lead to gifts being overlooked (see below);
- Inheritance – gifts can arise if there have been redistributions of property inherited by the deceased;
- Business or partnership – transfers from a business or partnership will not necessarily qualify for business relief;
- Rights under a pension scheme – a gift may arise if acts or omissions by a member of a pension scheme have the effect of increasing the value of benefits passing outside the member’s estate at the expense of his own estate.”
The Importance of Keeping Records
The HMRC website says “it will help your executor or personal representative to sort out your financial affairs when you die if you keep a record of any gifts you make and note on that record which exemption you’ve used.”
Self-employed taxpayers realise that they have to keep business records. So too must the taxpayer whether the estate falls below the nil rate band or above. Clearly, incorrectly recorded transfers could place the estate above the nil rate band, hence a need for review, and now there are games to be played with two nil rate bands.
As mentioned above in the context of lifetime transfers, making or receiving a commercial or family loan can have implications with regard to Wills and IHT. Not all loans can be deducted from a person’s estate.
It is common for an individual to either loan money or to receive money as a loan and there are complicated rules in notifying HMRC that judge whether that the loan is allowable as a deduction against the value of the estate or not. In family situations where a loan is made or received it is often done on an informal basis with little or no documentation.
A meeting with the family tax adviser and lawyer beckons. The answer is, don’t just lend it or gift it, document it! The same applies to jointly owned assets and lifetime transfers ‚and is the documentation robust enough?
GRAB THOSE TAX SAVINGS!
In something of a Robin Hood move, the recent Budget saw Chancellor Alistair Darling take from those at one end of the property ladder to give to those at the other. Sarah Bradford reveals who the winners and losers are in the Stamp Duty Land Tax stakes.
The Winners… …First time buyers! The Chancellor announced that legislation would be included in the 2010 Finance Bill to raise the Stamp Duty Land Tax (SDLT) threshold for first-time buyers to £250,000.