HM Revenue and Customs (HMRC) have quietly made a change to their policy regarding Inheritance Tax (IHT) that could leave executors of estates facing unexpected IHT liabilities.
The new risk results from the way HMRC intend to deal with estates in which gifts (‘gifts inter vivos’ in the parlance) are made in the seven years prior to death. Such gifts are called ‘potentially exempt transfers’ in IHT terminology, because they affect the IHT position unless the donor survives seven years after making the gift.
HMRC have previously raised any enquiries about gifts inter vivos within 60 days after the papers relating to the estate have been filed. The new policy abolishes this time limit, meaning that HMRC could potentially instigate an investigation into the gifts made prior to death several years after the estate tax returns are filed. If they find undeclared gifts, IHT may be payable on them.
This has potentially very serious implications for executors as not only may they be personally liable for any IHT that subsequently becomes payable, but also penalties can be levied. This could all take place years after the estate has been wound up and the assets distributed to the beneficiaries.
Furthermore, it makes it wise to conduct a proper review of the deceased’s financial records relating to the seven years prior to the death and to retain the records in case there is an enquiry.