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Mark McLaughlin CTA (Fellow) ATT TEP laments an unhelpful approach by HM Revenue & Customs when certainty of tax treatment is sought.

Mark McLaughlin

Worth asking?

In my experience, the technical specialists at HMRC Inheritance Tax have always been helpful, perhaps more so than the other HMRC specialist offices. They always seemed willing and able to agree or disagree on interpretations of ‘grey areas’ of the Inheritance Tax legislation where possible, and comment on their application of the law in practice. Unfortunately, this no longer seems to be the case.

My general impression of HMRC lately is that they seem increasingly reluctant to offer taxpayers (or practitioners) their view on technical issues unless it is absolutely necessary for them to do so (eg if the matter falls within Code of Practice 10 (‘Information and advice’)). This is despite a recent statement in HMRC’s ‘Litigation and Settlements Strategy’:

“It goes without saying that where possible, issues should be resolved in non-confrontational and collaborative ways without entering into a dispute. Where possible, much uncertainty may be resolved through dialogue on a pre-return and perhaps pre-transaction basis.”  (italics added).
 
There are occasions when a particular tax issue has implications for a number of clients, and it is therefore helpful to ascertain HMRC’s general approach. The following examples illustrate this point.

Example 1 – Is a return needed?

I work with an accountancy firm that acts for a number of discretionary trusts. In some cases, the trustees made interest-free loans to beneficiaries, in exercise of their powers under the trust deed and which are repayable on demand. For IHT purposes, the forgiveness of a loan generally constitutes a transfer of value, within IHTA 1984, s 3(1). There was some concern by the trustees that an interest-free loan may involve a chargeable transfer, by virtue of the interest foregone or possibly the trustees’ omission to exercise their right to charge interest. If a chargeable transfer did arise, there would be a requirement to report the transfers on form IHT100. This raised the supplementary question of whether a single account would be needed when the loan was repaid, or on a periodic (e.g. annual) basis.

HMRC initially refused to comment. It was only after pointing out that they may be receiving a number of unnecessary IHT returns with little or no tax at stake that HMRC offered their view. This was broadly that a loan involves a disposition of ‘relevant property’ (i.e. the money), but that no IHT charge arises without a fall in value of that property. The trustees must take into account the value of the right to receive repayment of the loan, and decide if there has been any fall in value. Form IHT100 would therefore only be necessary if the value of the right to repayment is less than the money lent. Although HMRC’s response could be summed up as “it all depends” and gave rise to a separate valuation issue, it was useful at least in terms of confirming how HMRC may approach the issue in similar cases.

Example 2 – Which assets to transfer?   

Another accountancy practice client was dealing with the estate of an individual who had run a business in partnership with his wife for many years. The business was incorporated, but the husband died approximately 18 months later. For IHT Business Property Relief (BPR) purposes, the two year ownership requirement for the shares was not satisfied. However, that requirement would be satisfied by combining the ownership period of the shares and partnership interest (IHTA 1984, s 107(1)). However, the partnership interest was sold to the company for cash (i.e. the proceeds being left outstanding as a loan to the company). It was not altogether clear (to me, at least) whether the company shares were ‘relevant business property’ for the purposes of the ‘replacement property’ rule, due to the sale of the business upon incorporation within two years of the husband’s death.

It occurred to me that many sole traders and partnerships have incorporated their businesses in recent years, and similar cases must have arisen. I therefore asked HMRC for confirmation that BPR is potentially due in such circumstances. The request for their view on the BPR position was refused, on the grounds that no IHT was immediately at stake in the case mentioned (the husband’s will created a discretionary trust of the nil rate band plus assets qualifying for BPR, with residue to the surviving spouse). I pointed out that the deceased’s personal representatives needed to know whether the shares could be appropriated to the discretionary trustees, but could not do so without knowing if BPR was due. The reply I received was that HMRC will not consider the availability of a relief or ascertain the value of an asset unless there is an immediate IHT liability. However (no doubt anticipating my dissatisfaction), they helpfully sent me the HMRC factsheet “Complaints and putting things right”!

HMRC’s response was all the more surprising because in the same month I attended a conference in which a senior representative of HMRC Inheritance Tax commented that even if BPR was considered to be available at the 100 per cent rate, it would be “worthwhile” making a return so that the extent of the relief can be agreed at the outset. This point was confirmed in the accompanying conference notes.
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As mentioned previously in Busy Practitioner (Issue 60, August 2007), some individuals who previously transferred foreign property to discretionary trusts in order to submit an account to HMRC and claim foreign domicile were disappointed to find that HMRC declined to consider their domicile status, even if there would otherwise be an IHT liability at stake, albeit usually a small one. Thankfully, HMRC have now resumed consideration of domicile cases, where the IHT at stake is more than £10,000 (Taxline (June 2007), contribution by Peter Vaines).

False economy?

It would seem that the problem is a lack of resources, with HMRC allocating their administration costs towards maximising tax yield. However, this policy is arguably counter-productive. The uncertainty caused by the complexity of legislation and HMRC’s inability to confirm matters of policy and practice inevitably means, for example, that IHT returns will be unnecessarily made (and tax either not paid or overpaid, depending on the position taken), which will only stretch HMRC’s resources further. HMRC should be willing and able to help practitioners, as this is likely to benefit HMRC in the long run.   

The above article is taken from 'Busy Practitioner', a Newsletter published by Tottel Publishing.