Tax really has become a matter of life and death with HM Revenue & Customs’ (HMRC) revelation about the possibility of paying inheritance tax before they die.
HMRC is now wobbling on the original announcement and has issued a statement redefining what was said – and pointing out that no one will have to pay death taxes before they die unless they are involved with a tax avoidance scheme.
“What we really meant was some people are dodging tax by reducing the value of their estate by taking advantage of schemes they should be reporting on their tax returns,” said an HMRC spokesman.
“We believe some providers are marketing inheritance tax avoidance schemes that also touch on other lifetime taxes and this is the problem we want to address.
“This affects only a few very wealthy taxpayers and no one will be asked to pay inheritance tax before they die unless they are a member of one of these schemes.”
HMRC hopes the clarification will stop the uproar the original announcement triggered with tax professionals and individuals.
Explaining the measure in more detail, HMRC says that some estate planning ploys are not reported under the Disclosure of Tax Avoidance Scheme (DOTAS) rules when they involve shifting assets that might involve capital gains tax.
The tax agency also points out that under current rules, no demand for advance inheritance tax payments could be made before a taxpayer dies because no one can predict the value of their estate on their death.
“Before any assessment of inheritance tax due, the estate would have to file financial information anyway,” said the spokesman.
According to official figures, around 3,500 DOTAS cases have been reported in the decade the scheme has run.
HMRC has recently opened a consultation on upgrading the reporting rules.
New powers will also make tax avoided under a DOTAS scheme payable upfront. The taxpayer would then reclaim the tax by proving the validity of the scheme before a court.
However, the HMRC spokesman revealed tax advisers are bypassing DOTAS rules in some cases with schemes that save capital gains tax under the guise of estate minimise inheritance tax liabilities.
The DOTAs and inheritance tax measures go hand-in-hand with another consultation also underway proposing to give trusts a single inheritance tax allowance of £325,000 in line with individuals.
Current rules give each trust set up by an individual a separate £325,000 allowance.
Over the £325,000 threshold, individuals pay inheritance tax at 40% on the balance of the value of their estate.
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