HMRC Tony Key, Ian Hempstead
TACT Mike Coulshed, Paul Saunders
1. Compensation payments
There are significant issues around the taxation of the various different redress payments being made at the present time, such as in relation to the PPI mis-selling.
We understand the correct position is that there is no value attributable for IHT purposes on death if the right to compensation had not been established before the date of death. Conversely, if as at the date of death an offer of settlement had been made, the value then on offer would seem to be the appropriate value for IHT purposes.
However, there will be many cases where the right will have arisen during the lifetime of the deceased but no offer of settlement made by the date of death. In some of these instances, the amount of compensation will be assessed by reference to identifiable factors and even if an offer had not been made before death, the amount payable would have been ascertainable by reference to the agreed formula. I such cases, would HMRC look to the value established by the formula, or some other method, and would a discount be allowed mindful that the offer will not have been communicate to the deceased before their death
TACT is also conscious that, even where a specific formula is set down to calculate any compensation due, until the claim is accepted, the deceased cannot know that they have any entitlement. This will include claims in respect of the PPI mis-selling, where the financial institutions have taken differing views as to how such claims might be dealt with – some agreeing to accept all lodged by a certain date, whereas others require proof of “loss” in each case
TACT sought confirmation about HMRC’s approach toward compensation payments given the number of instances currently eg PPI mis-selling where compensation payments could be received by executors.
HMRC confirmed that the basic approach is the same whether it is a claim that is specific to an individual, for example where they have received bad advice, or where a more widespread issue has arisen and the financial institution is instigating its own investigations into a larger body of transactions.
The right to pursue a claim for compensation is an item of property and therefore an asset of the estate. Whether or not the right has a more than nominal open market value at the date of death depends on several factors, but is fundamentally down to what was known, or capable of being known, at the date of death about
• the amount of compensation that might be reasonably anticipated based on the information available,
• the likelihood of the claim being successful,
• the likely costs that would be expected to be incurred in obtaining a successful outcome, and
• the time delay between the date of death and the date when the compensation might reasonably be expected to be made.
The open market value of the right to pursue the claim becomes more valuable as the outcome becomes more certain, so particular events can trigger a substantial increase in value. This is seen, for example, where the FSA has announced that a particular organisation has been mis-selling a particular product and that the organisation needs to investigate all sales and compensate those who have been adversely affected. The FSA announcement would be a trigger point increasing the likelihood of someone with the appropriate investment receiving a compensation payment. If the affected organisation then announced that they would pay all claims in full, that would be another trigger point further increasing the likelihood of a successful outcome.
The right to pursue a claim can be valuable whether or not the individual entitled to make the claim was aware of this right, provided that the information was capable of being known at the relevant date. For example, you might have a situation where a financial organisation has announced that it is reviewing a particular body of transactions to identify whether compensation was payable and the individual was someone who had undertaken such a transaction. Even if that particular individual was unaware of the announcement, they still have a right for their circumstances to be considered and possibly for compensation to be paid and that right has some value. If, in the alternative, the individual concerned died before there was any indication that any right to compensation might have arisen, then no value would attach to that right as an asset of the estate on death.
Where executors were aware of a potential claim at the date of death, they should record the existence of the claim on form IHT400 and provide such information about the claim as they can. No value needs to be included for the claim as it would need to be discussed once the actual payment had been received and all the circumstances could be considered.
Guidance about the treatment of compensation payments can be found at IHTM10261 et seq, in particular the NHS continuing care scheme at IHTM10270 and Equitable Life compensation payments at IHTM10271.
Whilst TACT has been assured that HMRC will treat the letters of closure of the file as the equivalent of formal clearance under s.239 IHTA 1984, we have found that file handlers have refused to adopt such a position and sought to enforce assessments raised as a result of increases in the value of assets under another title aggregable with the estate or trust in which the letter has been received. Would HMRC please clarify its position
HMRC published guidance that where a title is wholly exempt from IHT, but was aggregable with another title under which IHT was payable, HMRC would issue clearance in respect of the exempt title notwithstanding that no clearance had been issued in the taxable title. Despite this, there appears to be an increasing incidence of HMRC refusing to issue clearance where property is wholly exempt as passing to, say, charity or the surviving spouse of the deceased. Would HMRC please clarify its position and, if necessary, provide the relevant guidance to its teams
The above can be exacerbated by delays in the executors submitting an account (or no account being submitted in the free estate), where aggregable titles pass to exempt persons
TACT had been experiencing a number of cases where despite the issue of a closure letter by HMRC, caseworkers had sought to collect extra tax from the liable persons concerned where adjustments at another title had increased the overall IHT liability.
TACT was also concerned that HMRC would not issue closure letters for titles that were wholly exempt from IHT whilst the liability at other titles remained open.
HMRC confirmed that the issue of a closure letter has the same effect as a clearance certificate and had reminded caseworkers of this fact. HMRC had also drawn attention to the instructions about issuing closure letters at titles exempt from tax. HRMC will consider issuing an internal instruction to re-enforce the message.
3. Time limits
HMRC has drawn to TACT’s attention that there is a 4 year limitation of refunds of IHT. It is understood that the 4 year period will run from the (latest) date of closure of the file by HMRC. Where formal clearance is not obtained under s.239 IHTA, it is understood the 4 year period will run from the date of the letter to the taxpayer notifying closure of the file. This is the case notwithstanding that there could be further amendments to the disclosable value under the title which could give rise to a refund of IHT. It is understood that provided the taxpayer reasonably believes there may be grounds to claim a refund of IHT, and notifies HMRC that the tax has not been finalised, the 4 year period will not start to run.
If a certificate under s.239 is obtained, it is understood the time limit will run from the date of issue of that certificate (or any later certificate)
Would HMRC please confirm its position in this regard.
HMRC confirmed that the time limit for seeking a repayment of overpaid tax was 4 years from the date of payment (or last payment) of tax as per s.241. Where an estate was all but settled and there was a risk that a particular point may not be settled within that timeframe which might give rise to repayment, TACT were advised to make the position clear to HRMC and effectively make their claim for a refund within the 4 year period, even though the quantum of the repayment may not be known for some time. HMRC may well put their papers away (and issue a closure letter), but when the matter was finally settled, the claim for a repayment would have been made in time.
4. Charges at HM Land Registry
There have been instances recently where HM Land Registry has unilaterally set up a charge over property held within an estate or trust in respect of outstanding IHT. It is understood that such arrangement only applies where there is a liability to estate Duty, but not where there is a liability to IHT, although in the later case it is understood that HMRC has a discretion to impose a charge
Would HMRC please clarify its policy with regard to the charging of property and, in particular, any powers it understands HM Land Registry has to impose a unilateral charge on its behalf
HMRC confirmed that under s.73(7) Land Registration Act 1925, the registrar could place a charge over property when they became aware of a liability to Estate Duty. A similar provision applied to CTT (possibly reaching forward to IHT) under SI 367/1975. However, there seemed to be no equivalent provision in the 2003 Land Registration Regulations, so HMRC was not aware of any current powers that allow HM Land Registry to unilaterally impose a charge or notice over land where an IHT liability arises.
HMRC confirmed that it will place land charges (or tax notices) on the register where there is a risk to collection of tax, for example, where the executor is overseas.
5. Surviving spouse exemption – para 2 Sch 6 IHTA
Where the transitional surviving spouse exemption is due in respect of trust funds where the estate of the deceased spouse was subject to estate duty, the approach of HMRC is inconsistent.
Would HMRC please clarify its procedure, including details of the forms that it expects to be submitted by the trustees of such trusts
HMRC explained the number of cases where this exemption applied was now low and it was likely to be unfamiliarity with it that was leading to inconsistent handling by caseworkers. HMRC advised that rather than just write a letter explaining the position, a more consistent outcome would be obtained by the trustees submitting an IHT100 with the relevant event form (but no asset breakdown). They should also provide a copy of the testator’s Will, or other document setting up the trust; the name of the pre-deceased spouse and, if known, the Estate Duty reference. To forestall enquiries from HMRC, trustees should also advise, if known to them, the agents dealing with the Free Estate, or confirm that identity was unknown.
6. Instruments of Variation
The Finance Act 2012 introduced a new subsection 3A into s.142 IHTA 1984 which excludes the application of s.142(1) IHTA does not apply to “a variation by virtue of which any property comprised in the estate immediately before the person’s death becomes property in relation to which section 23(1) applies unless it is shown that the appropriate person has been notified of the existence of the instrument of variation”. This wording would seem to deny the benefit of s.142 to cases where the variation could pass significant sums to individuals and, say, only £100 to charity unless there is evidence that the charity was informed of the variation. This is potentially a rather draconian measure and TACT would appreciate HMRC’s guidance as to how it interprets this provision in practice
HMRC confirmed that the effect of s.142(3A) was that unless it was shown that a charity benefiting from a redirection was aware of the legacy due to it, the variation as a whole would not fall within s.142(1) with the result that the dispositions made by the IoV would be transfers of value under s.17, and subject to IHT as appropriate.
7. Loan trusts
Where a loan trust is established, and the investment in the trust at the date of the settlor’s death is worth less than the outstanding loan, it is the full value of the loan that must be included as an asset of the estate.
HMRC confirmed that where the deceased had loaned money to trustees, it would normally expect to see the full value of the debt due to the deceased included as an asset of the estate. Where those funds had been invested in an insurance bond, or any other asset(s), the proceeds of which were insufficient to the repay the debt, HMRC would still normally expect to see the full balance due to the deceased included as an asset of the estate.
However, if the trustees’ liability was specifically limited within the loan documentation to the value of the trust assets, then the value of the loan to be disclosed will be the value of the trust fund as at the date of death. Any change in value of the trust fund after the date of death, increasing or decreasing the amount the trustee is able to pay to the estate to discharge the loan, will not affect the value to be disclosed for IHT purposes, but will be treated as appreciation or depreciation within the estate.
However, where there was such a limitation, a question arose about whether the making of the loan gave rise to a loss to the estate at that time. It is necessary to look at what was said at the time the loan was made, to see if there was any expectation that the loan might not be repaid in full, notwithstanding the protection afforded to the trustee within the loan documentation. If the trustee’s liability is limited subsequent to the loan being made, HMRC may look to the position at the time such limitation is agreed