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The estate of a person who has died may be liable to Inheritance Tax. Bequests to spouses and charities are exempt, as are some heritage, agricultural and business assets. The tax is charged at 40% of the value of other assets, above a nil-rate band (£263,000 in 2004-05). The value of estates has risen in recent years, particularly house values which have outpaced increases in the level of the nil-rate band. The number of estates liable to the tax has therefore grown, to 30,000 in 2003-04. The Revenue collected £2.5 billion in Inheritance Tax that year, around 1% of the Revenue's net tax receipts.
The Committee last examined Inheritance Tax in 1999,[1] and recommended improvements in the way the Inland Revenue administered the tax, including strengthening its compliance checks and imposing penalties on those not complying; speeding up the processing of long-outstanding cases; and more rigorous enforcement of the conditional tax exemption scheme for heritage assets.
Securing the right amount of tax on time
The Revenue received 67,500 Inheritance Tax returns in 2003-04, launched compliance enquiries into 3,600 cases and secured an additional tax yield of £126 million. This represented a two-thirds increase in caseload since 1998-99, though managed with a similar level of staffing. The Revenue has also settled cases more quickly and reduced the number of long outstanding cases.
Since the Committee last reported, the Revenue has made greater use of information held by different parts of its organisation to inform its compliance investigations, and improved procedures for identifying undeclared gifts and tackling other compliance risks.
The Revenue cannot give a firm estimate of how much tax is lost from non-compliance because, unlike the United States Internal Revenue Service, it has not measured the Inheritance Tax 'tax gap' - the difference between the theoretical tax payable and the actual amount collected. It has now started to deal with this, drawing on the US experience. To help tackle artificial avoidance—part of the tax gap—the Revenue has monitored such schemes and challenged them through litigation and legislation, including a recently introduced tax charge on the benefits that continue to be derived from assets given away.
The Revenue can apply penalties for negligent inaccuracies in tax returns, but used this sanction on only 100 cases in 2003-04. It has recently secured its first successful prosecution for Inheritance Tax fraud. In applying penalties, the Revenue has abated the maximum available penalty according to the gravity and nature of the offence, including whether errors were voluntarily disclosed and the extent of cooperation. The Revenue also applied significant abatements, however, even when it discovered errors or omissions.
Making the tax procedures easier for representatives
While many people use solicitors or other professionals to deal with their Inheritance Tax affairs, 30% of tax returns are submitted by personal representatives. To help make the Inheritance Tax system easier to use, the Revenue has set up a joint probate/Inheritance Tax helpline, improved its website guidance and introduced a shorter, easier to complete, form for the majority of estates. But the main Inheritance Tax form remains difficult to use, and there is uncertainty among personal representatives about what is required in valuing property.
The heritage exemption
Assets of sufficient heritage importance can be exempt from Inheritance Tax, provided they are conserved and reasonable public access is provided. Following the Committee's 1999 report, the Revenue and heritage agencies have worked more closely in checking that exemption conditions are being met, and there has been less slippage in the programme of inspections. The Revenue has also publicised exempt assets and public access arrangements, and extended its register of heritage assets to include chattels as well as properties.
Since 1998 all new exemptions for heritage chattels require some open access for the public, without a prior appointment. The Revenue has also used its powers to renegotiate existing agreements with 16 of the 44 owners with the most significant collections, to provide open access to 1,900 chattels.
On the basis of a Report by the Comptroller and Auditor General,[2] we examined the Inland Revenue on securing the right amount of tax on time, making the tax procedures easier for representatives, and the operation of the heritage exemption.
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