In my previous article in Industry Eye, I referred to the study programme established by HM Revenue & Customs (HMRC) to consider how to challenge perceived abuses of the tax system and how to introduce effective anti-avoidance legislation. The programme members are expected to report by October 2011.
I also indicated that HMRC can now rely on the penalty regime introduced by Schedule 24 Finance Act 2007 and extended by Schedule 40 Finance Act 2008.
Where previously HMRC had to disprove a claim for Agricultural Property Relief (APR) or Business Property Relief (BPR) and then subject the estate to tax on the unrelieved amount, collecting the Inheritance Tax and any interest due, now they can also levy a penalty for making an incorrect claim in the first place.
In other words, the onus is now on the personal representatives of a deceased's estate and on the donor of a lifetime gift to ensure that any claim for APR/BPR is fully supported and can withstand any challenge by HMRC.
The purpose of the legislation is not to prevent legitimate claims. As ever, there will be grey areas open to interpretation or circumstances about which a proper debate with HMRC can establish the validity of a claim. If there any doubts about the validity of a claim, by declaring it at the start, e.g. when submitting the documents, you put HMRC on notice of your doubts and open up the position to debate, mitigating the potential for any penalty recovery when finalising the claim.
The extent of HMRC enquiries can be surprising! These can relate to your original intentions in establishing your business, its conduct over the years and in the case of BPR whether it has been carried on for commercial gain.
Interestingly, to qualify for APR the business need not have made a profit or prove that profit was intended – the assets qualifying for relief have to, inter-alia, be in agricultural occupation for a period of two or seven years, depending on whether the owner is in occupation.
Where does this leave owners and their advisers wishing to make a claim for APR/BPR? With the penalty system for Inheritance Tax enquiries you cannot afford to take the risk in submitting a weak claim without being able to substantiate the basis of the claim. When should you start to make checks on the validity of a claim? Well, preferably whilst you are still alive and able to contribute your knowledge of the circumstances surrounding a potential claim. Often, one of the major costs in settling an estate is trying to establish the facts and the validity of a claim all of which could have been avoided if the deceased had left a clear understanding of his affairs.
It is therefore worthwhile consulting with your advisers now and checking the validity of a claim during your lifetime. In doing so, you avoid making incorrect assumptions and offer the opportunity to repair matters before death.
Patrick McCreanor, of Baker Tilly. email: patrick.mccreanor@ bakertilly.co.uk, or tel: 0113 2855000.