Why HMRC (the taxman) likes taxpayers more than you would think

By 10 February 2022Estate Planning

I have just been made aware of the most amazing statistic, which has stirred me into penning this article: – just 12% of UK adults sought help from an adviser when looking to transfer assets to younger generations last year.

The reason I find this so remarkable is that the tax system in the UK is one of the most complex in the world (for your interest the United States and India rank alongside the UK). Therefore, the chances of making a mistake are alarmingly high. The most common methods of the transfer of assets and money is through the use of cash, gifting shares or portfolios, gifting property, or gifting chattels of value (e.g. a painting or an antique).

All these methods have tax implications and only one is difficult for HMRC to trace – the gifting of chattels. If you are honest and file your annual tax return and complete the Capital Gains Tax (CGT) page with the gift of the chattel(s), HMRC may quite possibly send “an enquiry letter”. The reason is the method they use for valuing chattels – it is not what most people would think.

If you give a beneficiary 10% of your set of Ming vases in the belief that 10% would take up your annual CGT allowance of £12,300. You would be mistaken. HMRC would take the view that it would be the loss of value to the remaining 90% of the vases, which is likely be considerably more than the value that you place on the 10%. i.e. only 90% of a complete set is probably only going to be worth 50% of the value of a complete set. Therefore, the person making the gift is likely going to get a large CGT bill.

If you give a large sum of cash to a beneficiary, it is possible you have to live seven years before the money falls outside of your estate and if you do not live seven years then the value of that cash will be added back to your estate value and taxed accordingly.

If you give a portfolio of shares to a beneficiary, this is a disposal for CGT purposes as well as a gift for Inheritance Tax purposes. Therefore, the above paragraph will apply i.e. having to live seven years. Also the value from when you invested in the portfolio to the time that it was gifted will also have to be assessed for CGT purposes. Again it is likely a large CGT bill could follow.

If you give an investment property or second home, the paragraph above applies in full as well.

Yet only 12% of people embarking on the above strategies are seeking advice. How many of the remaining 88% understand the tax system sufficiently to know what they are doing will not incur future tax liabilities when HMRC finds out what’s happened. A very bad idea is to work on the basis that HMRC will never find out? Unfortunately they very often do, because they can look at individuals’ annual tax self-assessment and look for a pattern and then see a change to that pattern. Then they will send out their standard “enquiry letter”.

At this stage it is a very polite letter asking you to provide information they feel may lead to an underpayment of tax and therefore, incur the taxpayer a penalty and interest payments. It will likely also involve HMRC seeking information from persons who have received any gifts to see what they have done with the money and whether their self-assessment returns have been completed correctly, and indeed, if they have completed one at all – the chances are that gifts received by beneficiaries will affect their tax circumstances and self assessment then becomes a requirement. However, they do not understand this and it may incur penalties and interest payments as well. I still hear stories where people say they will not report things, as they think it is unlikely anyone will find out. Why do you think the tax system is as complex as it is? It is so, for example, unreported transfers can be traceable!

It would appear that the most common reason for not seeking advice is that you have to pay for it and people don’t like paying. One other is that people don’t know where to seek the necessary advice. Individuals tend to have no idea of the complexity of the UK tax system and the consequences of what they are planning to do.

If paying for advice means saving potentially tens of thousands of pounds in tax liabilities (and indeed it can often run into hundreds of thousands), then it is well worth paying for. Would you buy a new car and not insure it?

Now do you understand the title of this article? HMRC relies on people making mistakes and the easiest way to make a mistake is to not obtain suitable advice.

I will leave you with one thought;- all the above scenarios I portray are ones we deal with every year and everyone has a solution that can (depending on circumstances) result in all tax liabilities legitimately being reduced, which is where we come in.

Colin Fogwill, Investment Director

If you would like to discuss estate planning or any other financial planning matter, please do not hesitate to contact us on 0114 2588899 or email info@fogwilljones.co.uk. Our Independent Financial Advisers are qualified to provide advice in the areas of retirement planning, tax planning, savings, inheritance tax, investments and protection.

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