I have taken over the conduct of an estate matter from another solicitor who, incorrectly in my view, did not claim IHT spouse relief for a right of occupation for the residence given to the widow (after her occupation ceases, presumably on death, it passes to children from previous marriage). £530,000 more in IHT was paid than would otherwise have been due if the spouse relief had been claimed.
Rather strangely, the family is not bothered by this, as they ‘want all the IHT paid now’ - as opposed to later on widow’s death. However, my concern is that on the widow’s eventual death, her right of occupation will be treated as having an life interest, and the IHT on her estate calculated accordingly, resulting effectively in IHT being paid twice on a quite nice residence. I hope to rectify the situation with either a Deed of Variation changing the right of occupation into a discretionary trust (meaning the correct amount of IHT will have been paid, but it will not be part of widow’s taxable estate on her death) or doing a Corrective Account to claim the spouse relief reclaim the overpayment of IHT.
My question is about deadlines if we opt for reclaiming the overpayment:
The guidance on Corrective Accounts states that the C4 should be filed within 6 months of discovering the error (so six months from me notifying the executor, presumably);
IHTA 1984/241(1) suggests that if a claim that too much tax has been paid within four years of the last payment of tax, then the overpayment will be repaid.
Any clarification on which is the relevant deadline I should be worried about?
And as a side question, if no repayment is ever claimed, would HMRC likely go ahead with charging the same asset twice on the widows, or is there a chance they would take the initial (incorrect) payment as some sort of payment on account?
I would expect HMRC to assess IHT on the circumstances that apply on the death of the surviving spouse, meaning that IHT will be paid on the termination of the IPDI. Whilst it looks a simple matter to resolve by a variation, putting the property into a discretionary trust, I suggest that might only serve to further complicate the situation. On the understanding that you are still within 2 years of the testator’s death (otherwise you would be outside the time limit for a variation) I see no reason HMRC should not accept a belated claim for spouse relief (can the failure to claim the relief on the IHT400 be categorised as a mere clerical error?).
I suggest you might also put the previous solicitor on notice that they have caused the estate to pay the excess IHT, and that if the monies cannot be recovered you will look to them to restore the estate.
If you are in the embarrassing position of the previous solicitor being in the same firm as you, a conversation with your compliance manager/partner may be beckoning.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
My personal preference is to simply submit the C4 and claim the relief, but I am mindful of both the testator’s and family’s genuine stated intention that they did not want any of the testator’s assets to burden the widow’s own estate with IHT related to the testator’s residence. They (mistakenly) believed a right of occupation instead of a ‘full life interest’ would be treated differently for IHT.
Hence they may opt for a discretionary trust under a DoV, and although this may result in additional compliance and anniversary/exit charges, it will have the desired result of the widow’s estate IHT calculation not being distorted (and liability worsened) by the IIP.
I may also bring an IFA into the loop to discuss possibly claiming the spouse relief, but then redirecting some or all of the repayment into a life insurance policy on the widow’s life to deal with the eventual added IHT on her estate.
The 4 year time limit is the operative one here. The 6 month limit is designed to cover the position where insufficient IHT has been calculated on the earlier IHT400 submission and provides absolution from a penalty. Penalties are no longer governed by IHTA s.247(1) and(2) but by Sch 24 FA 2007: CH81013.
Strictly, spouse relief itself does not need to be claimed. The only contestable issue here is whether the right of occupation granted by the Will is an IPDI thus securing the relief. You just need to convince HMRC of that.
As Paul says, if your instructions are not to attempt that you, or whoever, is later instructed on the reporting of the later termination of the ROO (unless it is a PET) cannot run the argument, if it is time-barred, that the earlier chargeable event attracted spouse relief because it has no bearing on whether the later termination of the ROO gives rise to a tax charge: by a failed PET or a lifetime CLT or on the death of the entitled occupier. There could not in law even be a claim to QSR if HMRC argued that no tax was due on the earlier event despite being paid: years ago I would have been confident that they would not do that but not nowadays.
I also endorse Paul on the need to carefully consider a variation which ironically would confirm that spouse relief was not due.
I can see that you have a dilemma with your present instructions and you no doubt will have to use your personal charm (sadly not one of my own attributes). There is a personal risk for you if the persons who have lost out by tax being wrongly charged on the testator’s death are different to those who will suffer the impact of the tax correctly charged by reference to the termination event.
Self-preservation would be justified in that case; I suggest that you might want to opt out on a clearly expressed basis in writing if you cannot obtain instructions from whomever you (and your insurers) need to instruct you to handle the matter in accordance with the strict law. That is abundantly clear unless the ROO cannot properly be characterised as being an IPDI and so outside s.18 IHTA.
So while you could properly accept instructions from all those entitled to give them to go down the DT variation route, identifying all those who would thereby lose out and so can (with capacity) assent nonetheless to the plan (neutralising the risk to you from them) might be a difficult though entirely prudent task.