Gifts with reservation of benefit are declared by the estate’s executors, whose job it is to tell HMRC whether IHT is due and how much.
But if the taxman isn’t convinced by the executors’ explanation, then it can investigate further. Investigators reserve the right to look at bank statements, Land Registry data, insurance policies and utility bills, and even photos from estate agents.
Investigations can include home visits and interviews.
Nimesh Shah, of accountancy firm Blick Rothenberg, said: “The most common situation for estate executors will be when the deceased has given away their home and continued to live in it.
“There is still wide misconception that someone can gift their home (say to their children) and this is effective for inheritance tax planning.”
Madeleine Beresford, of law firm TWM, said another mistake families made was assuming that the seven-year rule meant that after that period had passed, they could begin using the asset again as before.
She said: “What is often misunderstood is that this continues beyond the seven-year period after the gift, and the gift can fall back into the taxable estate even decades later if people don’t keep up with rent payments and rent reviews.”
An HMRC spokesman said: “The vast majority of people pay the correct inheritance tax. Investigations are only opened in to cases where there’s evidence the right amount of tax has not been paid.”
