Tax

Why Doesn’t HMRC Give Anything Back Without A Fight?

It can’t be right that HM Revenue and Customs (HMRC) knowingly takes more tax from hard working people and families simply by not explaining rules.

The tax charter even agrees with this – stating that HMRC will help the honest majority get their tax right.

How is it then that HMRC has collected more than £3 billion in inheritance tax since April 2006 from taxpayers who have breached the lifetime allowance rules?

The lifetime allowance or LTA sets the maximum size a pension fund can grow to in a retirement saver’s life.

At times the LTA has risen to £1.8 million, but currently stands at £1 million with a promise from former Chancellor George Osborne to increase the limit in line with annual inflation.

Following the rules

Yet the guidance published by HMRC clearly say that if someone dies and leaves a pension pot of more than the lifetime allowance, the beneficiary has two alternatives:

  • Take the lot and pay tax at 55% on the amount that is over £1 million
  • Take £1 million and then wait two years to draw any additional amount paying tax at their marginal rate – which would be 45% at the highest.

If the beneficiary tinkered with their finances, as long as they kept their gross annual income below £43,000, they would only pay tax at 20% on the additional amount taken after two years had passed.

The point is HMRC is quite OK with taxpayers applying their guidance to avoid paying unnecessary tax.

But if the taxpayer took the excess pension fund, HMRC inspectors would rub their hands with glee at the extra payment, even though the government has no legal right to the money.

HMRC publishes how much tax is collected each year, but does not keep a record of unnecessary over payments nor how much interest taxpayers receive on reclaiming the money.

Easy task for software boffins

The tax system is plain wrong.

The rules are not supposed to catch unwary taxpayers who cannot afford expensive accountants. They are meant as a reference framework for everyone to work within.

HMRC must have a template calculation for calculating how much tax they expect from estates breaching the LTA.

They have one that soon spots if someone has not paid them enough tax for smashing the glass ceiling, so their software boffins should have no trouble in subtracting what is calculated as due from what is paid to reveal an overpayment.

Then, instead of sitting on the cash and hoping the taxpayer does not spot their error, giving the money back is no less than anyone should expect under the tax charter.

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