Taxman on the warpath over unpaid inheritance tax

HMRC claws back record amounts of tax from high net worth families amid rise in DIY probates and rising house prices.

HM Revenue & Customs (HMRC) probes into underpaid inheritance tax (IHT) clawed back £274 million last year, the highest since 2016, after a crackdown on high net worth families.

The tax office’s average take from IHT investigations rose to £48,400 each last year, according to analysis of official figures by law firm Wilsons, up 22% in three years.

HMRC opened 5,658 investigations into IHT in 2019-20. Wilsons said HMRC is “continuing to dedicate huge resources” to targeting investigations into the estates of high-net worth individuals, which are more likely to yield extra tax.

Investigations into IHT typically relate to assets which have either not been declared or have been undervalued.

Average yields from IHT investigations jumped partly because rising property prices have increased the size of estates being passed on to dependants on death.

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The rise of so-called ‘DIY probates’ – people applying for a grant of probate and preparing the complex IHT returns themselves – could also be creating more mistakes, triggering higher clawback from IHT investigations.

Wilsons warned HMRC will be on the look-out for estates that use the impact of coronavirus as a cover for reporting exaggeratedly large falls in asset valuations to cut IHT bills. 

Belinda Watson, partner at the law firm, said: “HMRC will be very conscious that people will be using the impact of coronavirus on the economy to argue that asset values have fallen – they’ll be looking to challenge anything where the fall is too sharp to be credible.”

Some analysts do expect coronavirus will reduce the value of property and other assets over the medium term.

HMRC is also on the lookout for executors failing to declare gifts made by the deceased within seven years before the death, which remain liable to IHT.

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Other factors that can prompt HMRC to open an investigation include if the person gifting the asset retained some benefit from the asset after making the gift. 

For example, if they gave a property to their child (to exempt it from IHT) but remained living in that property without paying a full market rent, the value of the property would remain liable to IHT on their death (unless they had later moved out more than seven years before death).

Individuals evading IHT may try to use undisclosed bank accounts or accounts belonging to family or friends to hide assets. But according to Wilsons this has become increasingly difficult due to HMRC having the technology to monitor global bank accounts.