Thousands more families face inheritance tax investigations

Telegraph

01-05-2025

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Thousands more grieving families are facing investigations into their inheritance tax (IHT) liabilities as the taxman clamps down on underpayments.
HM Revenue and Customs (HMRC) launched 3,961 investigations in the 12 months to April 5, an increase of 31pc on the previous tax year as it vowed to leave 'no stone unturned' on revenue.
The tax authority has opened nearly 10,000 investigations into families in the past three years. Of those, 2,606 are ongoing, data from a Freedom of Information request reveals.
It comes after HMRC figures revealed that it pocketed £8.2bn from death duties last year, the fourth record-breaking year in a row.
Sean McCann, of NFU Mutual, who submitted the information request, said: 'Where there is a suspicion that inheritance tax has been underpaid through error, omission, or undervaluing assets, HMRC has substantial investigatory powers and will check a range of sources to build a picture of the deceased individual's financial affairs.'
He added: 'HMRC leaves no stone unturned in these investigations. The interest rate you pay on overdue inheritance tax stands at 8.5pc which is the highest rate for 18 years, and can add a significant amount to the bill. This can compound what for many is already a challenging and distressing situation.'
In 2024 HMRC began 3,028 investigations into inheritance tax underpayments. In the year ending April 2023, it launched 3,163.
Between April and August last year, the tax authority earned more than £105m of inheritance tax through compliance checks, according to wealth manager Evelyn Partners. The main reason it chose to investigate was because of concerns around the valuations of assets in an estate.
Mike Warburton, The Telegraph's tax expert, said: 'HMRC clearly has a right to investigate deceased estates, but it is important that this is done with understanding of the emotional state of the family left behind.'
In the autumn Budget, Rachel Reeves announced that private pensions would be considered part of a person's estate, and therefore liable for inheritance tax from 2027. This will increase the number of estates liable for death duties by almost a quarter, according to analysis by Rathbones.
Campaigners criticised the Chancellor for the 'cruel' blow to bereaved families that will 'wreak havoc on finances'.
Wealth advisers have said there has been a rise in parents making six-figure gifts to get their children on the property ladder to escape the tax grab.
Executors can find it difficult to answer all the questions HMRC ask,s and it can take time to locate the necessary documents
Mr McCann added: 'IHT remains one of the most feared and least understood taxes, with unspent pensions falling within the inheritance tax net from 2027 and many farms and businesses from 2026, more and more families will find themselves dragged into paying inheritance tax.'
An HMRC spokesman said: 'The majority of people pay the correct amount of inheritance tax. In cases where it is suspected someone has not, investigations can be opened to address issues and ensure the system remains fair.'
Between 2014 and 2020, the number of cases closed for inheritance tax regularly reached 5,000.
How to cut your inheritance tax bill
There are various ways you can reduce your inheritance tax bill and shield your money from the taxman.
First, it helps to tie the knot. You can pass on assets of unlimited value to a spouse or civil partner without any inheritance tax liability.
Spouses can also inherit their partner's unused nil-rate band when they die. But this is not passed on automatically – you must make a formal claim to HMRC.
For many families a property will be their most valuable asset. Fortunately, homeowners get an additional £175,000 allowance – called the 'residence nil-rate band' if they pass their main property to family members. And because spouses and civil partners can combine their allowances, they can pass on a total of £1m wealth without incurring a tax bill.
But perhaps the simplest way to avoid an inheritance tax bill is to give away your assets during your lifetime. A highly tax-efficient method is to give money out of surplus income. This must be money you can give away regularly without significantly changing your lifestyle.
Finally, trusts are a powerful tool to help reduce the amount of inheritance tax your beneficiaries have to pay. Placing assets into a trust removes them from your estate, potentially avoiding any inheritance tax charges at the time of your death, depending on the structure of the trust.
It is important to remember that HMRC will open an investigation where it believes an incorrect tax return has been submitted.
It is the job of the executor to calculate the value of the estate and submit the relevant inheritance tax forms to HMRC. If they fail to pay the tax within six months of the death, then interest is charged on the late payment.
On top of this, executors also face penalties for submitting inaccurate information – of up to 100pc of the tax due.
The average inquiry will drag on for 558 days, during which time the executors are blocked from distributing the estate to the beneficiaries.