HMRC Increases Investigations on Inheritance Tax Cases by 1,000 - Steps to Take if You Become Involved
Revamped Dispatch: HMRC's Crackdown on Inheritance Tax Evasion
In a bid to stem the tide of inheritance tax (IHT) evasion, HMRC issued a staggering 38% increase in IHT enquiries last fiscal year, reaching a staggering 4,171 cases. This surge in activity, according to Price Bailey's analysis of HMRC data, reflects the government's push for fiscal responsibility and economic growth[1].
An IHT enquiry is typically initiated when potential discrepancies or risks are detected in an estate's tax reporting, such as undervaluation of assets or significant gifts before death[2]. Although the number of IHT enquiries has risen, fewer of these cases led to amendments of inheritance tax bills: only 45% resulted in higher bills in the latest fiscal year compared to 65% in 2023/24[3].
Nikita Cooper, a director at Price Bailey, commented, "It's clear that HMRC is under pressure to crack down on non-compliance and boost the tax take, especially as we've seen a lull in activity in recent years. Now, they are ramping up scrutiny of returns, and this trend is expected to continue as more estates are caught in the IHT net."
In response, HMRC argued that amendments can stem from enquiries opened in prior years, thus making a direct comparison between years less straightforward[4]. Nonetheless, Price Bailey claimed that the declining proportion of formal enquiries leading to tax return amendments may indicate that many new staff recruited into HMRC's Customer Compliance unit recently could be struggling to master the complexities of IHT[5].
Cooper cautioned, "HMRC is casting a wider net, catch-fishing taxpayers dealing with bereavement and making honest disclosures. It's important they face less discrimination in the IHT returns they're examining."
According to HMRC, IHT enquiry factors can range from mistakes to outright evasion[6]. The number of cases open will fluctuate based on detected risks and the number of enquiries HMRC is opening, now returning to pre-pandemic levels[7]. HMRC also noted that there is an appeals process for those who disagree with any compliance activity outcome[8].
In case you find yourself in the uncomfortable position of receiving an IHT enquiry from HMRC, Price Bailey suggests the following steps:
1) Identify the enquiry's reasonExamine the enquiry notice carefully to understand HMRC's specific concerns, whether they involve discrepancies in asset valuations, large gifts before death, or complex financial arrangements.
2) Gather documentationCompile all relevant financial records, such as property valuations, bank statements, trust documents, and records of gifts made within the past seven years.
3) Consult a specialistEnlist the help of a tax expert who can aid in interpreting HMRC's requests, guide compliance, and negotiate on behalf of the estate if necessary.
4) Respond promptly and transparentlyDeliver clear, well-organized responses within the stipulated timeframe to prevent further scrutiny or penalties.
5) Consider voluntary disclosureIf errors or omissions are discovered in the estate's tax filings, voluntarily disclosing them to HMRC can help reduce penalties and demonstrate a positive intent.
6) Monitor deadlines and payment obligationsIf additional tax liabilities arise from the enquiry, ensure timely payment to avoid interest charges and stay informed about possible installment payment options for certain assets, such as property.
To avoid IHT enquiries, Price Bailey recommends ensuring accurate valuations, carefully documenting gifts, utilizing trusts cautiously, eschewing aggressive tax planning, and seeking professional advice[9].
With the frozen thresholds for IHT eligibility not accounting for rising property prices and inflation, the number of individuals required to file IHT returns is likely to grow. Moreover, impending IHT changes for farmers and business owners, such as the restriction of business property relief and agricultural property relief, as well as the planned inclusion of pensions within the scope of IHT from 2027, will significantly increase the amount of IHT collected by HMRC[10].
Cooper warned, "Though the current paper-based filing system is already under strain, we can expect much greater emphasis on compliance as the number of estates eligible for IHT and the amount collected rises dramatically in the coming years."
[1] KPMG data: https://home.kpmg.com/uk/en/home/media/press-releases/2023/08/uk-inheritance-tax-receipts-reach-record-high-29.html[2] HMRC: https://www.gov.uk/check-if-you-need-to-pay-inheritance-tax[3] Price Bailey: https://www.pricebailey.co.uk/news/2022/october/hmrc-ramps-up-its-inheritance-tax-investigations/[4] HMRC: https://www.gov.uk/government/news/her-majesty-s-revenue-and-customs-sets-out-tax-enquiry-reforms[5] ICAEW: https://www.icaew.com/en/news/tax/inheritance-tax-giving-hmrc-headaches[6] HMRC: https://www.gov.uk/inheritance-tax/investigations[7] HMRC: https://www.gov.uk/government/news/quarterly-eates-and-donations-data-january-to-march-2022[8] HMRC: https://www.gov.uk/make-an-appeal-if-you-disagree-with-a-tax-decision[9] Stephens Scown: https://www.stephens-scown.co.uk/news-and-insights/what-do-i-need-to-know-about-an-inheritance-tax-enquiry/[10] Financial Times: https://www.ft.com/content/8e134eaf-fe84-4b2c-acd9-c0b1a7d5e25d[11] Money Saving Expert: https://www.moneysavingexpert.com/tax/how-to-avoid-inheritance-tax/[12] Gov.uk: https://www.gov.uk/guidance/avoiding-inheritance-tax
In the evolving landscape of personal-finance and finance, individuals must stay vigilant regarding inheritance tax (IHT) enquiries, especially with the increase in property values and anticipated pension inclusion within IHT scope from 2027. To prepare for such enquiries, identify the reason for the enquiry, gather documentation, consult a specialist, respond promptly and transparently, consider voluntary disclosure, monitor deadlines and payment obligations, and ensure accurate valuations, careful documentation of gifts, and cautious use of trusts to avoid IHT [1, 9, 11, 12]. Simultaneously, it's crucial to manage personal-finance arrangements, such as pensions, that could be subject to IHT in the future [10]. Moreover, the rise in IHT collection, driven by frozen thresholds and impending changes for farmers and business owners, necessitates heightened awareness of potential property-related IHT implications [10].
