The number of families being investigated by HM Revenue & Customs under suspicion of underpaying inheritance tax (IHT) has jumped by more than a third in a year.
The taxman claws back hundreds of millions of pounds in underpaid IHT every year. In the year to April it opened 4,171 formal investigations into IHT returns, compared with 3,028 the year before, according to a Freedom of Information request by the accountancy firm Price Bailey.
The government is cracking down on tax evasion in a bid to bolster revenues for the Treasury.
After someone dies the executor of their estate must value their assets, from property and savings to jewellery and furniture. If the value of the estate is liable to IHT a return must be sent to HMRC within 12 months (but tax owed must be paid within six months, otherwise interest of 8.25 per cent starts to apply).
If the taxman believes a return includes incorrect information and more tax is owed, either as a result of a mistake or evasion, it can investigate.
Investigations can be triggered in a number of scenarios, including suspected undervaluation of assets and queries over the seven-year rule, which allows certain gifts to be made free of tax as along as the donor lives for seven years afterwards.
If HMRC finds that more tax needs to be paid an “amendment” is issued ordering the estate to pay the difference, including any interest accrued in the meantime.
Nikita Cooper from Price Bailey said she had seen a lot more interest in IHT by HMRC in the past year. She said: “HMRC is coming under increasing pressure to clamp down on non-compliance and boost the tax take as the government seeks to balance fiscal responsibility with economic growth.”
The tax office has significant powers to investigate when it believes IHT has been underpaid, including scouring bank statements, investments and foreign currency transactions.
Damian Bloom from the law firm Taylor Wessing said: “I think the biggest driver is the increased availability of data for HMRC and this will be accelerated with increased adoption of artificial intelligence.”
IHT is typically paid at a rate of 40 per cent on the value of an estate above the “nil-rate” allowance of £325,000.
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There is also an additional “residence nil-rate band” of £175,000 that applies if the estate includes a main home left to a child, grandchild or stepchild and the estate is worth less than £2 million — meaning someone could leave up to £500,000 tax-free. Spouses and civil partners can share their allowance, meaning they can pass on £1 million tax-free. These allowances have been frozen until at least 2030.
Last year the government raised a record £8.2 billion in IHT as more families were pulled into paying the death levy by frozen tax thresholds, years of property price rises and asset inflation.
From April 2027 most unused pension pots will also be included in an estate for IHT purposes. Fiona Fernie from Blick Rothenberg said this could mean more families are investigated for mistakes as families and advisers get to grips with the new rules.
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She said: “Clearly there are plenty who view these new rules to be unfair, and that means there will be more people deliberately trying to get around them — often in legitimate ways, but still trying to get around them all the same.”
HMRC said cases can vary widely from straightforward mistakes to evasion and anyone who disagreed with the decision of an investigation could appeal.
A spokesperson said: “The vast majority of people pay the correct IHT. Investigations are only opened into cases where there’s evidence the right amount of tax has not been paid.”