HMRC opened 3,574 investigations into Inheritance Tax (IHT) in 2020-21, netting an additional £254m in revenue, according to Pinsent Masons.
The firm said that with revenue from Inheritance Tax hitting a record £6bn in the last year and the complexity of the regime, there is “increasing scope” for disputes between HMRC and taxpayers in this area.
The firm added that rising property values have led to growing numbers of people coming within the scope for IHT. This is largely due to the nil rate band, the threshold above which IHT must be paid, remaining at £325,000 since 2009 without any adjustment to account for inflation.
Pinsent Masons said there are certain “red flags” that will prompt HMRC to look more closely into a deceased person’s estate. These can include but are not limited to:
- If an estate happens to conveniently fall just below the £325,000 threshold
- Valuable assets not being disclosed as part of the probate application
- Real estate that appear to have been significantly undervalued, compared to comparable real estate
- Taxpayers making invalid claims for IHT relief, through exemptions such as Business
- Property Relief and Agricultural Relief. This could include claiming the wrong amount or not being entitled to claim the relief at all
- Gifts made by the deceased which fall within the seven-year period before death, making them liable for IHT. Such transfers can easily be detected by HMRC’s Connect system
At the beginning of the pandemic, HMRC was forced to divert resources to the administration of the furlough scheme. However, since this ended on 30 September, it is expected that HMRC will now refocus its efforts on compliance activity.
Pinsent Masons said that it “expects to see an increase in investigations”.
Sophie Warren, tax manager at Pinsent Masons, said: “These numbers show that in spite of the pandemic, HMRC has not shied away from launching investigations into those it believes have underpaid IHT and HMRC will continue to scrutinise a person’s estate where a red flag is raised.
“Anyone who knows or suspects they may have underpaid IHT should not wait to be contacted by HMRC. The Revenue will look favourably on those who come forward and is likely to have a lower penalty levied as a result”.
A HMRC spokesperson said: “The majority of people pay the correct IHT. Investigations are opened into the small proportion of cases where compliance issues have been detected to ensure that everyone pays their fair share of tax. The number of enquiry cases and amount of tax we bring in each year changes as cases are opened and closed, and any tax owed is paid.”