HMRC ramps up its checks into inheritance tax filings

Current economic metrics and growing inheritance tax (IHT) receipts (estimated to be £7.6bn in 2023/24) suggest that despite speculation, it might prove too costly for the government to abolish IHT in the upcoming Spring Budget. 

HMRC considers various risk factors before initiating a check into IHT accounts. These risks may include apparent omissions, inadequate valuations and incorrect claims for reliefs or exemptions. Incorrect IHT accounts can lead to harsh penalties of up to a 100% of the tax lost if HMRC considers an error has been made deliberately. Additionally, interest may also be due on underpayments at the current rate of 7.75%. These charges erode the net value left to beneficiaries of a death estate and lengthen the administration period.     

An IHT return is generally only required when a death estate has an IHT exposure. However, estates worth more than £3m are reportable even if no IHT is due, perhaps because most of the estate is left to a spouse or qualifying charity. IHT is charged at up to 40% on death estates, 20% on chargeable lifetime transfers and 6% on relevant property trusts. 

So, what are the risk factors and how can families avoid them?       

Be aware of the deadlines 

IHT is usually payable six months after the end of the month of the chargeable event. However, IHT forms for deceased individuals do not need to be filed until 12 months after the deceased’s death. This mismatch in timings can be a trap for late payment penalties and interest. Late payment penalties are also tax geared and can be up to £3,000 in addition to the late payment interest.     

Know the rules for claiming reliefs and exemptions  

HMRC may challenge claims for business relief (BR) and agricultural relief (AR), so it is important to check that the reliefs, which can provide up to 100% relief from IHT, have been correctly claimed. For a BR claim, taxpayers should check if a business contains assets that are used for investment purposes, which may result in a restriction to the tax relief available. 

Outstanding debts may be subject to complex anti-avoidance rules and may not always qualify for a deduction against the gross estate. 

Get the valuations right

IHT valuations are based on the ‘loss to donor’ principle, which may significantly differ to an independent valuation of an asset transferred. HMRC’s internal valuation experts may contest valuations submitted in respect of unquoted shares and securities, land and jointly owned property. Personal representatives should obtain formal IHT valuations from experts where appropriate.    

Complete all the relevant boxes and supplementary pages    

The IHT100 and IHT400 forms used to report chargeable IHT events could benefit from a refresh to be more user friendly. For the unrepresented it is easy to make an innocent error, for example, by omitting details of relevant lifetime gifts made by the deceased or providing insufficient information to HMRC. 

The fall out 

An incorrect IHT return can be costly, especially if HMRC seeks to charge a penalty on the basis that a mistake was careless or deliberate. Personal representatives should approach IHT returns with care to avoid common traps.