Inheritance Tax Investigations Surge: What You Need to Know

UK tax authorities are intensifying their scrutiny of inheritance tax (IHT) payments, leading to a significant increase in investigations and revenue recovered. Recent figures reveal a growing trend of HMRC utilizing cross-agency data and advanced technologies to identify underpayments, impacting both executors and estates.

Rising Investigations and Revenue Recovery

HMRC clawed back £246 million in unpaid inheritance tax last year through approximately 4,000 compliance investigations . This represents a concerted effort to identify underpayments by leveraging information from various government bodies and external sources.

Data-Driven Scrutiny: Land Registry, TRS, and Beyond

HMRC investigators are accessing records from the Land Registry and the Trust Registration Service (TRS) to verify property details and asset declarations. They are even utilizing tools like Google Maps to identify potential discrepancies in estate valuations . This multi-agency approach allows for a more comprehensive assessment of an estate’s value.

Why the Increase in Investigations?

The surge in investigations is largely attributed to the unchanged inheritance tax thresholds since 2009. With property prices rising, more families are being drawn into the 40% levy on assets exceeding the £325,000 tax-free threshold (rising to £500,000 when a property passes directly to children or grandchildren, and potentially £1 million for married couples/civil partners combining allowances).

The situation is expected to worsen from April 2027, when pension pots become subject to inheritance tax for the first time, further expanding HMRC’s reach.

Challenges for Executors: Valuations and Deadlines

Executors face increasing pressure due to strict payment deadlines and the complexities of the IHT system. Often, they are forced to submit estimated valuations, particularly for properties, based on their best judgment at the time of death. Discrepancies between initial estimates and eventual sale prices can lead to both underpayments and overpayments.

Certain assets, such as jewellery, antiques, and furniture, are particularly difficult to value accurately, increasing the risk of errors or omissions.

Personal Responsibility and Potential Penalties

Executors bear personal responsibility for ensuring correct tax payments. HMRC can pursue them directly for any shortfalls discovered after an estate has been distributed.

Refunds and Overpayments

Despite the crackdown on underpayments, HMRC also processed over £300 million in refunds to more than 6,000 estates last year . Declining asset values, particularly in the property market, have driven this trend.

Executors can reclaim overpaid tax on property within four years of the sale using form IHT38. For shares and investments, the window is shorter – just twelve months – requiring form IHT35.

Tax Mitigation Strategies for High-Net-Worth Individuals

For wealthy individuals, legitimate planning strategies exist to mitigate future IHT liabilities. One approach involves establishing a family investment company, loaning assets to it, and investing in UK assets generating corporation tax-free income . This structure, combined with trusts, can reduce the overall tax burden.

Trust Registration and IHT

Trusts are commonly used in estate planning, and recent legislation has expanded the requirements for trust registration with HMRC’s Trust Registration Service (TRS) . It is crucial to register any relevant trusts before the applicable deadline.

You must register your trust with HMRC if it becomes liable for Capital Gains Tax, Income Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Land and Buildings Transaction Tax (in Scotland) or Land Transaction Tax (in Wales) . All UK express trusts must register unless specifically excluded.

If a trust is not a Schedule 3A trust, it must be registered even if it has no tax liability.