The number of investigations into underpaid Inheritance Tax (IHT) rose from 3,793 to 3,977 over the course of last year*, netting HM Revenue & Customs an additional £246 million, says TWM Solicitors, a leading private wealth and family law firm.
The rise reflects HMRC’s increased efforts to recover revenue from underreported and misvalued estates, the firm says.
With the annual tax take rising more than 61% to £8.3bn since 2020, HMRC is alert to the risk that more families may be tempted to underpay a tax that some consider to be unfair.
The tax authority’s use of AI, data-matching and other advanced big data tools, means that it is increasingly adept at identifying inconsistencies and errors in IHT returns, prompting a growing number of investigations.
Rising house and asset prices, combined with frozen tax thresholds, have resulted in more people having to pay IHT. Since April 2009, the IHT nil-rate band has been frozen at £325,000. It is worth bearing in mind that, since 1986 the tax threshold has risen every year until 2009 (except in 1993 and 1994) – that is 21 rises in 23 years followed by no rises in 17 years with no rises predicted in the near future either.
A sharp increase in the burden of any tax can lead to a rise in tax evasion and avoidance. The Government’s decisions to bring unspent pension pots into the scope of IHT and cut agricultural and business property reliefs will likely drag more estates into the tax net. The result could trigger further HMRC scrutiny.
“Inheritance tax investigations have risen because HMRC knows that, as the extent of IHT widens, irregularities become more common, and so the amount of tax, interest and penalties they can recover is likely to rise”, said David Lunn, Partner in the Private Client team at TWM Solicitors.
“Recent Budgets are a good example, as they have drawn even more assets into the scope of IHT. That inevitably leads to more challenges and investigations.”
Errors in IHT returns commonly include failing to declare personal items such as jewellery and furniture – assets many people do not realise must be included.
“Not declaring goods has prompted countless IHT investigations in the past,” David Lunn said. “HMRC is very strict about what must be included in an IHT return, so items such as jewellery or even a valuable set of dining chairs must be declared at their full market value. However, disputes over residential property valuations remain a significant area of friction between HMRC and estates that have to pay IHT.”
The freeze in IHT thresholds has been particularly painful for homeowners, as property prices have risen sharply in recent years.
David Lunn adds: “The IHT threshold was originally set so that only families with significant assets would pay the tax. But after years of being frozen, even families with a relatively modest home are now finding they owe IHT.”
HMRC has become increasingly sophisticated in identifying underpayments. To challenge undervalued properties, for example, the taxman is reportedly drawing on data from the Land Registry, the Trust Registration Service and even Google Maps.
“HMRC’s investigations are becoming increasingly complex, particularly when it comes to residential property,” David Lunn said.
“With tax rules growing ever more complicated, and the IHT net widening with each Budget, people need to ensure they obtain proper advice. Penalties can run into tens of thousands of pounds.”
* Year ending 5 April 2025
