HM Revenue and Customs (HMRC) has warned that grieving families could be hit with up to £3,200 in fines due to “misunderstandings” in understanding their tax obligations.
HMRC is issuing an educational letter as a “preventative and educational exercise” to help estate inheritors who mistakenly think they are exempt to better understand what to do if the value of their estate is near the borderline which would make them eligible to pay inheritance tax.
Since HMRC changed the rules in January 2022, more estates which fall well under the thresholds have been able to apply for a grant of probate or confirmation as ‘excepted estates’ without having to first submit a full IHT400 form.
An IHT400 form is 19 pages long, and only needs to be completed if an estate is likely to be worth more than the inheritance tax threshold.
However, HMRC has noticed “common misunderstandings about eligibility and reporting”, meaning estate inheritors who haven’t filled in the form could be fined.
The fine for not submitting an IHT400 within a year is £200, and goes up to a further £3,000 after two years.
In addition, families who owe inheritance tax, will accrue interest on the sum owed at a rate of 7.75% per year.
HMRC said: “HMRC has noticed common misunderstandings about eligibility and reporting for the various nil rate band (NRB) allowances.”
It particularly warned against taking the residence nil rate band (RNRB) and any brought-forward (transferable) allowance into account when they consider if the estate is an excepted estate. This is because the downsizing allowance, or transferable allowance, does not apply automatically and needs to be claimed in an IHT400.
HMRC added: “By not sending an IHT400 when they should, estates may find later that incorrect calculations or out of time claims cause problems and they may face unexpected tax and penalties.”
The educational letter is being sent out regarding excepted applications with estate values at or around the various NRB thresholds, of £325,000, £500,000, £650,000, £825,000 and £1m.
HMRC says this is “a preventative and educational exercise, not a compliance investigation” aiming to “identify common errors and misunderstandings around each of the NRB allowances, so that agents can avoid these pitfalls and claim them correctly”.
