The rise in inheritance tax investigations by HMRC

HMRC recovered a record £326million following investigations into underpayments of inheritance tax in the year ending March 2022. Perhaps unsurprisingly in light of these figures, it seems that HMRC have continued their focus on inheritance tax investigations since then. Pursuant to a recent freedom of information request it is understood that HMRC opened 2,029 inheritance tax investigations between April and November 2023. 

Despite the (now defunct) Office of Tax Simplification recommending the simplification of inheritance tax in reports published in 2018 and 2019, the rules remain complex. Particular areas of complexity can include lifetime gifts, the interaction between inheritance and capital gains taxes, businesses, and farms. For example, many might not realise that inheritance tax may be payable in respect of lifetime gifts, and the tax due can depend on the amount, the recipient, when the gift was made, the nature of the gift, amounts given to others, and the source of funds used to purchase the gift amongst other factors.

Issues such as these can give rise to complex arguments between HMRC and experienced tax advisors regarding the interpretation of historic tax legislation, case law, and guidance, and so it seems unfair for beneficiaries or lay executors of estates to be punished with penalties (and interest) where they make a genuine mistake when trying to properly interpret the rules.

Interest rates on unpaid inheritance tax have been steadily increasing and are 7.75% at the time of writing. This means that if there is a delay in paying the correct amount of tax, the interest on the unpaid portion can be significant (in addition to the potential penalties).

Particular care needs to be taken by personal representatives when making distributions of estate assets if there is any possibility of a HMRC investigation being commenced, as there is a risk that they could find themselves personally liable for any shortfall if there are insufficient assets remaining in the estate to pay the tax due.

If an investigation is commenced by HMRC, or if there might have been an error which means that tax has not been paid at some point, it is important to obtain advice at an early stage to establish the correct inheritance tax position, the merits of challenging any decision by HMRC, and to mitigate or reduce any penalties being applied by considering disclosure to HMRC of any mistakes.

Written by Waqar Shah and Anna Metadjer, Kingsley Napley.

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