Inheritance Tax is one of the most complicated areas of tax law. As it is open to systemic misunderstanding and poor reporting practices, HMRC specifically and understandably targets inheritance tax as an area for investigation. I anticipate that an average of 25% of estates are currently investigated by HMRC every year.
Against this background, it is fascinating to note that the sums collected by HMRC through probes into missing inheritance tax payments rose by almost 20 percent in the last tax year. HMRC recovered £326m following inheritance tax investigations in 2021/22, up from £254m in 2020/21 and £273m the previous year, according to figures released a few days ago under a Freedom of Information request.
The number of investigations also rose by 20 percent compared with the previous year to 4,258, but fell short of the pre-pandemic average, which ran above 5,000 a year for over five years. HMRC confirmed that the number of inheritance tax inquiries fell during the first six months of the 2020/21 tax year when the UK first went into lockdown and the tax authority “reprioritised resource to support people and businesses”.
HMRC’s inheritance tax toolkit states that valuations are the “biggest single area of risk” accounting for a “large part” of the agency’s compliance checks, noting several issues around the valuing of properties which can be “easily overlooked”, such as the potential for the development of land.
HMRC has been challenging asset and property values especially when there has been a sale within two years of death at a higher value than the submitted probate value. HMRC is very reluctant to accept anything other than the ultimate sale price as probate value in these circumstances unless there is a demonstrable change in market conditions.
Common errors people may make when dealing with an estate can include a failure to declare bank accounts or unquoted shares or a misunderstanding of the reliefs and exemptions available.
Accuracy and detailed records are, however, absolutely crucial. Not having accurate records and keeping track of activities carried out by an executor can quite easily result in an investigation being opened. The actions and records of the deceased, or lack of them, can equally lead to investigation. An investigation will slow down probate applications and the winding up of estates. It is an inevitable consequence of poor compliance.
Tax investigations are often triggered by:
- Complex structures caught by the gift with reservation rules, the pre-owned asset tax rules or HMRC’s catch all General Anti-Avoidance Rules.
- Valuation of particular assets, particularly where HMRC believe assets have been undervalued.
- Residence or domicile of the deceased.
- Whether particular tax reliefs are available, particularly business property relief.
- Complex trust structures.
- Deliberate and inadvisable decisions by executors or the deceased’s family not to fully disclose all assets to HMRC.
Expect inheritance tax investigations to increase and even exceed pre-pandemic figures in the next year or two.