Inheritance tax avoidance investigations rise as HMRC cracks down on estate undervaluations

HM Revenue and Customs is increasingly targeting estates it believes have undervalued residential property to avoid Inheritance Tax bills, according to an accountancy firm.

HMRC investigated 5,400 estates for underpayment of inheritance tax (IHT) last year. This is up 5% from 5,100 in the 2016/17 tax year.

One in four (24%) of the total estates liable for IHT were investigated by HMRC in the latest available year.

Accountancy firm UHY Hacker Young says the area most likely to be queried by HMRC is the valuation of residential property that is passed onto heirs.

In some cases, HMRC might argue that additional value should be attributed to properties that have potential for refurbishment, or development of any attached land.

If an investigation finds that IHT has been underpaid, the estate may have to pay all of the tax owed plus a penalty, which could be up to 100% of the tax at stake in the estate.

HMRC knows that there is a temptation to under-value residential property to save on IHT as it is typically the largest figure on the return, according to Mark Giddens, a partner at the firm.

He says: “The rise in investigations means more beneficiaries and estates, who may not necessarily be cash-rich, could be hit with hefty fines.”

HMRC is increasingly challenging the value of estates as investigating IHT returns is becoming more lucrative for raking in extra tax, Mr Giddens says.

He adds: “If HMRC deem that there has been a lack of care in carrying out valuations, the estate could end up having to pay up to 100% in penalties. With that much at stake, taking professional advice is absolutely critical.”

Responding to the claims, an HMRC spokesperson comments: “Our investigations ensure that everyone pays the right tax.”

Inheritance Tax: what you need to know
Commonly known as the ‘death tax’, IHT is a tax on the estate – property, money and possessions – that is paid when someone dies. It is payable when the assets of an estate total in excess of £325,000. Any assets above this amount are liable to a tax of 40%.

However, married couples can combine their IHT thresholds, meaning that up to the first £650,000 of their combined estate is IHT-free, as any unused nil-rate band can normally be passed on to the surviving spouse.

There is also an additional threshold called the residence nil rate band, which is increasing year-on-year. You can use the HMRC calculator to find out how much the additional threshold on your estate might be.

You must pay Inheritance Tax by the end of the sixth month after the person dies.

Widely loathed by the middle-classes, there have been frequent calls for the tax to be overhauled in recent years.