A total of 5,400 investigations into Inheritance Tax (IHT) returns were launched by HMRC in 2017/18, up 5% from 5,100 the previous year, according to research by UHY Hacker Young.
HMRC is treating IHT as an increasingly lucrative source of income. Rising asset prices such as property means that the amount of IHT at stake can be very substantial.
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.
The three areas that HMRC are likely to look into when they investigate an IHT return include:
- Whether the figures submitted accurately reflect market value – particularly in respect of residential property.
- Whether any claims for business or agricultural reliefs are valid.
- Whether any assets have been omitted deliberately or due to lack of reasonable care.
It is likely that the area most likely to be queried by HMRC is the valuations 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.
Some 24% of the total estates liable for IHT were investigated by HMRC in the latest available year.
The average house price in the UK is currently £245,076 and £476,752 in London, up from £172,655 and £324,518 respectively five years ago. IHT can be payable when the assets of an estate total in excess of £325,000.
Mark Giddens, partner in the firm’s London office, said: “HMRC are increasingly challenging the value of estates as investigating IHT returns becomes considerably more lucrative for raking in extra tax.
“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. The rise in investigations means more beneficiaries and estates, who may not necessarily be cash-rich, could be hit with hefty fines.”
He added: “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.”
The number of estates liable for IHT rose 5% to 24,500 last year, up from 23,200 the previous year, as property prices continued to increase while IHT thresholds were frozen.