Bereaved families beware: HMRC's inheritance tax investigation surge
The taxman is cracking down on suspected underpayments of inheritance tax (IHT), with a staggering 3,636 investigations launched by HM Revenue and Customs (HMRC) in the first nine months of the current tax year alone. This marks a significant increase of nearly 1,000 compared to the same period last year, according to Freedom of Information (FoI) data.
Since the 2022-2023 financial year, a total of 14,027 families have faced the scrutiny of HMRC's inheritance tax investigations. And the news gets worse: over 1,800 cases are still active, with 13 investigations dragging on for nearly four years.
But what triggers these investigations? It's not just about the money. Sean McCann, a chartered financial planner, explains that HMRC has the power to delve into bank statements, looking for hidden income that might suggest undisclosed assets like investments, property, or large foreign currency transactions.
Estate executors are responsible for calculating asset values and reporting IHT liabilities to HMRC. And the stakes are high. The death duty must be settled within six months of the deceased's passing, after which interest accrues at a hefty 7.75% annually.
Inheritance tax applies at 40% on estate values exceeding the £325,000 nil-rate band. However, a £175,000 residence allowance is available when property passes to direct descendants. Married couples and civil partners can combine these thresholds, potentially shielding up to £1 million from the levy.
The revenue from death duties has skyrocketed over two decades, from £3.3 billion in 2005 to a staggering £8.2 billion in 2024-2025. This surge is attributed to rising property values and unchanged tax-free thresholds, ensnaring more estates in the tax net.
The future looks even more challenging. From April 2027, pension savings will be subject to inheritance tax for the first time, affecting an estimated 50,000 estates with higher bills or initial liabilities. By 2030-2031, the Office for Budget Responsibility (OBR) predicts that nearly one in ten deaths will trigger an IHT charge, double the current rate.
Despite the concerns, an HMRC spokesperson reassures: 'Most people pay the correct amount of inheritance tax. Investigations are necessary to address any issues and ensure fairness within the system.'
But will this be enough to ease the worries of bereaved families? Only time will tell. As the inheritance tax net tightens, it's crucial for families to understand their obligations and be prepared for potential scrutiny.
