HMRC Increases Scrutiny on Inheritance Tax Underpayment Among Families

The number of families being examined by HM Revenue & Customs (HMRC) for suspected underpayment of inheritance tax (IHT) has surged by over 33% in just one year.

Each year, the tax authority recovers hundreds of millions of pounds linked to unpaid IHT. For the fiscal year ending in April, HMRC launched 4,171 formal investigations into IHT filings, a significant rise from 3,028 investigations the previous year, as revealed by a Freedom of Information request from the accountancy firm Price Bailey.

This rise in investigations reflects the government’s intensified efforts to deter tax evasion and enhance income for the Treasury.

When an individual passes away, the executor is responsible for assessing the value of the estate’s assets, which can include real estate, savings, jewelry, and personal belongings. Should the estate exceed the IHT threshold, a return must be submitted to HMRC within one year; however, the owed tax must be paid within six months to avoid accruing interest at a rate of 8.25%.

If HMRC suspects inaccuracies in the reported information or believes that additional tax is owed—whether due to errors or intentional evasion—it has the authority to investigate further.

There are several triggers for these investigations, such as indications of asset undervaluation or inquiries regarding the seven-year rule, which allows tax-free gifts as long as the donor lives for an additional seven years after giving.

Should HMRC determine that more tax is owed, an “amendment” is issued instructing the estate to pay the difference along with any interest that has accrued.

Nikita Cooper from Price Bailey noted a marked increase in HMRC’s focus on IHT over the past year. She stated, “HMRC is under growing pressure to enforce compliance and boost tax revenues as the government aims to balance fiscal responsibility and economic growth.”

The tax office possesses extensive investigatory powers when it suspects that IHT has been underreported, including analyzing bank accounts, investments, and transactions involving foreign currencies.

Damian Bloom from Taylor Wessing commented, “The primary reason for this scrutiny is the improved data availability for HMRC, and this trend will likely escalate with the increasing use of artificial intelligence.”

IHT is generally charged at a rate of 40% on the value of an estate that exceeds the “nil-rate” allowance of £325,000.

Additionally, there is a separate “residence nil-rate band” of £175,000 that applies if the estate consists of a primary home left to a child, grandchild, or stepchild, provided the estate’s total value is under £2 million—allowing individuals to leave as much as £500,000 free from tax. Spouses and civil partners can combine their allowances, enabling them to pass on £1 million without incurring taxes. These allowances remain frozen until at least 2030.

Last year, the government garnered record-breaking IHT revenue of £8.2 billion as more families found themselves subjected to the death levy due to stagnant tax thresholds, rising property valuations, and inflation in asset prices.

Starting in April 2027, most unused pension funds will also be counted as part of an estate for IHT calculations. Fiona Fernie from Blick Rothenberg indicated that this change could increase the likelihood of families being investigated for errors, as individuals and advisors adapt to the new regulations.

She remarked, “Many people consider these new rules to be unjust, which could lead to an uptick in individuals attempting to navigate around them—often through legitimate means, yet still attempting to circumvent the regulations.

HMRC acknowledged that investigation cases can range from simple mistakes to deliberate evasion, and individuals who dispute investigation outcomes have the right to appeal.

A representative stated, “The vast majority of individuals correctly fulfill their IHT obligations. Investigations are only initiated in cases where there is evidence suggesting that the correct tax amount has not been paid.”