HM Insights

Almost one in four estates investigated for IHT purposes

One month after the Office for Tax Simplification (OTS) suggested a mass overhaul of the Inheritance Tax (IHT) regime, HMRC have revealed a 3.4% increase in the number of investigations into estates in which IHT was due. In 2018/2019, 5,537 investigations were conducted equating to around 23% of the estates in which the tax was payable.

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The increase in the number of investigations clearly demonstrates HMRC's intent to crack down on those, either knowingly or unknowingly, avoiding payment of the correct amount of inheritance tax due on an estate they are administering.

Why the increase?

One reason may be the general deceleration in IHT being ingathered by HMRC. In 2015/16, HMRC reported a 20.6% increase in IHT receipts with the year on year figures rising from £3.78 billion to £4.56 billion. However, the year on year percentage has drastically reduced to a 7.4% increase in 2017/18, despite tax revenues reaching a record high £5.2 billion. The slowing of IHT revenue streams may be due to the introduction of the Residential Nil Rate Band (RNRB) in April 2017 which, at the time of introduction, allowed a further £100,000 of an estate to pass tax-free provided the relevant conditions are met. When combined with the general ageing population of the UK, it is clear that HMRC wish to close the gap of IHT being left unaccounted for.

Another potential factor may be the complexity of IHT rules. Rules and reliefs in relation to the Nil Rate Band, gifting and pensions can be complicated depending on the individual's specific circumstances, which often leads to confusion when planning to mitigate IHT. Canada Life's 2019 IHT Monitor revealed that 80% of over 45 year olds believed that IHT rules were too complicated and three fifths of that age demographic have failed to obtain professional estate planning advice. These statistics suggest a strong possibility that those estates which are due to pay IHT might not be paying the correct amount of tax due.

What next?

With recent recommendations being provided by the OTS to simplify rules on lifetime gifting and the seven year tapering regime, it is yet to be seen if HMRC will continue to increase the number of investigations into estates where IHT is due. However, it is likely that if the IHT rules remain unchanged moving forward, the increasing trend of investigations will follow suit to ensure that returns accurately reflect the estate of the deceased individual and the tax due thereon.

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