Thanks to thresholds that have been frozen since 2011, more people than ever are falling into the Inheritance Tax (IHT) net. Not only did the taxman net a record £6.1 billion in IHT during 2021/22, but growing numbers of individuals are paying IHT on gifts. Now, thanks to a freedom of information request made by insurer NFU Mutual, we know that Inheritance Tax investigations are also raking in record sums for HMRC.
According to reports in the Financial Times and The Telegraph, Inheritance Tax investigations brought in an extra £326 million in the year to March 2022. This was an increase of 28% on the previous 12-month period.
Who is being targeted by Inheritance Tax investigations?
HMRC has a dedicated team that targets wealthy individuals. These are people whose annual income exceeds £200,000 or who have assets worth over £2 million. IHT investigations are opened when HMRC believes someone has made an honest mistake or deliberately made an incorrect return.
In the most recent year, HMRC opened 4,258 Inheritance Tax investigations. This was up from 3,574 the previous year. Since 2019, more than 13,000 people have been subject to IHT investigations.
What mistakes is HMRC looking out for?
The rules relating to Inheritance Tax are complex. You can learn a bit more about them in our post that covers some common IHT questions.
While calculating the value of property and shares is fairly simple, the same can’t be said of valuable items such as paintings and antiques. For this reason, if HMRC opens an Inheritance Tax Investigation, it will commonly ask for copies of home contents insurance. They will then cross reference the insured items with the items submitted on the IHT return.
That said, HMRC also keeps a close eye on property values. If a property is sold within two years of probate and it fetches a significantly higher price than the probate value, HMRC may decide to open an Inheritance Tax investigation.
Gifts are another area that HMRC takes a keen look at. Currently, if you make a gift to someone it is covered by the ‘7-year rule’. In a nutshell, if you live for 7 years after making the gift, it becomes exempt from IHT. If you live for between 3 and 7 years, there’s a tapered reduction on the amount of IHT payable. However, it’s essential that you keep detailed records of any gifts – if you can’t provide evidence of when a gift was made or to who, then HMRC may well argue it falls within IHT.
How long do Inheritance Tax investigations take?
The length of Inheritance Tax investigations varies according to your circumstances. However, they can drag on for many months or even years. Much of the income HMRC gets from IHT investigations comes from enquiries that were opened in previous financial years.
How can I avoid an investigation?
It’s difficult to avoid an IHT investigation, but it’s certainly wise to make sure you’re prepared for the eventuality. If you work with THP’s accountants, we’ll help you submit an accurate IHT return and make sure you benefit from all relevant reliefs and exemptions. Better still, if you plan far enough ahead we can help you with Inheritance Tax Planning. This is when we look at your circumstances and make completely legal recommendations designed to reduce your eventual IHT bill.
Finally, if THP wholly prepares your IHT return, you can use our Tax Investigation Fee Protection Service. This can cover you for up to £100,000 of fees if we need to handle your Inheritance Tax investigation.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration