HMRC collected £274m from Inheritance Tax investigations last year – hitting a four-year high

HMRC collected £274m in extra tax from investigations into underpaid Inheritance Tax (IHT) last year, which is a four-year high. It is likely HMRC will continue to ramp up its activity in this area as it looks to increase overall tax receipts.
 
In order to improve its yield from IHT investigations, HMRC is dedicating huge resources to investigations into the estates of High Net Worth individuals and other wealthy taxpayers. This is because these investigations are more likely to offer a better return on investment.
 
Latest data show HMRC opened a total of 5,658 investigations into IHT in 2019-20, which means the average yield from each investigation was £48,422. That is a 22% rise from an average yield of £39,763 three years ago in 2016-17.
 
The average yield from IHT investigations has jumped partly because rising property prices have increased the size of estates being passed on to dependants on death.
 
As many accountants will know, most of HMRC’s investigations into underpaid IHT have focused on one of two areas in recent years – enquiries into assets that have not been declared or assets that have been undervalued.
 
Clients need to be aware HMRC is currently on the look-out for estates using the impact of coronavirus as a cover for reporting exaggeratedly large falls in valuations, such as shares or commercial property, as a way to reduce IHT bills. HMRC will challenge any falls that look too sharp to be credible.
 
One thing HMRC looks for is when an executor fails to declare gifts made by the deceased within seven years before death, which remain liable to IHT until a full seven years have elapsed. 
 
Another thing HMRC looks for is if the person gifting an asset retained some benefit from it after making the gift. For example, if someone gave a property to their child (to exempt it from IHT) but remained living in that property without paying a full market rent, then the value of the property would remain liable to IHT on their death.
 
Clients evading IHT may try to use undisclosed bank accounts or accounts belonging to family or friends to hide assets However, this is a high-risk strategy given HMRC has access to information on offshore bank accounts from over 100 countries.
 
If the amounts of IHT that have been evaded are significant then HMRC will not hesitate to bring criminal charges, which could mean a custodial sentence.
 
Tax investigations can be very stressful and costly for those involved. PfP are specialists in this area and you can protect your clients against the cost of most tax investigations by offering a Tax Investigation Service. To find out how we can help, contact info@pfp.uk.com.