Her Majesty's Revenue and Customs (HMRC) has recovered an additional £1.36 billion over the past five years through investigations into unpaid inheritance tax. The figures, obtained by NFU Mutual via a Freedom of Information request, reveal that suspected errors, omissions, or under-valuations of assets can trigger deeper scrutiny, leading to increased tax bills, interest, and penalties.
HMRC Investigative Powers
HMRC possesses substantial investigative powers and examines various sources to compile a complete picture of a deceased individual's financial affairs. These investigations may include reviewing bank statements for undisclosed assets like overseas property or investments, checking life insurance policies not held in trust, and examining other insurance records that might detail valuable items such as jewelry or art collections omitted from inheritance tax returns.
Additionally, insurance records can highlight assets gifted more than seven years prior where the deceased continued to benefit from their use, such as a valuable painting remaining in their home. This concept, known as 'reservation of benefit,' can result in the asset being included in the inheritance tax calculation.
Tax experts warn that property valuations require careful attention. If an asset like a family home is to be sold, its market value is generally accepted. However, if the property is to be passed directly to a beneficiary, a valuation by a surveyor is recommended. Disagreements with HMRC over valuations could lead to intervention by the district valuer.
Penalties for underpaying inheritance tax can be severe, depending on the circumstances. Late payments incur interest at a rate of 4 percent plus the Bank of England base rate (currently 7.75 percent). Taxpayers have six months from the last day of the month following a loved one's death to assess assets, calculate tax liability, and remit payment to HMRC.
Inheritance Tax Landscape
Total inheritance tax collected reached a record nearly £8.5 billion in the last tax year. Currently, approximately 4 percent of estates are liable for inheritance tax at a 40 percent rate on assets exceeding a certain threshold. For single individuals, this threshold is £325,000, rising to £650,000 for couples. When assets like the family home are passed to direct descendants, these allowances increase to £500,000 for individuals and £1 million for couples.
The figures show that inheritance tax raised through investigations was £247 million in the 2024-25 tax year, a 13 percent decrease from the previous year. However, Sean McCann, a chartered financial planner at NFU, noted that investigations can span months or even years, meaning the revenue collected in 2024-25 may stem from inquiries initiated earlier. He suggested that the significant sums recovered and the increasing value of assets justify continued and potentially increased HMRC attention on individual cases.
Speculation about potential reforms to inheritance tax has arisen, particularly concerning proposals for a 10 percent 'death tax' on all estates, a concept previously floated by Andy Burnham, who is now Prime Minister. Such a reform could potentially impact a broader range of estates. Furthermore, pensions are expected to be brought into the inheritance tax levy starting in April 2027, which is also anticipated to affect a larger number of estates.