Over the past five years, the UK's tax authority, HMRC, has recovered an additional £1.36 billion through investigations into unpaid inheritance tax. These recoveries stem from identified errors, omissions, or undervaluation of assets, which can trigger deeper scrutiny and result in higher tax bills, along with interest and penalties.
HMRC possesses substantial investigative powers and examines various sources to compile a comprehensive picture of a deceased individual's financial affairs, according to NFU Mutual, which compiled the figures from a Freedom of Information request.
The total inheritance tax collected reached a record nearly £8.5 billion in the last tax year. Speculation about potential overhauls, including the introduction of a 10% "death tax" on all estates to fund social care, has arisen following the arrival of Andy Burnham as Prime Minister. Currently, approximately 4% of estates are liable for inheritance tax, paid at a 40% rate on assets exceeding a certain threshold. This is anticipated to rise when pensions are included in the levy from April 2027.
Inheritance Tax Thresholds
Individuals are generally liable for inheritance tax if their estate is valued at more than £325,000. For married couples or civil partners, this joint threshold rises to £650,000. When passing on a home to direct descendants, the threshold increases to £500,000 for single individuals and £1 million for couples.
HMRC Investigations and Recoveries
The £1.36 billion was recovered through investigations into underpaid bills. In the 2024-25 tax year, HMRC collected £247 million from these investigations, a 13% decrease from the previous year. However, this decrease may not indicate a shift in enforcement strategy, as investigations can be lengthy.
Sean McCann, a chartered financial planner at NFU Mutual, noted that the £247 million recovered in 2024-25 might be the result of inquiries initiated in earlier years. He suggested that the significant revenue recovered, coupled with the rising value of assets, justifies HMRC's continued focus on individual cases.
Areas of Scrutiny
HMRC investigations into suspected inheritance tax underpayments can examine several financial areas. These include bank statements that may reveal income from undisclosed assets, such as overseas property or investments. Life insurance premiums, if not set up in trust, are typically included in the taxable estate. Records from other insurance policies may highlight high-value items like jewelry or art collections that were omitted from inheritance tax returns.
Insurance records can also identify assets gifted more than seven years prior, where the deceased continued to benefit from the item—a situation known as "reservation of benefit." This can lead to the asset being included in the inheritance tax calculation.
Valuations and Penalties
Tax experts advise caution with property valuations. If HMRC disputes a valuation, a district valuer may become involved. If a property is sold, the sale price determines its value for the final tax account. However, if a property is to be transferred to a beneficiary, a valuation by a surveyor is recommended.
Penalties for inheritance tax underpayment can be severe, depending on the circumstances. Late payments incur interest, currently at 7.75%, which is 4% plus the Bank of England base rate. Taxpayers have six months from the end of the month following a death to calculate and pay any inheritance tax due.