HM Revenue & Customs (HMRC) has significantly escalated its scrutiny of Inheritance Tax (IHT) compliance, with official figures revealing that investigations into underpaid tax have targeted approximately 4,000 UK households. The number of active probes rose from 3,793 to 3,977 over the past year, marking a notable increase in enforcement activity.
Substantial Financial Recoveries from Tax Investigations
These intensified investigations have yielded substantial financial returns for the government, with an additional £246 million recovered in unpaid tax, interest, and penalties. According to analysis by TWM Solicitors, a prominent private wealth and family law firm, this recovery highlights HMRC's growing effectiveness in identifying discrepancies in estate valuations and tax returns.
Advanced Technology Driving Enforcement
HMRC's enhanced capability stems from the deployment of sophisticated technological tools, including artificial intelligence (AI), data-matching systems, and advanced big data analytics. These resources enable the tax authority to detect inconsistencies and errors in IHT returns with greater precision, leading to a higher volume of investigations.
David Lunn, Partner in the Private Client team at TWM Solicitors, commented on the trend, stating: "Inheritance tax investigations have risen because HMRC knows that, as the extent of IHT widens, irregularities become more common, and so the amount of tax, interest and penalties they can recover is likely to rise."
Expanding Tax Net and Frozen Thresholds
The scope of Inheritance Tax has broadened considerably in recent years, partly due to policy changes in successive Budgets that have drawn more assets into its reach. Concurrently, the IHT threshold has remained frozen, meaning that even families with relatively modest homes are increasingly finding themselves liable for the tax.
Lunn explained: "The IHT threshold was originally set so that only families with significant assets would pay the tax. But after years of being frozen, even families with a relatively modest home are now finding they owe IHT."
Common Triggers for Investigations
Several factors commonly prompt HMRC investigations into Inheritance Tax underpayments:
- Undervaluation of Assets: Disputes over residential property valuations remain a significant area of contention between HMRC and estates.
- Non-Declaration of Goods: Failure to declare items such as jewellery or valuable furniture at their full market value has led to numerous investigations.
- Complex Tax Rules: The increasing complexity of tax regulations makes compliance more challenging for individuals.
Lunn added: "Not declaring goods has prompted countless IHT investigations in the past. HMRC is very strict about what must be included in an IHT return, so items such as jewellery or even a valuable set of dining chairs must be declared at their full market value."
Rising Tax Take and Future Implications
The annual revenue from Inheritance Tax has surged by more than 61% since 2020, reaching £8.3 billion. This growth, coupled with HMRC's technological advancements, suggests that investigations are likely to continue increasing. The tax authority remains vigilant to the risk that more families may attempt to underpay IHT, a levy that some perceive as unfair.
With penalties for non-compliance potentially running into tens of thousands of pounds, experts emphasise the importance of seeking professional advice. Lunn concluded: "With tax rules growing ever more complicated, and the IHT net widening with each Budget, people need to ensure they obtain proper advice."
