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Investigations by HMRC into the affairs of families it believes have underpaid inheritance tax have increased by 41% over the last year.
A freedom of information request by wealth manager NFU Mutual found HMRC opened 3,961 inheritance tax (IHT) investigations in the 2024/25 tax year.
This is up from 2,807 in the previous year – a jump of 41%. We’ll reveal the areas that are most likely to trigger a probe, and how you can avoid issues with the taxman by following three simple rules.
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Shaun Moore, tax and financial planning expert at Quilter, says frozen IHT thresholds and rising asset values mean more families find that they need to pay inheritance tax. But he adds that HMRC is also being more vigilant.
“As pressure to increase Treasury flows heightens, tax ‘leakage’ is high on the agenda, increasing the HMRC scrutiny on an ever-growing tax pool. At the same time, HMRC is leveraging better tools to close the tax gap, making it easier to spot inconsistencies,” he adds.
Where inheritance tax is due on an estate – which can be up to 40% – it must usually be paid within six months of the death. But if HMRC suspects IHT has been underpaid it can go back as far as 20 years to check on estate valuations.
Moore says: “HMRC has become increasingly sophisticated in identifying underpaid tax, using advanced data analytics and third-party sources to flag discrepancies. With public finances under pressure, inheritance tax has become a natural area of focus.”
Sean McCann, chartered financial planner at NFU Mutual, says: “HMRC leaves no stone unturned in these investigations.”
Here are some of the things HMRC will be looking out for:
McCann says the tax office can get access to bank statements to look for income which may suggest there are assets that haven’t been disclosed, such as investments, property or significant foreign currency transactions.
Estates with complex arrangements or last-minute asset movements are also more likely to be investigated.
HMRC will look out for undeclared or wrongly-declared gifts, especially those made in the seven years before death. Older gifts can still face scrutiny if they’re not considered a genuine gift.
£61m in gifts given to reduce inheritance tax bills broke HMRC’s rules in 2023/24, according to analysis by TWM Solicitors.
That’s because they were ‘gifts with reservation of benefit’ – meaning that the original owner makes a gift but continues using or getting a benefit from the asset, such as gifting a property to a child and continuing to live in it. HMRC does not consider this a gift, and there will potentially be an unexpected IHT bill.
Gillian Dunlea, managing associate in private client at TWM Solicitors, explains: “Many individuals give away assets to family during their lifetime to reduce the size of their estate, and therefore reduce the IHT bill when they die. However, if HMRC does not accept that an asset has been truly gifted, they will consider it part of the original estate, and it will be subject to IHT.”
Inaccurate records, such as claiming a large cash gift was given more than seven years ago (and therefore outside of IHT) when in fact the gift was given more recently and therefore could be subject to IHT, can also fall foul of HMRC’s rules.
HMRC investigators will go into the details of bank statements to look for outgoings that may suggest premiums were paid for life insurance policies, which if not written in trust, will form part of the taxable estate. Even if the policy is written in trust, the premiums could still affect the IHT bill if they are not covered by gifting allowances.
According to TWM Solicitors, deliberately undervaluing the home by exaggerating the state of disrepair, basing the value on an out-of-date survey, or incorrectly believing that a ‘probate valuation’ should be lower than the open market value at the date of death, are all causes for HMRC to investigate.
Failing to declare cash, or other valuables such as jewellery or paintings passed on to relatives, on the IHT form is another area HMRC will check.
Mistakes like this are more common when a friend or family member is acting as the executor, rather than a professional.
HMRC has also been reported to use a copy of a property’s contents insurance to check for valuable items that may have been omitted from an IHT return, according to TWM Solicitors.
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Even if an HMRC IHT investigation doesn’t result in a higher tax bill, it can be stressful and time-consuming. Here are the three biggest ways you can avoid that happening.
Moore says: “Good documentation during your lifetime can help your loved ones avoid unnecessary scrutiny later.”
Transparency and preparation are key. Keeping detailed records of gifts and valuations, including details of any overseas assets or investments. This helps ensure everything is defensible if the IHT paid – or not paid – is queried by HMRC.
McCann says: “If you’re taking advantage of the ‘regular gifts out of surplus income’ exemption, recording your gifts, income and expenditure on the last page of the HMRC IHT403 form, available on HMRC’s website, allows you to record these during your lifetime.
“Getting it right first time reduces the chances of any potential penalties or interest payments.’’
Gifting with ‘reservation of benefit’ is where lots of people fall foul of the rules. This could cover a wide range of scenarios where people continue to benefit from things they have given away. This might include continuing to live in a property, receiving the income from an investment or keeping physical possession of an item, such as a painting that is still hanging in your home.
Gillian Dunlea, managing associate at TWM Solicitors, says: “Someone wanting to make a gift would need to make sure they no longer receive any benefit at all for it to be effective for tax purposes.”
It’s important to have clarity on what property is being gifted and what the intentions are, she adds.
A true gift does not normally have strings attached. If there is an arrangement when a property is gifted to continue to live there, or to have use of it informally, that counts as a reservation of benefit.
Dunlea says: “Arrangements can be put in place such as having a formal rental agreement, paying commercial rent for the use (or full consideration with other assets) and ensuring this is reviewed periodically.”
Taking advice before making major estate planning decisions can reduce the risk of issues later on. Getting professional support with will writing is one way of helping to protect your assets so they can be passed on to your loved ones.
If you’re looking to give away a high-value asset, this is an occasion to think about getting professional advice.
When it comes to choosing an executor, some people choose a professional such as a solicitor or estate administration specialist to act for them. This can be expensive, although it may be worth it if your estate is large or complicated. Another option is that your executors can appoint professionals at the time to help them if they need it, which may be a cheaper option.
Moore says: “It’s vital to keep clear records, seek professional advice, and avoid cutting corners, especially around lifetime gifts and property valuations.”
Saga Legal partners with Co-op Legal Services to provide support across a range of estate planning, will writing and probate solutions.
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