HMRC catches out almost 1,200 more families in inheritance tax crackdown

HMRC opened thousands more inheritance tax investigations in the last year as it cracked down on families suspected of underpaying. Figures obtained by NFU Mutual through a Freedom of Information (FOI) request show that cases rose 41% in 2024/25, from 2,807 to 3,961.

HM Revenue and Customs (HMRC) can investigate an estate if it suspects irregularities such as undervaluing property or other assets, or making large gifts before death to reduce a tax liability. These cases can involve indepth checks of bank statements, property and life insurance records, and gifts made within seven years of death. HMRC can also revisit valuations up to 20 years after tax has been paid.

The current top rate of inheritance tax is 40% on estates above £325,000, with payment due within six months of death.

Mistakes or omissions can lead to interest currently set at 8.25% and potential penalties, extending what can already be a drawnout and distressing process.

Sean McCann, chartered financial planner at NFU Mutual, told MoneyWeek that HMRC "has substantial investigatory powers and will check a range of sources to build a picture of the deceased individual's financial affairs".

He suggested families keep detailed records of gifts, valuations and overseas holdings to reduce the risk of delays, penalties and interest charges.

Mr McCann said: "HMRC leaves no stone unturned in these investigations. For example, they will look at outgoings such as gifts made in the seven years before death, or premiums for life insurance policies which, if not written in trust, will form part of the taxable estate.

"Getting it right first time reduces the chances of any potential penalties or interest payments.''

In the FOI, HMRC said: "The majority of people pay the correct amount of IHT. Investigations are opened into cases where compliance issues have been detected to ensure that everyone pays the right amount of tax."

According to HMRC's latest report based on the 2022/23 tax year, 4.62% of UK deaths resulted in an inheritance tax charge, up 0.23 percentage points from the 2021/22 tax year. This means that inheritance tax is payable on fewer than one in 20 estates.

Despite the relatively low proportion of liable estates, inheritance tax liabilities reached £6.7billion in 2022/23, marking a 12% increase compared to the previous year.

The rising share of estates subject to inheritance tax comes ahead of major reforms set to reshape the regime from April 2026 onwards, potentially bringing many more estates into the IHT net.

From April 2026, the cap on Business Property Relief (BPR) and Agricultural Property Relief (APR) will take effect, limiting 100% relief to the first £1 million of qualifying assets. Amounts above this threshold will receive only 50% relief, effectively imposing a 20% tax rate on the excess.

This change will also affect listed shares treated as unquoted, including AIM shares, which will only qualify for 50% relief instead of the full amount previously allowed.

Further reforms will come into effect in April 2027, when unused pension pots will be included in the inheritance tax valuation of estates for the first time, impacting approximately 8% of estates.

The Office for Budget Responsibility (OBR) forecasted inheritance tax receipts to reach £8.4 billion in 2024-25, an 11.6% increase driven by rising asset prices and frozen thresholds. They may escalate further to £ 14.3 billion by 2029-30.

About £2.5 billion of that growth is attributed directly to the new IHT reforms announced in the October 2024 Budget.

Ben Handley, a tax partner at BDO, said: "While the latest figures show a fairly modest rise in the number of estates subject to inheritance tax in 22-23, we're likely to see many more people dragged into the IHT net when seismic changes to the regime come into force from 2026.

"The reforms mean it's even more important for people to plan for the future and determine how to pass on their assets to the next generation in an efficient way."