Navigating the Nuances: HMRC Enhances Oversight on Inheritance Tax Returns

HM Revenue & Customs (HMRC) is currently scrutinising a greater number of inheritance tax (IHT) filings, focusing on instances where there may have been an underpayment of tax.

Navigating IHT forms can be tricky, with various pitfalls that could prompt a review. To prevent costly mistakes, which could lead to penalties and interest charges, families should be proactive in understanding the risks and taking steps to safeguard their inheritance.

Despite ongoing discussions, the likelihood of IHT being abolished in the forthcoming Spring Budget seems slim, given the projected IHT revenue of £7.6 billion for the fiscal year 2023/24. HMRC assesses several risk factors before conducting a review of IHT accounts, such as potential omissions, undervaluations, and incorrect applications for reliefs or exemptions.

Deliberate errors in IHT filings can result in severe penalties, up to 100% of the unpaid tax, along with interest charges at the current rate of 7.75%. These additional costs can significantly reduce the inheritance left for beneficiaries and extend the time needed to settle an estate.    

Typically, an IHT return is mandatory when an estate is liable for IHT. However, estates valued over £3 million must be reported even if no IHT is due, for instance, when the majority of the estate is bequeathed to a spouse or a qualifying charity. IHT rates can reach up to 40% on estates at death, 20% on chargeable lifetime transfers, and 6% on relevant property trusts.

To avoid these risks, families should:        

Stay on top of deadlines: IHT is generally due six months after the month in which the chargeable event occurred. However, IHT forms for deceased individuals need not be filed until 12 months post-death. This discrepancy can lead to late payment penalties and interest, with penalties potentially reaching £3,000.

Understand the rules for reliefs and exemptions: Claims for business relief (BR) and agricultural relief (AR) may be scrutinised by HMRC. It’s crucial to ensure these reliefs, which can offer up to 100% exemption from IHT, are claimed correctly.

Ensure accurate valuations: IHT valuations should reflect the ‘loss to donor’ principle and may differ from independent asset valuations. Disputes over valuations, particularly for unquoted shares, land, and jointly owned property, are not uncommon. Formal valuations from specialists are advisable.

Fill out all necessary forms and supplementary pages: The IHT100 and IHT400 forms, used for reporting chargeable IHT events, could be more user-friendly. It’s easy to make innocent mistakes, such as omitting details of lifetime gifts or providing insufficient information to HMRC.

An incorrect IHT return can lead to significant costs, especially if HMRC imposes a penalty based on a careless or deliberate mistake. Personal representatives must handle IHT returns diligently to avoid common pitfalls and ensure a smooth process. Talk to us today if you need any assistance with IHT.