HMRC launched 5,347 IHT investigations last year between 1 April 2019 and 28 February 2020, generating £259m in extra tax, according to Pinsent Masons.

Overall, 27,283 IHT investigations have been launched in the last five years, with a total yield of £1.3bn.

The law firm warns that the suspension of tax investigations is only temporary and HMRC is likely to be more aggressive once its compliance work resumes. HMRC will be looking for ways to increase its compliance revenues to cover rising coronavirus-driven public spending.

HMRC dramatically increased the number of tax investigations it opened in the aftermath of the 2008 financial crisis as it tried to close the gap in the public finances.

Individuals who use the short period of suspension of tax investigations to get their IHT affairs in order can help reduce the risk of being investigated when HMRC resumes its compliance work after the crisis.

When taxpayers are reviewing their IHT affairs, there are some common mistakes they need to be aware of which act as ‘red flags’ to HMRC and can trigger investigations.

Red flags

One common problem involves taxpayers making invalid claims for IHT reliefs. The claiming of Agricultural Property Relief (APR), which gives 100% relief on the passing down of farm land, in particular has attracted HMRC’s attention.

HMRC believes some individuals may be misrepresenting land and property in the countryside as active ‘agricultural’ land and property.

HMRC data shows that APR cost the government £365m during 2018/19 and HMRC is increasingly challenging those claiming the relief to ensure the claims are legitimate.

Farmers who rent their land under grazing licenses are being scrutinised by HMRC to see what role they play in the agricultural activity.

Another common mistake relates to pension transfers, which are usually exempt from IHT but not if that individual dies within two years of making a transfer. In this case the pension may be classed an asset and therefore subject to IHT.

HMRC may also look more closely into the affairs of individuals who have valued their assets just below the Nil Rate Band. If they find that tax has been underpaid it can issue a penalty worth up to 100% of the tax owed, depending on why it believes tax was underpaid.

The number if IHT investigations launched during 2016/17represents 11% of the number of estates with a net capital value above the Nil Rate Band (50,900), which is the level at which tax liabilities arise.

Steven Porter, partner at Pinsent Masons, said: ‘Taxpayers should be well prepared as this truce on IHT investigations is only temporary and HMRC are likely to take a more aggressive approach when they resume this work.

‘IHT rules are complex and it can be easy to make mistakes which can quickly lead to investigations. It is therefore important taxpayers are aware of the common pitfalls.

‘There were many calling for a simplification of the rules surrounding IHT – this did not make the March 2020 Budget and given the current environment, will likely not be high on the government’s agenda. For now, taxpayers will have to manage.’