Over 5,000 IHT investigations were opened by HMRC in the 2018/19 tax year, representing nearly 25% of of the 22,000 estates liable for inheritance tax over the period, according to a freedom of information request by wealth management adviser, Quilter. This equated to 5,537 investigatins, up from 5,354 the previous year.

The number of IHT investigations has grown by around 7.8% following the introduction of the residence nil rate band (RNRB) in April 2017, which made the already complex system even harder to navigate.

IHT receipts totalled £5.2bn in 2017-18, an increase of 8% (£388m) compared to 2016-17 with wealthier estates contributing nearly half of total IHT revenue. In that particular tax year, only 4.2% of all UK deaths were subject to IHT. The 2018-19 IHT figures have not been released as yet. The latest figures show that an estimated £1.3bn in inheritance tax is open to investigation, with HMRC reviewing compliance issues and potential tax avoidance.

Earlier this month, the Office of Tax Simplification (OTS) called for a major overhaul of inheritance tax, citing complexity and recommending that the government review the rules to deliver ‘more coherent and understandable structure to the tax’. Although only 5% of estates are liable for IHT, the system is unnecessarily complex.

The RNRB has created further problems, although the OTS stopped short of calling for its repeal. This tax break gave married couples and civil partners an additional £150,000 each of tax-free property-based inheritance as of 6 April 2019. This allowance is set to rise to £175,000 from 6 April 2020.

In the report, OTS accepted that ‘the most complicated aspects of the residence nil rate band are the downsizing provisions. The residence nil rate band is one of the most complex areas of inheritance tax and generated a large proportion of the correspondence received’.

Gordon Andrews, tax and financial planning expert at Quilter, said: ‘Inheritance tax is infamous for being not only disliked, but complex and at times deeply unfair. On top of everything, there is almost a one in four chance HMRC will investigate your estate. Over the past number of years politicians have been keen to show they are cracking down on tax-dodgers and IHT is one of the departments that HMRC has been throwing its resources at.’

‘More often than not people aren’t deliberately trying to defraud HMRC and given the current complexity of the IHT system it’s really no surprise if things go awry.

‘For instance, under the current rules, if a pension transfer is made while someone is in ill-health then there is a risk that HMRC will challenge the IHT-free status of the death benefits if the person passes away within two years of the transfer.

‘All the complications surrounding inheritance tax means getting financial advice is crucial to mitigate the chances of an investigation. It’s also vital to choose the right executor because the onus is on them if there is an investigation.

‘Equally, if you are asked to be an executor of the will you need to understand the responsibilities that come with it. This is not just another piece of admin, it can be an involved and time-consuming process.’

An HMRC spokesperson told Accountancy Daily: ‘The majority of people pay the correct IHT. Investigations are opened into the small proportion of cases where compliance issues have been detected to ensure that everyone pays their fair share of tax.’

Sara White | 29-07-2019