Inheritance tax investigations and clawbacks are becoming more common, as more people become liable for this unpopular and complex tax. Beware!
Earlier this year, as people were busy with New Year resolutions and the like, HMRC revealed a statistic that went largely unnoticed. For many families, however, it definitely merited attention.
The statistic in question was that, in the last tax year, it had increased the sum collected through investigations into inheritance tax (IHT) by more than 20%. So whereas £254 million IHT was clawed back from families in 2020/21, the following year, it soared to £326 million. Over 13,000 people have faced an IHT investigation since 2019.
Note that these figures are referring to actual HMRC investigations and clawbacks, not just ‘standard’ IHT bills.
What’s going on?
There are a number of stories behind these figures. The first issue is that more people are being drawn into the IHT net. Whereas the government has kept the IHT threshold at £325,000 in recent tax years, the value of property has continued to rise. So, people who thought they were ‘not wealthy enough’ to worry about IHT may find this is no longer the case. Or, rather, their families may discover this too late.
The second issue is that it’s common for families to make errors when reporting the value of estates to HMRC, perhaps through trying to save on legal fees. Common mistakes include underestimating property values, omitting bank accounts or investments, getting lost in the maze of IHT reliefs and exemptions, or not keeping records to the standard required by HMRC.
HMRC’s more active stance
There’s a third issue too, which is that HMRC appears to be more actively challenging the figures and records provided by families, resulting in unpaid IHT being clawed back from those who inherited. If it turns out that beneficiaries no longer have the assets to pay the outstanding IHT, the executors themselves may be personally liable.
Fortunately, there are two easy ways to mitigate the risks:
• Lawyers can help you reduce any IHT liability with advice on the use of different reliefs and exemptions.
• Legal advice can help executors to comply with HMRC processes when distributing the estate.
If the rising trend of 2021/2022 continues, thousands more people will be facing IHT challenges and clawbacks this year. Don’t let yourself be one of them!
Caroline Fraser, Partner, Private Client Services
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