IHT expert issues warning as HMRC punishes inheritance tax errors with ‘harsh penalties’ | Personal Finance | Finance

Tax experts are warning that HMRC is ramping up its checks into IHT tax filings in a drive to unearth errors and underpayments. Basic errors in calculating this complex tax could attract harsh penalties.

HMRC on the hunt for families who haven’t paid the correct amount of inheritance tax, reports suggest. Its beefed-up investigations team is checking thousands of IHT accounts where it believes tax has been underpaid.

As a result, it expects to increase its IHT take by £500million in 2023/24 tax year. That’s on top of the expected increase due to the continued freeze in the nil-rate band.

This morning, we learned that the 2023/24 tax year is set to be a record-breaker for IHT receipts, after HMRC pocketed £6.3billion between April 2023 and January 2024.

That’s £400million higher than the same period last year.

The Office for Budget Responsibility has already predicted that the bill for the full tax year will top £7.2billion. Now experts reckon it could hit a staggering £7.6billion.

They were talk of Chancellor Jeremy Hunt scrapping inheritance tax in his Spring budget on March 6. Given how much it generates for HM Treasury, that looks unlikely now.

Nobody likes paying IHT but trying to avoid it can multiply the misery. Unfortunately, so will accidental errors.

This is a worry as Eugenia Campbell, private client tax director at accountancy firm RSM, warns that complex IHT forms can trip up the unwary.

“They can be difficult to navigate with several pitfalls lurking which can trigger a check. Errors can be costly in terms of penalties and late payment interest.”

So what can families do to minimise risk and protect their inheritance?

Campbell said HMRC considers a number of risk factors before it launches a check into somebody’s IHT account.

“These risks may include apparent omissions, inadequate valuations and incorrect claims for reliefs or exemptions.”

She warned: “Incorrect IHT accounts can lead to harsh penalties of up to 100 percent of the tax lost if HMRC considers an error has been made deliberately.”

It doesn’t stop there. HMRC may also charge interest on underpayments, set at a punitive rate of 7.75 percent.

Campbell added: “These charges erode the net value left to beneficiaries of a death estate and lengthen the administration period.”

Typically, families only have to file an inheritance return where IHT is due. “However, estates worth more than £3million are reportable even if no IHT is due, perhaps because most of the estate is left to a spouse or qualifying charity.”

The IHT rate band has been frozen at £325,000 since 2009. Families get a further £175,000 main residence band, when passing on homes to direct descendants such as children or grandchildren.

Anything above those bands is usually taxed at 40 percent. 

Campbell said families must tread carefully to avoid incurring HMRC’s attentions.

READ MORE: Forget Budget tax cuts. Hunt will hike taxes again in April. Time to fight back

It’s important to be aware of the deadlines, which can be confusing. IHT is usually payable within six months, but forms don’t need to be filed until 12 months after the deceased’s death.

Campbell said: “This mismatch in timings can be a trap for late payment penalties and interest.”

Exemptions such as business relief and agricultural relief can cut bills by up to 100 percent but make sure you know the rules.

“If a business contains assets that are used for investment purposes, tax relief may be restricted.”

Taxpayers should make sure they get correct valuations for assets such as unquoted shares and securities, land and jointly owned property.

Expert help may be required.

The IHT100 and IHT400 forms to report chargeable IHT events could “benefit from a refresh to be more user friendly”, Campbell said.

“It is easy to make an innocent error, say, by omitting details of relevant lifetime gifts made by the deceased or providing insufficient information to HMRC.”

Campbell said an incorrect IHT return can be costly, especially if HMRC seeks to charge a penalty on the basis that a mistake was careless or deliberate. 

You may need advice to avoid common traps. HMRC is watching.