HMRC increases estate investigations for Inheritance Tax

It has been reported that the number of HMRC investigations into estates for inheritance tax purposes has reached a four-year high. A freedom of information request published in the Telegraph this week shows that HMRC collected a total of £274million of additional inheritance tax from over 5,000 investigations during in the 2019/20 tax year. It is estimated this represents around one quarter of all taxable estates.

Executors are legally obliged to complete a declaration for HMRC when dealing with the estate of someone who has died. HMRC will often open an investigation, either at random or because of certain ‘red flags’. This can cause significant delays in administering the estate and, in some cases, Executors can be personally liable for penalties.

Economic uncertainty and previous trends in HMRC investigations

It is likely that the increase in investigations last year is likely to be repeated in 2020/21 and in future years. 

Previous trends show that the number of HMRC investigations tends to increase in light of economic uncertainty. This was noticeable in the aftermath of the 2008 financial crisis, when HMRC significantly increased the number of tax investigations opened. HMRC also promised a crack-down on tax evasion generally following the Panama papers leak in 2016 and inheritance tax investigations have increased since the introduction of the complex Residence Nil Rate Band in April 2017.  

Advice for Executors facing an HMRC investigation

Most Executors will not want to deliberately defraud HMRC. However, the IHT regime is complex and Executors must take great care to make all necessary enquiries into the estate to ensure they comply with their reporting requirements. Without professional assistance, it can be easy to make reporting errors.  

If an investigation is opened by HMRC, Executors should ensure they do not distribute the estate until the tax position is settled and formal clearance issued.  Failure to do this could mean that an Executor risks being personally liable for any additional tax due.

Our team of specialists can assist Executors to ensure they have complied with all of their reporting requirements and guide them through the investigation process where necessary.