Number of inheritance tax investigations increases

One in four estates face investigations over their inheritance tax payments as HMRC ramps up anti-avoidance activity with probes into £1.3bn worth of tax liability.


Over 5,000 IHT investigations were opened by HMRC in the 2018/19 tax year, representing nearly 25% of the 22,000 estates liable for inheritance tax over the period. This equated to 5,537 investigations, 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 figures have not been released as yet. The latest figures show that an estimated £1.3bn in inheritance tax is open to investigation, with HRMC 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 inheritance tax and generated a large proportion of the correspondence received.