Inheritance Tax: thousands targeted by HMRC for underpayment

Families believed to have been caught out by gifting rules

There are few taxes more universally disliked in the UK than Inheritance Tax, which is why many families take proactive steps to reduce the amount their estate is likely to have to pay after they die.

Unfortunately, some of those families have now found themselves in hot water with HM Revenue & Customs (HMRC).

According to figures obtained by The Telegraph, the taxman has issued back taxes worth an eye-watering £608 million to families it believes have not paid enough Inheritance Tax over the last five years.

In total, the reports suggest almost 2,000 families have been hit with these tax claims, after falling foul of the various gifting rules that make up part of the Inheritance Tax regime. 

In some cases, this appears to be down to the rules governing ‘gifts with reservation of benefits’.

Generally, if you hand over an asset to a loved one and don’t pass away within seven years of making the gift, then it is not counted as being part of your estate when calculating your Inheritance Tax liability.

However, this is not always the case with property. If, for example, you gave your home to your child but continued to live in it, then the gift would fall foul of the rules unless you paid a market rate of rent while living there.

That’s because you have continued to benefit from the asset, even if you no longer technically own it.

What’s clear is that the taxman is keeping a close eye on the amount of tax paid by families falling into the Inheritance Tax bracket, and will actively chase up those who it believes may have been too eager to take advantage of the various loopholes open to those looking to reduce their liability. 

Rising tax receipts

It’s notable that this clampdown comes off the back of rising tax receipts from Inheritance Tax.

The latest data from HM Revenue & Customs (HMRC) shows that Inheritance Tax receipts for April 2021 to March 2022 totalled a massive £6.1 billion. That’s a whopping £0.7 billion higher than the same period the year before.

That’s a seriously large amount of money, driven by a few things, particularly the incredible increases to house prices that we have seen over the last few years.

For example, according to the latest figures from Land Registry, the average property price in February was £276,755, having jumped by a mammoth 10.9% over the previous 12 months.

That’s on top of the huge growth seen during the first year of the pandemic, sparked by the stamp duty holiday.

As our homes jump in value, it means more and more estates end up falling within the Inheritance Tax thresholds, and therefore face coughing up cash after death.

I want my money back

It’s interesting to note that at the other end of the scale, thousands of households are successfully applying to have some of the Inheritance Tax that they have already paid refunded.

A Freedom of Information request from NFU Mutual found that whopping 32,000 claims for Inheritance Tax refunds have been successful over the past six years.

While 2021/22 saw the lowest number of refunds of any financial year during this period, there were still more than 4,200 families who successfully reclaimed some cash from the taxman that they should not have paid.

NFU Mutual noted that Inheritance Tax is assessed based on the value of assets like property or shares, but the actual figure received from selling those assets can be rather different.

Frustratingly, the tax refund is not automatic and instead has to be proactively reclaimed, with refunds available on property sold within four years of death or other qualifying investments sold within 12 months of death.

Being prepared

There is no denying the fact that Inheritance Tax is an awfully complex form of taxation. However, if you do your homework on the allowances around the tax, you can reduce the size of your eventual bill.

We’ve put together a comprehensive guide that outlines all you need to know about gifting when it comes to Inheritance Tax.