HMRC investigations into inheritance tax up by 5%

HMRC investigations into inheritance tax up by 5%

UHY Hacker Young says that HMRC is treating inheritance tax as a 'lucrative source of income'

According to UHY Hacker Young, there has been 5,400 estate investigations by HMRC into inheritance tax (IHT) underpayments in 2017-18.  This is a 5% increase on the 5,100 investigations in the previous year.

More worryingly than this, the House of Lord’s Sub-Committee for the Finance Bill 2018 has recently revealed that they want to investigate the amount of power HMRC currently possesses, so statistics such as these are being increasingly scrutinised.

UHY Hacker Young’s report stated: “It is likely that the area most likely to be queried by HMRC is the valuations of residential property that is passed onto heirs. In some cases, HMRC might argue that additional value should be attributed to properties that have potential for refurbishment, or development of any attached land.”

In 2015-16, 24% of all taxable estates were investigated by HMRC. With rising asset prices in the property market, the amount of IHT at stake is now very substantial.

The report continued: “If an investigation finds that IHT has been underpaid, the estate may have to pay all of the tax owed, plus a penalty which could be up to 100% of the tax at stake in the state.”

Particular areas HMRC investigates in relation to IHT include the validity of claims for business or agricultural reliefs, omitted assets, and whether submitted figures accurately reflect the current market value.

In 2018, IHT is payable when assets of an estate total in excess of £325,000. Therefore, as of June 2018, 24,500 estates are now liable, compared to the 23,200 of the previous year. This largely reflects the increasing average house prices in the UK.

Five years ago, the average property cost £324,518 in London, and £172,655 throughout the rest of the country. This year the average property in the capital costs £476,752 and £245,076 in the rest of the UK. However, instead of adjusting alongside property prices, IHT has remained frozen at £325,000, which explains why there has been an increase in HMRC investigations.

Mark Giddens, partner at UHY Hacker Young, said: “HMRC is increasingly challenging the value of estates, as investigating IHT returns becomes considerably more lucrative for raking in extra tax.

“HMRC knows that there is a temptation to undervalue residential property to save on IHT, as it is typically the largest figure on the return. The rise in investigations means more beneficiaries and estates who may not necessarily be cash-rich could be hit with hefty fines.

“If HMRC deem that there has been a lack of care in carrying out valuations, the estate could end up having to pay up to 100% in penalties. With that much at stake, taking professional advice is absolutely critical.”

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