HM Revenue and Customs increased investigations into inheritance tax (IHT) by 5% in the past 12 months, according to accountants UHY Hacker Young.
There were 5,400 investigations into returns launched by HMRC in 2017/18, up from 5,100 the previous year.
Rising asset prices, such as property, means the amount of IHT at stake can be very substantial.
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 estate.
The three areas that HMRC are likely to look into when they investigate an IHT return include:
- Whether the figures submitted accurately reflect market value – particularly in respect of residential property;
- Whether any claims for business or agricultural reliefs are valid;
- Whether any assets have been omitted deliberately or due to lack of reasonable care.
It is likely that the area most likely to be queried by HMRC is the valuations of residential property that is passed on to heirs.
In some cases, UHY Hacker Young has found that HMRC might argue that additional value should be attributed to properties that have potential for refurbishment, or development of any attached land.
Rising house prices
The average house price in the UK is currently £245,076 ($322,827, €276,011) and £476,752 in London.
This is up from £172,655 and £324,518, respectively, five years ago.
IHT can be payable when the assets of an estate total in excess of £325,000.
Mark Giddens, partner in UHY’s London office, said: “HMRC are 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 under-value 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,” Giddens said.
The number of estates liable for IHT rose 5% to 24,500 last year, up from 23,200 the previous year, as property prices continued to increase while IHT thresholds were frozen.
Last month, UK lawmakers said they would look into HMRC’s investigatory powers to see if individual rights are being overstepped.
