Tax investigators are targeting a quarter of bereaved families who they suspect of understating inheritance tax.
HM Revenue & Customs has increased the number of IHT inquiries by 300 to 5,400 estates, according to numbers reported to accountants UHY Hacker Young.
At the same time, the number of IHT returns filed has risen 5% from 23,200 to 24,500.
If investigators uncover underpaid IHT, penalties can reach as high as 100% of the tax owed.
Key issues for investigators
UHY Hacker Young warn that HMRC reviews three key areas of an IHT return to try and find undeclared tax:
- If figures on the IHT return reflect the true market value of the deceased’s home
- If any claims for business or agricultural relief are correct
- If families have deliberately understated how much assets are worth or deliberately left them off the IHT return
The firm claims the most common issue that tax inspectors raise is the value of a home, arguing some with potential for development or refurbishment are worth more than the value reported by the estate.
The chances of being picked for an inquiry are about 1 in 4, the firm adds.
Mark Giddens, a UHY Hacker Young partner, said: “HMRC are increasingly challenging the value of estates as investigating IHT returns becomes considerably more lucrative for raking in extra tax.
Undervaluing the home
“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.”
IHT is paid at a rate of 40% when assets of more than £325,000 for an individual or £650,000 for couples. A family home worth £125,000 can be gifted to close relatives– with this increasing to £175,000 (£325,000 for couples) in 2020.
However, the average family home is worth £245,076 – and as high as £324,518 in London.