Inheritance Tax Warnings: Expert Advice on Avoiding Costly HMRC Penalties

The United Kingdom is expected to see a surge in inheritance tax (IHT) bills this fiscal year, with HM Revenue & Customs (HMRC) preparing to take strict action against potential errors with severe penalties. Tax experts are cautioning the public about the heightened scrutiny of IHT tax filings by HMRC, emphasizing that even minor miscalculations in this intricate tax could have significant financial repercussions.

Recent reports indicate that HMRC is escalating its efforts to identify families who have underpaid inheritance tax, significantly increasing its investigations into thousands of IHT accounts. As a result of this crackdown, HMRC anticipates a potential increase of £500 million in the 2023/24 tax year, in addition to the expected rise due to the ongoing freeze in the nil-rate band.

The Office for Budget Responsibility has forecasted that the total IHT bill for the 2023/24 tax year is likely to exceed £7.2 billion, with some experts projecting it to reach an astonishing £7.6 billion. Despite speculations of a potential scrapping of inheritance tax in the upcoming Spring budget, the substantial revenue it generates for HM Treasury makes this outcome seem unlikely.

Eugenia Campbell, private client tax director at RSM, has emphasized the complexity of IHT forms, warning that the process can be riddled with potential pitfalls that may trigger HMRC’s scrutiny. Errors in IHT accounts could lead to severe penalties and late payment interest, adding to the overall burden for families.

Campbell highlighted the various risk factors that HMRC considers before launching an investigation into an individual’s IHT account, including omissions, inadequate valuations, and incorrect claims for reliefs or exemptions. Families are also at risk of facing penalties of up to 100 percent of the tax lost, along with a punitive interest rate of 7.75 percent on underpayments.

With the IHT rate band frozen at £325,000 since 2009, families must navigate the intricate rules and deadlines associated with IHT payments. HMRC stipulates that IHT must be paid within six months, but the filing of forms is not required until 12 months after the deceased’s death, creating potential traps for late payment penalties and interest.

Expert guidance is crucial in ensuring accurate valuations for various assets, as well as understanding the eligibility for exemptions such as business relief and agricultural relief, which can significantly reduce IHT bills. However, the intricate nature of the IHT100 and IHT400 forms has been cited as a potential area for improvement, with Campbell suggesting a more user-friendly approach to prevent inadvertent errors.

Overall, the impending scrutiny from HMRC underscores the importance of seeking professional advice to avoid the common traps associated with inheritance tax. Families are urged to stay informed about the evolving regulations and deadlines, and to engage with experts to minimize the risk of encountering punitive penalties from HMRC.