Undervaluation of estates leads to rise in inheritance tax investigations

Undervaluation of estates leads to rise in inheritance tax investigations

Recent figures released by HM Revenue and Customs have shown that the number of investigations carried out concerning inheritance tax (IHT) avoidance in the UK has increased substantially.

Some accountancy professionals have put this down to HMRC's decision to increasingly target estates where it is believed that residential property has been deliberately undervalued in the hope of reducing the bill for IHT.

In the last year, HMRC has investigated 5,400 estates for the underpayment of IHT. This figure increased from 5,100 investigations in 2016/17, a rise of 5%. Of the total number of estates liable for IHT, nearly a quarter (24%) were subject to an investigation by HMRC.

Why is HMRC carrying out so many investigations into IHT?

HMRC may carry out investigations into an estate for many different reasons but the most common, say experts, is due to undervaluing of residential property. In some cases, this may be because the potential for refurbishment or development of an attached piece of land may attribute additional value to a property making up part of the estate.

If investigations reveal that IHT has been underpaid, the consequences can be severe. The estate can be required to pay any outstanding sums due plus an additional fine. This penalty can be as much as 100% of the tax due on the estate.

Mark Gibbons, a partner at accountancy firm UHY Hacker Young who analysed the figures, says that HMRC are well aware that some people will be tempted to undervalue residential property to reduce IHT liability.

He stated: "The rise in investigations means that more beneficiaries, who may not be cash-rich, could be hit with hefty fines. If HMRC deems that there has been a lack of care in carrying out valuations, an estate could end up having to pay up to 100% in penalties. With that much at stake, taking professional advice is absolutely critical."

What is inheritance tax?

IHT is paid on a person's estate – that is their money, property and possessions – when they die. If the deceased person has total assets that are valued at above £325,000, then the estate will be liable for IHT. The current rate for IHT is 40%.

Married couples can combine their personal allowance when it comes to IHT. This means that up to the first £650,000 of their combined estate can be passed on without having to pay IHT.

There is also a range of other steps that can be taken to legitimately and legally reduce your liability for IHT through your Will. This could mean setting up and utilising trusts or gifting parts of your estate over your lifetime to people or causes that are close to you.

Contact our Wills & Estate Planning solicitors in London, Sheffield and Manchester

The Wills & Estate Planning lawyers at Wilford Smith can offer clear, pragmatic, sensible advice when it comes to planning for inheritance tax.

Our lawyers are based in London, Sheffield and Manchester and assist clients throughout England and Wales. Contact us today on 0808 168 5813 to find out how we can help.

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