HMRC recently announced it is going to clamp down further on its investigations into Inheritance Tax (IHT), after clawing back £326m through investigations last year. Data obtained by a Freedom of Information request from insurer NFU Mutual found the amount raised by investigators in the year to March 2022 was 28pc higher than for the previous 12 months.

After years of cutbacks, it appears HMRC has decided to inject some resource in an area where it can see immediate benefit through an attractive rate of return – 40% IHT. HMRC can easily focus on taxable estates or borderline estates through the details received in the IHT return. This new specialist HMRC team will be able to look for ‘red flags’ potentially leading to more tax being due, allowing the tax authority to potentially retrieve hundreds of thousands of pounds. HMRC intends to target the wealthiest individuals – those with an income above £200,000 or assets of over £2 million.

Why the clampdown?

The market value attributed to assets at the date of death has long been a bone of contention and HMRC will instruct its own valuation team to investigate if they suspect values may have been understated for probate. HMRC will also look to join up the dots in relation to all the information at its disposal, (e.g. income tax returns, Land Registry, DWP, bank statements) to check that an estate has been correctly reported. Lifetime gifts, although notoriously difficult for them to police, is an area of particular interest – banks statements tell a story which HMRC will use. Chattels such as jewellery, antiques and family heirlooms are more difficult, of course, and HMRC has historically relied heavily on the honesty of the family to report.

IHT rules are complex and often innocent mistakes are made. Sometimes there is intent to avoid IHT due to widespread feeling that IHT is a tax too far. Perhaps if the thresholds for IHT had been properly indexed with inflation and house prices over the last decade, the public would not feel quite so upset about yet another tax being levied on funds that have almost certainly been subject to high rates of capital or income tax already. HMRC is regarding both people who deliberately conceal money and those making an honest mistake as legitimate targets, and therefore, there is even more reason to ensure i’s are dotted and t’s are crossed to avoid a hefty tax bill (with interest and a potential penalty for providing incorrect information).

Saving on IHT

For those intending to save on IHT, it is possible to look at planning around the family home through a ‘gift with leaseback’ arrangement to potentially save huge sums of IHT through the payment of market rent for a lease for the rest of your life having given away the freehold.

Such an arrangement on a £3 million estate with a £1 million family home could save £140,000 in IHT immediately through reinstating the residence nil rate band, a further £80,000 to £320,000 between years three and seven following the gift (taper applying to the tax due after three years), with a maximum of £540,000 of saved IHT after seven years from the date of the gift.

Such numbers are eye-watering and warrant consideration for those whose joint assets breach the £2 million threshold, whether a simple gift is made to bring the estate down to £2 million or a large gift of the family home is made to radically reduce the liability over time, the latter being suitable for couples who can comfortably afford the market rent.