How to avoid an inheritance tax investigation

Notwithstanding the emotional and financial difficulties that you may find yourself facing following the death of a loved one, the taxman may still elect to investigate the inheritance tax liability on the deceased’s estate – and issue hefty penalties where payment is found to have fallen short of what is due.

Needless to say, it is vital that you get the right advice at the right time. Below we look at how it all works and the importance of securing expert legal advice long before the taxman takes a look at what is owed.

How does inheritance tax work? 

As the law currently stands, we are each entitled to an inheritance tax allowance of £325,000. This is known as the inheritance tax nil-rate band. The net effect is that you are able to pass on to your loved ones up to £325,000 tax-free.

For anything over and above this threshold, a standard inheritance tax rate of 40% will apply to the remainder of the estate. For example, if an estate is valued at £500,000, the tax bill will be £70,000, ie; 40% of £175,000, the difference between the value of the estate and the nil-rate band of £325,000.

However, since April 2017, where you are leaving property to a family member you may also be entitled to a residence nil-rate band. This will mean you will pay even less inheritance tax. For 2019-2020, this new allowance rose to £150,000. It will rise by £25,000 again in April 2020, to a total of £175,000.

In most cases, married couples and civil partners are also allowed to pass their possessions and assets to each other tax-free. As such, by using both tax-free allowances, this can effectively double the amount a surviving partner can leave behind to their loved ones without incurring any inheritance tax liability.

What is likely to cause the taxman to investigate?

Although the available tax allowances mean that many estates will not be subject to any inheritance tax whatsoever, there are plenty of instances where the value of an estate will still exceed the relevant thresholds.

Furthermore, following the recent legislative changes that saw the introduction of the new residence nil-rate band, HMRC is increasingly targeting estates it believes have undervalued residential property to avoid the payment of IHT.

Statistics show that almost a quarter of estates are investigated over IHT. For the tax year 2018 to 2019, HMRC opened 5,537 inheritance tax investigations, equating to almost one in four of the 22,000 estates on which the tax fell due.

How do I avoid an inheritance tax investigation?

There is no guaranteed way of avoiding an inheritance tax investigation. That said, you can minimise the risk of this happening by ensuring that you instruct an expert to deal with the legalities of the estate.

The legislation relating to inheritance tax rates, not least the rules for the new residence nil-rate band can be complex. Moreover, even where there is nothing to pay, you may still be required to fill in complicated tax forms to notify HMRC.

By seeking expert advice, you can have the peace of mind that the estate will be administered correctly, and an investigation by the taxman is far less likely.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.