Beware the Inheritance Tax crackdown

You might not know what your estate’s worth, but HMRC is likely to double check.

When it comes to leaving an inheritance for others, it’s so important to be clear and accurate. Not only could any ambiguity lead to damaging family arguments over your Will, your loved ones could face all manner of headaches sorting through your financial affairs – and it may even lead to a costly penalty.

According to research by UHY Hacker Young,* over the 2017/18 tax year, HMRC investigated 5,400 estates of a deceased person – to challenge whether the stated value was lower than it should be, to avoid inheritance tax. That accounts to around one in every four estates that might be liable for inheritance tax.

The growing problem of inheritance tax

Inheritance tax is a deeply unpopular tax, which applies if the value of your estate is above a certain threshold.

In 2015/16, the latest figures available, the average inheritance tax bill was £179,000.** The government’s own projections show annual revenue will continue to rise.

Your estate is made up of everything you own, with the exception of your pensions. If its total value exceeds £325,000 (if you’re single or divorced) or £650,000 (if you’re married, in a civil partnership or widowed) everything above your threshold is taxed at 40%.

The government has started to roll out a main residence nil rate band, currently worth £125,000 a person, that can be added onto your threshold if you leave your home to a direct descendent. But the rules are complicated, and not everyone can benefit.

What is HMRC investigating?

When you die, the executor of your estate – usually a family member – will have to sort through your financial affairs and submit this information to HMRC. If your estate is above your threshold, they will receive a 40% tax bill. It needs to be paid within six months or interest is charged on top. And, usually, your family can’t inherit your estate until it’s settled.

HMRC’s extra investigations mainly centre on checking if the stated value of your property is actually accurate – and they’re prepared to challenge it. So if your family aren’t precise, they could face a larger bill. Should HMRC have reason to believe the estate was deliberately undervalued to avoid inheritance tax, they could issue a financial penalty.

Plan your legacy

Inheritance tax rules are complicated, but there are ways you can plan and address it – which can ease the burden on your family.

Speaking to a financial adviser can help you explore if your estate has a liability, and the steps you can take to tackle it. A great benefit is they’ll be able to present solutions tailored to your situation. This is a complicated issue, but an expert adviser can help you build the most appropriate plans.

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Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate taxation & trust.