Inheritance tax penalties soar - October 13th 2023

The value of inheritance tax (IHT) penalties to government receipts has increased by more than half over the past two years, with higher property values and the frozen IHT nil rate band pushing more estates into the IHT net.

Increase in values

Even though property prices have been falling recently, the average price of a detached house in June 2023 was still over £450,000, while the average price for London property was over £525,000. At the same time, the IHT nil rate band has been frozen at £325,000 since 2009, with average property prices going up more than 85% since then.

Property is not the only area to go up in value. The FTSE All Share index shows an even better return, having gone up by just under 245%. An investment of £50,000 in 2009 linked to the FTSE All Share index would now be worth over £170,000.

With the value of a typical estate now approaching £500,000, this makes it subject to IHT in cases where the residence nil rate band is not applicable. Last year, 4% of estates had to pay IHT, with an average tax bill of over £210,000.

 Complexities and conundrums

The complexities of IHT can catch out even the most knowledgeable, so there are a lot of pitfalls if a deceased’s relatives decide to undertake probate themselves. The most common reasons for HMRC charging a penalty are because:

• Forms are not filed on time or IHT is paid late. The IHT on an estate must be paid within six months after the end of the month in which death occurs – a much tighter deadline than those available for most other major taxes.
• Assets are undervalued or even omitted entirely. Valuing property of an unusual nature can be difficult, so here the best advice is to obtain a formal valuation from a qualified surveyor.
• Lifetime gifts made by the deceased in the seven years before death are overlooked. It can be difficult enough trying to establish cash gifts from bank statements, and there may be no record at all where gifts of assets, such as jewellery or antiques, have been made.

The seven-year look back requirement can be particularly confusing, especially as in certain cases – where gifts to trusts are involved – it is necessary to go back 14 years. More confusing still is where the deceased ‘gifted’ an asset, such as their main residence, to children, but then continued to live in it. Regardless of when the ‘gift’ was made, the property is still part of the deceased’s estate.  

Penalties for underpayment

The amount of penalty will depend on the circumstances leading to the IHT underpayment, and can be severe:

• Reasonable care has been taken – up to 30% penalty (but be warned that this let-out will not apply if a professional valuation hasn’t been obtained for a property or other valuable assets).
• Assets have been deliberately omitted from an IHT return – up to 70% penalty.
• Hiding a deliberate error – up to 100%.

With these complexities in mind, particularly during what is usually a difficult and emotional time, it is wise to seek professional help for all but the simplest of estates.