In a significant move to enhance revenue collection and ensure compliance, the UK’s HM Revenue and Customs (HMRC) reported a notable increase in inheritance tax (IHT) enquiries over the last year. Recent data obtained by Price Bailey, a prominent accountancy firm, reveals that HMRC initiated 4,171 inheritance tax investigations in the 2024/25 fiscal year, a substantial 38% rise from the previous year’s total of 3,028. These enquiries, a procedure often triggered by identified discrepancies in estate tax reporting, indicate a heightened scrutiny of inheritance tax compliance amid growing pressures on the UK government to ensure fiscal responsibility while supporting economic growth.
The purpose of an IHT enquiry typically revolves around assessing whether the correct amount of inheritance tax has been paid. However, while the number of investigations has surged, the percentage that resulted in revised tax bills has declined. In the last fiscal year, only 45% of HMRC’s enquiries led to higher inheritance tax liabilities, a marked decrease from 65% in 2023/24. This shift suggests that although HMRC is intensifying its investigation efforts, many of these checks may not uncover the anticipated discrepancies, raising questions about the efficiency of the investigations and the competency of the staff handling these cases.
Nikita Cooper, a director at Price Bailey, attributed the shift in enquiry outcomes to increased pressures faced by HMRC. “The agency is already under scrutiny to increase its tax collection efforts as the government tries to navigate fiscal challenges,” Cooper said. “With inheritance tax catching more estates in its net, HMRC is ramping up the scrutiny of returns, a trend likely to continue in the coming years.”
Although the HMRC maintains that many of the cases flagged may relate back to previous years’ enquiries and thus complicate year-on-year comparisons, the declining yield from investigations poses concerns over the training and capabilities of staff within HMRC’s Customer Compliance unit. The number of these compliance staff has grown by 17% since the 2018/19 period, increasing from 23,342 to 27,226 in 2023/24. Despite this expansion, industry experts suggest that new recruits may still be grappling with the complexities surrounding inheritance tax regulations.
Cooper further noted, “HMRC is becoming less selective in the returns it chooses to investigate, which results in undue stress for taxpayers, particularly those already navigating the emotional landscape of losing a loved one.” The HMRC has acknowledged that factors contributing to IHT enquiry cases vary significantly, ranging from simple errors to potential tax evasion. The agency underscored that the number of active cases can fluctuate based on the number of identified risks.
In defense of its procedures, a spokesperson from HMRC highlighted that most individuals indeed pay the correct amount of inheritance tax. Investigations arise primarily from cases where there is reason to suspect that the appropriate tax has not been remitted. They also pointed out that there exists an appeal process for individuals dissatisfied with the outcomes of these compliance activities.
Understanding the implications of an inheritance tax enquiry is vital for taxpayers. HMRC, in its authority to scrutinize IHT submissions, aims to verify that any applicable reliefs are correctly applied and that the proper tax is levied. Discrepancies that trigger investigations can stem from various factors, including fluctuations in asset valuations, significant financial gifts prior to death, or the inherent complexity of the estate in question. Unlike many other forms of taxation, inheritance tax returns must be manually submitted in paper format, adding another layer of challenge to the process.
Cooper criticized the outdated reporting system for IHT, noting that it constitutes a significant hurdle for both HMRC and taxpayers. “The inefficiencies reflect a broader issue, with the system being so antiquated that HMRC struggles to quantify tax collected from these enquiries, and in many scenarios, the collectable amount could be negligible,” she highlighted.
For individuals receiving an inheritance tax enquiry from HMRC, Price Bailey recommends a structured approach to navigate the process effectively. Initially, it is crucial to ascertain the reason behind the enquiry by analyzing the official notice to identify potential discrepancies. Subsequently, gathering all relevant documentation, including financial records, property valuations, and records of significant gifts made in the last seven years, becomes essential.
Engaging with a tax specialist can also provide valuable guidance; their expertise helps interpret HMRC’s requests and navigate the complexities of compliance. Timely and transparent responses to HMRC inquiries can mitigate further scrutiny, while proactively disclosing any identified discrepancies showcases good faith and can reduce potential penalties. Maintaining strict awareness of deadlines and payment obligations is also critical, particularly if an inheritance tax liability arises from the enquiry.
As estate values rise in conjunction with property market inflation, the pool of individuals required to file IHT returns is expected to expand. Significant upcoming changes to IHT regulations, particularly concerning farmers and business owners, may further complicate the landscape. Effective April 6, 2027, the restriction of business property relief and agricultural property relief, alongside adjustments that include pensions within the IHT framework, will likely escalate the total inheritances taxed by HMRC.
Cooper noted, “We expect to see a much greater emphasis on compliance in the near future, as both the number of estates subject to inheritance tax and the overall tax revenue collected rise markedly.” With the existing paper-based filing system already under considerable strain, HMRC will need to enhance its capacity for filtering out inaccurate submissions from those taxpayers fulfilling their obligations correctly.
The steadily increasing enquiries into inheritance tax, the changing regulatory environment, and the anticipated impact of reforms on compliance practices pose significant implications for taxpayers and the broader financial landscape in the UK. As individuals brace for changes in IHT policies and face scrutiny over estate responsibilities, proactive engagement and informed decision-making will become essential to navigate this complex fiscal reality.