HMRC suspects the wealthy underpaid £343m in inheritance tax – how to avoid falling foul of the rules

HMRC believes up to £343 million in inheritance tax has been underpaid by wealthy taxpayers in the last year, according to new figures, up by £18 million on the previous year.

Lawyers have warned of a looming crackdown following the inheritance tax data for the 2024/25 tax year, which comes from HMRC’s annual report.

The figures for suspected tax avoidance and evasion – known as ‘tax under consideration’ – could increase significantly in future years following inheritance tax rule changes from April 2026, according to TWM Solicitors.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Next April sees business property relief and agricultural property relief slashed from 100% – where most farms and family businesses paid zero inheritance tax – to 50% on assets over £1 million, meaning 20% inheritance tax will be due above that cap.

From April 2027, pensions will be newly subject to inheritance tax too. Both rule changes are expected to bring in more inheritance tax for the Treasury.

Laura Walkley, partner and head of private client at TWM Solicitors, said: “Disputes over IHT are likely to become increasingly more common as HMRC increases the scope of assets eligible for inheritance tax, bringing business assets, farms and pensions into the inheritance tax net.”

“HMRC clearly sees underpaid inheritance tax as an area of increasing concern. The penalties that HMRC can impose for tax avoidance and evasion are very substantial so it’s important that IHT calculations are done properly with professional advice,” she added.

Risks of under-reporting inheritance tax

When probates are being undertaken just by friends and family, there can be the temptation to under-report in order to reduce the IHT bill, said Walkley.

Values can be under-reported inadvertently or deliberately, artificially reducing the IHT bill.

“HMRC takes a very dim view of this and can impose heavy fines if these errors are discovered,” she said.

Penalties can be as much as 100% of the extra tax due plus interest – at a rate of 7.75% – from the date the tax was due until the date of payment.

“We are expecting that the number of disputes between taxpayers and HMRC over IHT will increase, partly because of an expected increase in IHT-focused tax investigations from HMRC,” Walkley added.

We look at how to avoid inheritance tax through gifts and other ways to reduce an IHT bill in separate guides.

How to avoid inheritance tax penalties

To avoid inheritance tax penalties, the best protection you have is to report all assets accurately.

HMRC will look for a range of issues when it carries out investigations into suspected underpaid inheritance tax. The kind of things it is looking for include:

Deliberately undervaluing a residential property that is part of an estate

This could be by exaggerating the state of disrepair, basing the value on an out-of-date survey, or incorrectly believing that a “probate valuation” should be lower than the open market value at the date of death.

HMRC is increasingly investigating suspected undervaluations of properties for inheritance tax purposes by cross-referencing data from HM Land Registry and using tools such as Google Street View, according to TWM Solicitors.

Failing to declare cash or other valuables in an inheritance tax form

This can include not declaring items such as jewellery or paintings passed on to relatives, for example by a lay executor.

HMRC has also been reported to use a copy of a property’s contents insurance to check for valuable items that may have been omitted from an inheritance tax return.

Claiming a large cash gift was given more than seven years ago, when it was actually more recently
Gifts made more than seven years ago are typically no longer subject to inheritance tax. If HMRC finds out the gift was given much more recently, they will expect the IHT to be paid on it.