Inheritance tax ("IHT") is a topic that often strikes fear into the hearts of families dealing with the loss of a loved one. With the latest economic metrics showing a steady rise in IHT receipts, reaching an estimated £7.6 billion in the 2023/24 tax year, it's clear that HMRC is taking a closer look at this area. But what does this mean for you and your family? And how can you navigate the complexities of IHT to avoid costly mistakes?

inheritance tax considerations

HMRC's crackdown on inheritance tax involves a careful consideration of various risk factors before initiating checks into IHT accounts. These risks include everything from apparent omissions to incorrect claims for reliefs or exemptions. Incorrect IHT accounts can result in harsh penalties of up to 100% of the tax lost if HMRC deems an error to be deliberate. Additionally, interest may also be due on underpayments that HMRC identify. These charges not only reduce the net value left to beneficiaries but also prolong the administration period of the estate and add stress at an already painful time.

Understanding HMRC's Crackdown

1. Deadlines Matter: It's crucial to be aware of the deadlines for filing IHT forms. While IHT is typically payable six months after the end of the month of the chargeable event, forms for deceased individuals don't need to be filed until 12 months after the deceased's death. Late filings can lead to penalties and interest charges, which can significantly impact the estate's value. Importantly, both filing and payment must be complete before it is possible to apply for probate.

2. Understanding Reliefs and Exemptions: HMRC often challenges claims for business relief (BR) and agricultural relief (AR), so it's essential to ensure that these reliefs are correctly claimed. Additionally, outstanding debts may not always qualify for a deduction against the gross estate, subject to complex anti-avoidance rules.

3. Accurate Valuations: IHT valuations are based on the 'loss to donor' principle, which may differ from independent valuations. HMRC's internal experts may contest valuations, particularly for assets like unquoted shares, land, and jointly-owned property. Obtaining formal valuations from experts can help avoid disputes.

4. Complete Documentation: Completing all relevant boxes and supplementary pages in the IHT forms is crucial. Errors or omissions can lead to penalties, especially for unrepresented individuals who may inadvertently provide insufficient information to HMRC.

Key Risk Factors and How to Avoid Them

An incorrect IHT return can have significant financial implications, especially if HMRC deems a mistake to be careless or deliberate. Personal representatives should approach IHT returns with caution and attention to detail to avoid common traps and ensure compliance with HMRC regulations.

In conclusion, while HMRC's latest crackdown on inheritance tax may seem daunting, understanding the key risk factors and taking proactive steps to mitigate them can help alleviate stress and protect the value of the estate for beneficiaries. Seeking professional advice from tax consultants, such as The Tax Faculty LLP, can provide invaluable support in navigating the complexities of inheritance tax and ensuring compliance with HMRC regulations.

Avoiding Costly Mistakes

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