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.
Last year, 4% of estates had to pay IHT, with an average tax bill of over £210,000. The most common reasons for HMRC charging a penalty are because:
- Forms are not filed on time or IHT is paid late. (The deadline is six months after the month of the death).
- Assets are undervalued or even omitted entirely. Valuing property of an unusual nature can be difficult, so it’s wise 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. 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:
- 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%.
