HMRC under fire as inheritance tax bill rises by 23% in three months (2024)

Inheritance tax receipts have surged by 22.9 per cent in the first quarter of the tax year, according to data from the Office for National Statistics.

The latest figures show more than £2bn has been taken from people’s estates since March in IHT – earned by charging 40 per cent tax on assets a person owns over a total value of £325,000 when they die.

“It’s clear that the taxman is cracking down hard on inheritance tax by looking more closely at people’s estates and challenging claims for reliefs,” warns Sean McCann, chartered financial planner at NFU Mutual. He notes that since the government’s flagship inheritance tax policy – the new residents nil rate band – was introduced in April, Inheritance Tax (IHT) receipts have leapt by £285m compared with the same time last year.

“When inheritance tax receipts rise, it’s usually because of a buoyant housing market. Now, with property prices stagnating, it’s difficult to see what could have caused such a sharp increase in receipts other than a more aggressive approach to inheritance tax.

“The extra scrutiny from tax officials means those who haven’t taken professional advice or planned early could be caught out. This could have a catastrophic effect on family wealth. IHT is one of the more complex taxes and there are plenty of traps to fall foul of – as many families appear be finding out.”

However, the increase could also be at least in part due to people rushing to submit estates for probate in a bid to avoid planned Ministry of Justice charges due in April that never materialised.

“There has been no change of approach by HMRC,” an HMRC spokesperson said. “Inheritance Tax receipts fluctuate from month to month for many reasons, including changes to asset values, variations in estate sizes and the number of deaths in a given period.”

Meanwhile though, those people who to act as executors to the estates of family and friends have been warned they may face paying inheritance tax bills out of their own pockets due to delays in sorting out the finances of an estate, especially where property is involved.

Under current rules, the executor of a will gains the legal right to administer someone’s estate after death by obtaining ‘probate’. The process includes valuing the estate, paying any debts or taxes and then sharing out the remainder of the estate in accordance with the deceased’s wishes. However, many larger estates are complex and it can take a long time to sell assets, insurer Royal London has warned.

Inheritance tax must be paid by the end of the sixth month after death. But the complexity of the process and the assets contained within many estates means assets are unlikely to be sold in time to meet this bill.

For the 2016-17 tax year, around 30,000 estates are expected to be liable for IHT, up from 19,000 in 2013-14, though HMRC is keen to point out that 95 per cent of estates still fall within the nil rate band threshold and so don’t incur IHT.

Simple estates, such as those with no property or shares included, can be wrapped up in as little as three to six months. However, the majority of estates take anywhere between six and 12 months to complete as properties or shares may need to be sold and potential creditors need to be found.

Disposing of these assets can be a time consuming and complex business for executors and problems can often be exacerbated by lost paperwork and inaccurate record keeping. If the estate’s assets are unable to be sold by the time the inheritance tax bill comes in then executors must find other ways of paying the bill.

In some circ*mstances, insurers will pay out sums assured on protection policies the deceased person may have had without waiting for probate. Many have also signed the “Fair Funeral” pledge, which means they will advance up to £10,000 to allow families to arrange funerals before the estate has been settled.

Other options include insurance policies written in trust (therefore outside the estate) which can be used to release money to meet such bills and there is also the ability to spread inheritance tax payments over 10 years if related to a property.

However, many executors will still find themselves either having to get a short term bank loan to cover the debt, or else pay it from their own funds. While the money can be reclaimed once the estate is settled it still leaves executors in a difficult position.

“People agree to be executors to ensure the wishes of a friend or family member are honoured after death,” says Helen Morrissey, personal finance specialist at Royal London. “However, they are unwittingly leaving themselves open to footing what can be a sizeable inheritance tax bill.

“We are seeing more estates than ever subject to inheritance tax and larger estates can take a long time to wind up. Many executors may have no idea that they could be responsible for finding the money for a large tax bill before money in the estate is available.

“While the money can be reclaimed once assets have been sold it is an issue that could cause many executors real financial stress during an already difficult time. HMRC needs to think again about giving executors who are acting in good faith more time to sort out an estate before they start demanding tax.”