thousands targeted by HMRC for underpayment

Families believed to have been caught off guard by donation rules

There are few taxes more universally hated in the UK than inheritance tax, which is why many families are taking proactive steps to reduce the amount their estates are likely to have to pay after their death.

Unfortunately, some of these families have now found themselves in hot water with HM Revenue & Customs (HMRC).

According to figures obtained by The Telegraph, the Inland Revenue has issued back taxes worth £608million to families it says have not paid enough inheritance tax over the past five years.

In total, reports suggest that nearly 2,000 families have been affected by these tax claims, having breached the various gift rules that form part of the inheritance tax regime.

In some cases, this appears to be due to rules governing “qualified gifts”.

As a general rule, if you give property to a loved one and do not die within seven years of the gift, it is not considered part of your estate when calculating your estate tax.

However, this is not always the case with property. If, for example, you gave your home to your child but continued to live in it, the gift would break the rules unless you paid market-rate rent while you lived there.

This is because you have continued to benefit from the asset, even though you technically no longer own it.

What is clear is that the tax authorities are closely monitoring the amount of tax paid by families falling into the inheritance tax bracket and will actively pursue those they believe were too eager to take advantage. various loopholes open to those seeking to reduce their liability.

Tax revenue up

It should be noted that this repression stems from the increase in tax revenue from inheritance tax.

The latest data from HM Revenue & Customs (HMRC) shows that inheritance tax receipts from April 2021 to March 2022 totaled £6.1billion. That’s a whopping £0.7 billion more than the same period the year before.

That’s a very significant amount of money, driven by a few things, in particular the incredible house price increases we’ve seen over the past few years.

For example, according to the latest Land Registry figures, the average house price in February was £276,755, having jumped 10.9% in the previous 12 months.

This is on top of the huge growth seen in the first year of the pandemic, triggered by the stamp duty holiday.

As the value of our homes increases, this means that more and more estates end up falling within the estate tax thresholds and therefore having to cough up money after death.

I want my money back

Interestingly, at the other end of the scale, thousands of households are successfully claiming back some of the inheritance tax they have already paid.

A freedom of information request from NFU Mutual revealed that 32,000 claims for inheritance tax refunds have been successful over the past six years.

While 2021/22 saw the lowest number of refunds of any fiscal year during this period, there were still more than 4,200 families who managed to recover money from the taxman than they would have didn’t have to pay.

NFU Mutual noted that inheritance tax is assessed based on the value of assets such as property or shares, but the actual figure received from the sale of these assets can be quite different.

Unfortunately, the tax refund is not automatic and must instead be reclaimed proactively, with refunds available on property sold within four years of death or on other eligible investments sold within 12 months of death. death.

In preparation

It is undeniable that inheritance tax is an extremely complex form of taxation. However, if you do your homework on allowances around the tax, you can reduce the amount of your eventual bill.

We’ve put together a comprehensive guide that describes everything you need to know about inheritance tax donations.

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