How to reduce the risk of an HMRC Inheritance Tax enquiry

Among the responsibilities executors and administrators (‘personal representatives’) of estates have, submitting an inheritance tax (IHT400) account to HMRC is often one of the most significant.

When someone passes away, their personal representatives must ascertain the value of their estate and report it to HMRC. HMRC will review the information disclosed and it is becoming increasingly common for them to raise questions. Such enquiries can result in delays, additional professional fees, and stress for the personal representatives.

In our view, taking these practical steps can significantly reduce the likelihood of an enquiry.

1. Provide full and accurate asset valuations 

One of the most common areas for enquiry is where an asset valuation appears inconsistent with market evidence or industry expectations. 

Property valuations should be obtained from reputable local estate agents or qualified surveyors, particularly where the property is unusual, of significant value or has the potential for development.

Business interests, shareholdings, and investment portfolios should also be valued appropriately and supported by documentary evidence.

Personal representatives should avoid the temptation to estimate values where they are not qualified to do so or rely on outdated information. A carefully evidenced valuation as at the date of death demonstrates that reasonable care has been taken and provides a strong basis for supporting the figures reported

2. Disclose all relevant information 

Transparency is critical when preparing an IHT400.

Unusual transactions, substantial lifetime gifts, trusts, jointly owned assets, liabilities, or foreign assets should be clearly disclosed. Where there is uncertainty as to whether or not to include an item in an IHT400, it is often better to explain the position in a covering letter or supplementary schedule rather than leave HMRC to discover it independently.

Providing complete information from the outset helps ensure that HMRC has a clear understanding of the estate and the reasoning behind the positions taken.

3. Keep comprehensive supporting records

Even where the IHT400 has been completed correctly, HMRC may request evidence to support values or relief claims.

Personal representatives should retain copies of bank statements, investment valuations, property appraisals, gift records, loan documentation, and any correspondence relevant to the estate. Claims for reliefs, such as Business Property Relief or Agricultural Property Relief, should be supported by detailed evidence demonstrating eligibility.

Good record keeping enables personal representatives to respond promptly and confidently should supporting evidence be required.

4. Review lifetime gifts carefully

Lifetime gifts (which are potentially free of inheritance tax) and genuine gifts out of income (which will be exempt from inheritance tax) are two of the areas most frequently examined by HMRC. 

Personal representatives should undertake a thorough review of the deceased’s financial affairs to identify gifts made within the seven years prior to death. Particular attention should be paid to regular gifts, transfers to family members, gifts into trust, and any transactions that may constitute gifts with a reservation of benefit.

Incomplete disclosure of lifetime gifts can lead HMRC to question the accuracy of the wider return. Taking the time to review lifetime transfers thoroughly can prevent important details from being overlooked later in the administration process.

5. Seek professional advice early

Inheritance tax legislation is complex, and many estates contain issues that are not immediately obvious to non-professionals. 

Professional advisers can help identify potential areas of risk before the return is submitted, ensure that all available reliefs are claimed correctly, and present information in a way that is less likely to attract unnecessary scrutiny. In many cases, early professional involvement can prevent costly problems arising later.

A professionally prepared IHT400 can also provide personal representatives with confidence that their responsibilities have been met appropriately and that available reliefs have been fully considered.

Protection against HMRC enquiries

Even where every precaution has been taken, HMRC can still decide to review an estate.

To provide additional peace of mind, we offer our Tax Investigation Service (TIS) insurance policy for estates where we have been instructed to prepare the IHT400. This policy covers our professional costs in dealing with an HMRC enquiry into an Inheritance Tax return, subject to the policy terms and conditions.

An HMRC enquiry can involve extensive correspondence, gathering supporting evidence, negotiating with HMRC officers, and responding to technical questions. The associated professional fees can be significant, particularly if the enquiry becomes prolonged.

By taking out TIS cover, personal representatives can protect themselves against these unexpected costs and ensure that expert assistance is available throughout the enquiry process without the concern of escalating professional fees. To find out more about this service click here or speak to your usual Kreston Reeves contact.

While it is impossible to eliminate the risk of an HMRC enquiry entirely, careful preparation, complete disclosure, robust record keeping, and professional advice can significantly reduce the likelihood of one arising.

If you are administering an estate and would like assistance with preparing an IHT400, or would like to learn more about our TIS insurance policy, please contact our team. We would be pleased to discuss how we can help make the estate administration process as smooth and stress-free as possible.