How to avoid an Inheritance Tax investigation – which are up 41%!

Ensuring your loved ones are well supported after you’re gone is likely one of your main priorities. That’s why it can be especially frustrating to think that, despite your best efforts, your beneficiaries could still face unexpected tax bills simply because some elements weren’t handled correctly.

This situation is becoming increasingly common as estate values rise and HMRC collects more in Inheritance Tax (IHT) each year.

MoneyWeek reports that investigations by HMRC into families it believes have underpaid IHT have increased by 41% over the last year.

So, with more scrutiny of IHT bills than ever before, it’s important to make sure your estate isn’t at risk.

Read on to find out what’s behind the rise in investigations and how to protect your estate from one.

Investigations are rising as Inheritance Tax revenue increases

The key driver behind increasing IHT investigations is the rise in IHT revenue. With more taxes to collect, there are naturally more opportunities for evasion and avoidance to occur.

Data from Statista shows that IHT receipts reached around £8.25 billion in 2024/25, which marked the fourth consecutive year of a record high. The ongoing freeze on IHT thresholds alongside rising asset prices has led to steadily higher receipts.

Upcoming reforms to pensions and IHT, as well as Business Relief and Agricultural Relief, will all further widen the IHT net, meaning investigations are likely to continue to rise as well.

You can read more about this in our previous article on the topic.

How an HMRC investigation works

Where IHT is due on an estate, it usually must be paid within six months of the death. However, if HMRC suspects IHT has been underpaid, they can go back as far as 20 years to check on various estate valuations.

When an estate is reported to HMRC for IHT, the details are carefully reviewed to ensure everything is accurate and complete. If anything looks unusual or if there are any particularly complex transfers or arrangements, HMRC may open an investigation.

The process usually begins with a letter to the executor or their adviser asking for further information or supporting documents. HMRC might request bank statements, property valuations, or evidence about gifts and life insurance policies.

If HMRC concludes that you have underpaid IHT, they may ask for additional payments along with interest and, in some cases, penalties.

Once the figures are agreed and any tax due is paid, the investigation is closed.

What HMRC might look for during an investigation

When investigating an estate, HMRC will look for signs of non-compliance or inaccuracies. Common things they may look for include:

• Undeclared income – Income from sources such as property rentals that hasn’t been declared but is liable for IHT.

• Last-minute or unusual asset transfers – Estates showing significant or sudden transfers of assets are more likely to attract HMRC’s attention.

• Non-compliant gifts – Gifts made within seven years before death are closely reviewed to confirm they fall within the allowable exemptions. HMRC also investigates potential gifts with reservation of benefit. For example, this includes when you gift a property to a child but continue to live in it.

• Life insurance policy premiums – HMRC may look at bank statements for evidence of payments towards life insurance policies. If these policies weren’t written in trust, their value could form part of the taxable estate.

• Undervalued property – Attempting to reduce tax liability by undervaluing a property can trigger an investigation.

• Omitted valuables – Cash, jewellery, art, or other valuable items passed on to relatives must be declared on the IHT form.

How to ensure your estate isn’t investigated by HMRC

Even if an HMRC investigation doesn’t lead to a higher bill, it can still be stressful and time-consuming for your beneficiaries. A few simple steps can make things easier for your loved ones and reduce the chance of your estate being questioned.

Keep thorough records

Keeping clear, well-organised records of any gifts, valuations, or transfers you make during your lifetime can help ensure your family avoids an investigation.

Transparency is key to showing what’s owed and what isn’t, and taking extra care now can help prevent penalties for your beneficiaries in the future.

It can also be helpful for any professional advisers you work with, such as financial planners, accountants, and solicitors, to be in coordination with one another. That way, they can join up your estate planning and keep track of your intentions and transfers, which can help reduce the risk of discrepancies or misunderstandings further down the line.

Be careful that you don’t continue to benefit from your gifts

Many people fall into the trap of giving gifts with reservation of benefit and continue to benefit from an asset they’ve given to someone. For a gift to be tax-efficient, you must give up all benefit from it.

For example, if you gift your home to your child but want to keep living there, the property could still be liable for IHT. To make sure it isn’t, you would need to create a formal rental agreement that sees you pay the market rate.

A financial planner can help you ensure that any gifts you give during your lifetime are structured to be efficient.

Plan ahead

Making last-minute transfers or giving multiple gifts all at once could raise suspicions with HMRC. So, it’s important to plan ahead of time and build your estate and legacy planning into your wider financial plan.

Work with a financial planner

A financial planner can help you create an estate plan that minimises IHT and avoids common pitfalls that could lead to future investigations.

They can also use cashflow modelling to show how your estate might change over time. This can help you see both how much IHT may be due and how much you could gift during your lifetime without affecting your own financial security.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.