HMRC Is Investigating Thousands Over Underpaid Inheritance Tax
- MAZ
- 2 hours ago
- 11 min read
HMRC Is Investigating Thousands of Estates Over Underpaid Inheritance Tax: What Executors Need to Know for 2026/27
HMRC opened close to 4,000 inheritance tax investigations in the year to April 2025, recovering an additional £246 million from bereaved families, and the number of live enquiries has kept climbing through 2025/26. For the 2026/27 tax year, the nil-rate band stays frozen at £325,000, agricultural and business property relief is being restructured from 6 April 2026, and HMRC's data-matching tools are catching more errors than ever. If you are an executor, or you are named as one, this is the year to get the paperwork right the first time.
I have sat across the table from enough executors now to know that almost nobody sets out to underpay inheritance tax deliberately. Most of the cases that end up on HMRC's desk started as an honest oversight: a piece of jewellery nobody thought to value, a gift made four years before death that got forgotten, a house valued using an estate agent's guess rather than a proper appraisal. The problem is that HMRC no longer needs a tip-off to find these things. It cross-references.
Why Are Investigations Rising So Sharply?
Three separate pressures are converging at once, and none of them are going away.
The first is the freeze on the nil-rate band. It has sat at £325,000 since April 2009 and the 2025 Autumn Budget confirmed it will stay there until April 2031. House prices and investment values have not stood still over that period, so estates that would never have touched inheritance tax fifteen years ago now sit squarely inside it, often without the family realising until probate is well underway.
The second is technology. HMRC increasingly draws on data from the Land Registry, the Trust Registration Service, and other government and financial datasets to check whether the figures on an IHT return match what is recorded elsewhere. If a property was declared at £650,000 on the IHT400 and sells eighteen months later for £820,000 with no explanation for the uplift, that discrepancy gets flagged. It does not need a human to spot it first.
The third is the reform itself. From 6 April 2026, the rules on agricultural property relief (APR) and business property relief (BPR) change materially, and any change of this size tends to generate a wave of enquiries as HMRC checks that estates are applying the new regime correctly rather than the old one.
What the 2026/27 Reforms Actually Change
This is worth setting out precisely, because the detail has shifted more than once since it was first announced and a lot of secondary commentary is now out of date.
From 6 April 2026, a new £2.5 million allowance applies to the combined value of property in an estate qualifying for 100% agricultural property relief or 100% business property relief, or both. Anything above that allowance receives relief at 50% instead of 100%, which produces an effective inheritance tax rate of 20% on the excess. The government's original proposal in October 2024 set this allowance at £1 million; it was raised to £2.5 million following the 23 December 2025 announcement, after sustained pressure from the farming and family-business sector.
The allowance is transferable between spouses and civil partners, allowing a couple to pass on up to £5 million in qualifying agricultural or business assets before this particular restriction bites, and this applies even where the first spouse died before 6 April 2026. HMRC's own published estimate is that around 1,100 estates across the UK will pay more inheritance tax as a result of the reform in 2026/27, with roughly 185 of those involving an agricultural property relief claim.
There is a separate change worth flagging for anyone holding shares admitted to trading on a market such as AIM: from 6 April 2026, shares on a recognised stock exchange that are designated "not listed" attract only 50% business property relief rather than the previous 100%, and this reduction sits outside the £2.5 million allowance entirely. If a client's estate planning was built around AIM shares qualifying for full relief, it needs revisiting now rather than at the next review meeting.
None of this affects the core nil-rate band of £325,000 or the residence nil-rate band of £175,000, both of which remain frozen and continue to taper away at £1 for every £2 an estate exceeds £2 million, disappearing entirely once an estate passes roughly £2.35 million for an individual or £2.7 million for a couple who have combined both allowances. Full detail of the reform is set out in the government's agricultural property relief and business property relief changes policy paper on GOV.UK.
What Actually Triggers an HMRC Enquiry
In practice, a handful of recurring patterns account for most of the investigations I have seen open.
Undervalued or single-source property valuations. Residential property is consistently the area where HMRC pushes back hardest. A probate valuation obtained from a single estate agent, especially one produced quickly and without inspection, is far weaker evidence than a RICS valuation, and HMRC knows the difference. Where a property is sold within a reasonably short period after death for materially more than the declared probate value, expect a question.
Personal possessions. Jewellery, art, antiques, and furniture are commonly omitted or wildly undervalued, not through dishonesty but because nobody thinks to have a house clearance professionally appraised. HMRC's guidance is clear that these items must be included at full open market value, and a return that lists "household contents: £500" for a house full of furniture and a jewellery collection tends to attract attention.
Gifts within seven years of death. This is probably the single biggest source of genuine confusion. A gift is only fully outside the estate if the donor survives seven years from the date it was made. Where death occurs within that window, tapered relief reduces the tax rather than removing it entirely, and the rate depends on exactly how many complete years elapsed: nil relief inside three years, rising in stages to 80% relief in the sixth to seventh year, which is why the effective rate on a lapsed gift can range from the full 40% down to 8%. Executors frequently do not know about gifts the deceased made, particularly informal transfers or regular payments from surplus income, and HMRC's investigators are trained to look for large bank transfers in the years before death that were never reported.
Life insurance not written in trust. A policy that pays out to the estate rather than directly to a named beneficiary under trust is added to the taxable estate. I still see this missed regularly, usually because the family assumes life cover is automatically outside the scope of inheritance tax. It is not, unless it has been placed in trust.
How an Investigation Unfolds and What It Costs
HMRC typically opens contact with an "opening letter" addressed to the executors, framed as a compliance check, requesting supporting evidence such as bank statements, professional valuations, or records of gifts. You are not usually warned before this letter arrives; there is no pre-enquiry notice. Most enquiries resolve within six to twelve months, though complex cases involving trusts, business assets, or disputed valuations can run considerably longer.
Where HMRC concludes that tax was underpaid because of an error, the financial consequence has two separate components, and it is worth understanding both because they are calculated differently.
Interest accrues automatically on any inheritance tax paid late, currently running at 7.75%, regardless of whether the underpayment was innocent or deliberate. It is not a penalty in the behavioural sense; it is simply the cost of HMRC being kept out of its money, and it applies from six months after the end of the month of death, which is also the standard payment deadline before interest starts running at all.
Penalties are behaviour-based and can be far more punishing. Under the standard tax-geared penalty regime, a careless error typically attracts a penalty of up to 30% of the extra tax due; a deliberate but not concealed inaccuracy can reach 70%; and a deliberate and concealed inaccuracy can reach 100% of the tax lost. Where HMRC believes the underpayment resulted from deliberate concealment, and particularly where offshore assets are involved, it can go back as far as 20 years to raise an assessment, though the more common four or six-year time limits apply where the conduct was innocent or merely careless. The legal basis for these penalties sits in Schedule 24 of the Finance Act 2007 alongside the specific machinery of the Inheritance Tax Act 1984, and personal representatives should understand that a genuine, promptly corrected mistake is treated very differently from one HMRC believes was concealed.
A point worth making plainly to anyone acting as executor for the first time: the liability sits with you personally in your capacity as personal representative, not with the beneficiaries. If tax is underpaid because of an error in the return you submitted, and the estate has already been distributed, HMRC can still pursue you for the shortfall. This is precisely why I tell clients acting as executor to hold back a contingency sum before making final distributions, particularly where valuations were uncertain or gifts history was incomplete.
The Scottish and Welsh Position
Inheritance tax itself is a reserved matter. The rates, thresholds, reliefs, and penalty regime described above apply identically whether the deceased was domiciled in England, Scotland, Wales, or Northern Ireland. There is no separate Scottish or Welsh inheritance tax, and the APR/BPR reforms taking effect on 6 April 2026 apply UK-wide without variation.
Where the position genuinely differs is procedural rather than fiscal. In Scotland, the equivalent of the grant of probate is called confirmation, obtained from the local sheriff court rather than the Probate Registry, and Scots succession law includes concepts such as legal rights for a surviving spouse and children that do not exist in English and Welsh law.
This affects how an estate is distributed, and therefore who ends up bearing the practical burden of an inheritance tax bill, but it does not change the amount of tax due or how HMRC investigates a suspected underpayment. The application process for probate or confirmation is set out on GOV.UK's guidance on applying for probate, which explains the differences by nation. Wales follows the same procedural framework as England, with no separate Welsh inheritance tax variation currently in place.
A Practical Checklist Before You Submit an IHT Return
Risk area | What HMRC will check | What reduces the risk |
Property valuation | Sale price versus declared probate value | RICS valuation, not a single agent's estimate |
Personal possessions | Whether jewellery, art, and furniture are included at all | A proper house clearance valuation, even for modest estates |
Lifetime gifts | Bank transfers in the seven years before death | A written gifts schedule with dates and amounts, cross-checked against bank records |
Life insurance | Whether the policy sits in or outside the estate | Confirm trust status with the insurer before submitting the return |
APR/BPR claims | Whether the £2.5 million allowance has been applied correctly, and whether any lifetime gifts of qualifying property since 30 October 2024 have reduced it | A clear calculation showing how the allowance has been used, retained with the return |
The full rules on what must be reported and how estate value is calculated are set out in HMRC's guidance on valuing the estate of someone who has died, and the general rates and thresholds are confirmed on the main inheritance tax guidance page on GOV.UK.
Looking Ahead to 2027/28
One further change is already locked in and worth flagging now, even though it falls outside the current tax year. From April 2027, unused pension funds and death benefits will be brought within the scope of inheritance tax for the first time, a change the Office for Budget Responsibility estimates will affect around 50,000 estates. If you are advising on estate planning today, particularly for anyone with a defined contribution pension they intended to pass on tax-free, this needs building into the conversation now rather than left until the rule takes effect.
FAQs
How many inheritance tax investigations does HMRC open each year? HMRC opened almost 4,000 investigations into suspected underpaid inheritance tax in the year to April 2025, and more than 14,000 since 2022. The trend has continued upward through 2025/26, with over 3,600 new investigations opened in the first nine months of that tax year alone.
What triggers an inheritance tax investigation? The most common triggers are undervalued residential property, omitted or undervalued personal possessions such as jewellery and antiques, unreported lifetime gifts made within seven years of death, and life insurance payouts that were not written in trust. HMRC increasingly identifies these through data-matching against Land Registry and other official records rather than manual review.
How long does an HMRC inheritance tax investigation take? Most investigations resolve within six to twelve months. Cases involving complex valuations, offshore assets, or disputed lifetime gifts can take considerably longer.
What penalties apply if HMRC finds an underpayment? Penalties depend on behaviour. A careless error can attract a penalty of up to 30% of the extra tax due, a deliberate but undisclosed inaccuracy up to 70%, and a deliberate and concealed inaccuracy up to 100%. Interest also accrues separately on any tax paid late, currently at 7.75%, regardless of whether the error was innocent.
Is the executor personally liable if inheritance tax was underpaid? Yes. Personal representatives are personally responsible for the accuracy of the IHT return and for ensuring the correct tax is paid before the estate is distributed. If a shortfall is discovered after distribution, HMRC can still pursue the executor for it.
What has changed for agricultural and business property relief from April 2026? From 6 April 2026, only the first £2.5 million of combined qualifying agricultural and business property in an estate receives 100% relief. Anything above that receives 50% relief, producing an effective 20% inheritance tax rate on the excess. The allowance is transferable between spouses and civil partners.
Does inheritance tax work differently in Scotland or Wales? No. Inheritance tax is a UK-wide reserved tax with identical rates, thresholds, and reliefs across England, Scotland, Wales, and Northern Ireland. Scotland's probate process is called confirmation and involves different succession law concepts, but this affects estate administration rather than the tax itself.
Do I need to report a gift I received from someone who has since died? If the gift was made within seven years of the donor's death and exceeds the available exemptions, it must be reported as part of the deceased's estate for inheritance tax purposes, even though the gift itself may have been made years earlier. Executors are expected to make reasonable enquiries into lifetime gifts as part of preparing the return.
Will pensions be included in inheritance tax calculations for 2026/27? Not yet. Unused pension funds remain outside the scope of inheritance tax for the current 2026/27 tax year. This changes from April 2027, when most unused pension funds and death benefits will be brought within the estate for inheritance tax purposes.
What should I do if I think a mistake has already been made on a submitted IHT return? Correct it as soon as possible rather than waiting for HMRC to find it. An unprompted disclosure to HMRC of a careless or even deliberate error typically results in a substantially lower penalty than one HMRC uncovers itself, and early correction also stops interest accruing on a larger balance for longer.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTAÂ and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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