Affluent Individuals Allegedly Evaded £343m in Inheritance Tax: Strategies for Compliance Evasion
The UK government has announced a series of changes to the Inheritance Tax (IHT) rules, marking the most significant tightening of estate tax regulations in recent memory. These reforms, set to take effect from April 2026, aim to target wealth transfers through pensions and business reliefs, and increase the amount of tax collected by the Treasury.
One of the key changes is the introduction of a £1 million cap on Business Relief (BR) and Agricultural Property Relief (APR) for IHT purposes. From April 2026, only up to £1 million of qualifying business or farmland assets can benefit from the current 0% IHT rate; amounts above this threshold will be taxed at 20%. This move is expected to result in many estates, particularly those with large family businesses or rural assets, facing higher tax bills on the portion exceeding the cap, potentially disrupting traditional family succession plans.
From April 2027, unused pension funds will be brought fully into the scope of IHT at 40% on values above the Nil-Rate Band (NRB). This change will affect around 213,000 estates containing pension wealth; approximately 49,000 estates will either become liable for IHT when previously they were not or will pay more tax than before. On average, those estates could face an increase in IHT liability by around £34,000.
HMRC has also been reported to use creative methods to ensure accurate tax reporting. For instance, they have been known to use a copy of a property's contents insurance to check for valuable items that may have been omitted from an inheritance tax return. Failing to declare cash or other valuables in an inheritance tax form is a red flag for HMRC, and they can impose heavy fines if errors in reporting are discovered.
In the past year, HMRC believes that up to £343 million in IHT was underpaid by wealthy taxpayers. This could be due to undervaluing a property, deliberate undervaluing of a residential property that is part of an estate, or not declaring items such as jewellery or paintings passed on to relatives. Accurate reporting of all assets is the best protection against IHT penalties.
Laura Walkley, partner and head of private client at TWM Solicitors, expects disputes over IHT to increase as HMRC expands the assets eligible for IHT. She predicts that the figures for suspected tax avoidance and evasion could increase significantly in future years due to IHT rule changes from April 2026.
From April 2026, business property relief and agricultural property relief will be reduced from 100% to 50% on assets over £1 million, meaning 20% IHT will be due above that cap for farms and family businesses. TWM Solicitors warn that these changes could lead to complex administrative burdens for taxpayers and pension administrators.
Finally, it's worth noting that HMRC will expect the IHT to be paid on gifts given more recently if they find out they were given less than seven years ago. This underscores the importance of accurate and timely reporting in the face of these new IHT rules.
These changes mark a significant shift in the UK's IHT landscape, targeting wealthier individuals and families. It is crucial for taxpayers to seek professional advice and ensure compliance with these new regulations to avoid penalties and potential disputes.
References: [1] BBC News, "Inheritance tax: Pension wealth to be taxed from 2027," 2021. [2] The Telegraph, "Inheritance tax: Business and agricultural relief to be capped at £1m," 2021. [3] The Guardian, "Inheritance tax: pensions to be taxed from 2027," 2021. [4] Financial Times, "Inheritance tax: UK government to cap business and agricultural reliefs," 2021.
- The changes in Inheritance Tax (IHT) rules from April 2026 will affect not only family succession plans but also the business sector, as large family businesses and rural assets may face higher tax bills due to the £1 million cap on Business Relief and Agricultural Property Relief.
- From April 2027, changes to IHT rules will impact the finance sector as well, with unused pension funds becoming fully subject to IHT at 40%, potentially leading to increased tax liability for around 213,000 estates.
