Wealthy individuals potentially evaded £343 million in inheritance taxes, with HMRC economists suggesting potential loopholes in tax reporting
Starting from April 2026, significant changes are being introduced to the UK's inheritance tax (IHT) rules. One of the key changes is the introduction of a cap of £1 million on Business Relief, affecting inheritance tax reliefs on qualifying business properties, particularly when held in certain trusts [3].
This cap will limit the amount of business property relief available, potentially increasing the taxable value of affected estates. From April 2027, unused pension funds that previously passed free of IHT will become subject to IHT at the 40% rate on amounts above the Nil-Rate Band [1][2][4].
These changes represent a significant tightening of estate planning rules. The government estimates that around 213,000 estates with pension wealth exist annually. Of these, 10,500 estates will face new IHT liabilities that previously would not have been liable, and approximately 38,500 estates will pay more tax than before. The average increase in IHT liability from including pensions is expected to be about £34,000 per affected estate [2].
These reforms are expected to increase the amount of IHT collected by HMRC by bringing previously exempt pension funds into the tax net and capping a key relief on business assets, thereby broadening the tax base and increasing liabilities for some estates and beneficiaries [1][2][3].
In addition to these changes, it's important to be aware of other factors that can lead to IHT issues. For instance, claiming a large cash gift was given more than seven years ago, when it was actually more recently, can result in IHT being due on the gift. HMRC may also use a copy of a property's contents insurance to check for valuable items that may have been omitted from an IHT return [1].
From April 2026, business property relief and agricultural property relief will be reduced from 100% to 50% on assets over £1 million, resulting in 20% IHT being due above that cap [4]. This means that estates with business or agricultural properties valued over £1 million will see a significant increase in their IHT liability.
These rule changes are expected to lead to an increase in suspected tax avoidance and evasion, according to TWM Solicitors [5]. HMRC can impose penalties on underpaid IHT, with penalties as much as 100% of the extra tax due plus interest at a rate of 7.75% from the due date until payment [1].
It's crucial to report all assets accurately to avoid these penalties. Under-reporting of IHT can occur inadvertently or deliberately when probates are being undertaken by friends and family, or by lay executors. Deliberately undervaluing a residential property that is part of an estate is a concern for HMRC in IHT investigations [1].
Not declaring items such as jewellery or paintings passed on to relatives, or failing to declare cash or other valuables in an IHT form, can also be issues in IHT investigations [1]. HMRC looks for a range of issues when it carries out investigations into suspected underpaid IHT [1].
In the 2024/25 tax year, HMRC estimates that up to £343 million in IHT was underpaid by wealthy taxpayers [6]. The number of disputes between taxpayers and HMRC over IHT is expected to increase due to an increase in IHT-focused investigations from HMRC [7].
Laura Walkley, partner and head of private client at TWM Solicitors, warns that disputes over IHT are likely to become more common as HMRC increases the scope of assets eligible for IHT [8]. The best protection against IHT penalties is to report all assets accurately [9].
From April 2027, pensions will become subject to IHT [1]. It's important for individuals to review their estate planning strategies in light of these changes to ensure they are compliant and minimise their potential IHT liability.
References:
- The Telegraph
- The Guardian
- HMRC
- GOV.UK
- TWM Solicitors
- HMRC Annual Report
- The Times
- The Independent
- Financial Times
- Given the upcoming changes to UK's inheritance tax rules in 2027, it may be necessary to reassess wealth-management strategies to account for the inclusion of pensions in the taxable estate, potentially requiring adjustments in business, finance, and property planning.
- With the reduction of Business Relief from 100% to 50% on assets over £1 million starting in April 2026, property holders and wealth managers need to carefully consider the impact of these changes on the associated inheritance tax liabilities for qualifying business properties.
