As more families make payments, inheritance tax penalties rise by 35%

As more families are drawn into the tax system, inheritance tax penalties for late returns have increased

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According to data from a Freedom of Information request, HMRC is increasingly penalizing grieving families for filing inheritance tax returns after the deadline due to their difficulties with lengthy, complex forms.

According to data up to the tax year 2024/25 obtained by TWM Solicitors, the number of penalties imposed by HMRC for filing inheritance tax (IHT) returns late increased by 35 percent over the previous five years, from 3,850 to 5,200.

Over time, late filing penalties rise quickly, starting at £100 and reaching up to £3,000 after a year.

Due in large part to the IHT threshold remaining frozen since 2009, many families with modest estates have been forced to pay IHT in recent years. These days, an average home can generate an IHT bill on its own.

However, Duncan Mitchell-Innes, partner and deputy head of private client at TWM, claimed that more families trying to finish IHT returns on their own without realizing the difficulty involved is also contributing to the rise in late fines.

"People frequently undervalue how complicated the UK's IHT regulations are. When HMRC demands a lot of supporting documentation, an apparently simple task can quickly become time-consuming and technically difficult. If deadlines are missed, this could result in penalties," he stated.

Intricate IHT forms.

There are 122 questions on the basic IHT400 form alone, many of which call for specific financial and historical data.

Families must complete this form primarily in order to pay inheritance taxes. However, depending on the type of estate, it frequently needs to be supplemented with additional schedules and information requestsof which there are more than thirty.

Lawyers claim that asset valuation is one of the most time-consuming components of an IHT return. Market estimates are insufficient for the professional valuation of many assets, including residential property.

Furthermore, there are particular methods for valuing certain assets, like shares, for IHT purposes. Without prior technical knowledge, completing these valuations on the right technical bases can take a lot of time.

When executors are unable to find all the pertinent information required for the IHT400, delays may also occur. Tracing all bank accounts, investments, and past giftswhich occasionally date back many years, for example, because of the seven-year rulecan fall under this category. This information is only given by mail by many banks.

Losing out on tax breaks related to inheritance.

According to Mitchell-Innes, it can be challenging for individuals managing their loved ones' IHT return on their own to find all the pertinent technical reliefs and exemptions that might be applicable and to compile the supporting documentation.

Gifts made more than seven years prior to death or from surplus income, for instance, might be exempt, but it can take time to find proof of this.

Due to their ignorance, some families managing their own return even miss out on available exemptions and reliefs.

"Reliefs are not automatically administered. It can be time-consuming for people to actively seek out reliefs and exemptions and locate the necessary supporting documentation. Families run the risk of fines and losing out on important reliefs if they don't get the right advice, according to Mitchell-Innes.

After unused pension pots are added to the IHT net starting in April 2027, more families will likely have to file inheritance tax returns, increasing the number of penalties for late filing.

The development is anticipated to put more pressure on personal representatives who are in charge of managing a deceased person's estate to complete the pension IHT paperwork correctly or risk fines.

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