Inheritance Tax Late Penalties Rise 35% as Families Struggle with Complex Returns

Inheritance tax late penalties issued by HMRC rose 35% over the five years to 2024/25, with 5,200 estates hit in the most recent tax year alone, according to data obtained through a Freedom of Information request by TWM Solicitors. The total bill across those cases reached £3.1m in 2024-25, up from 3,850 penalties five years earlier.

Why Inheritance Tax Late Penalties Are Rising

The freeze on IHT thresholds since 2009 has pulled more estates into the net. The standard rate remains 40% on the value of an estate above £325,000, according to the Office for Budget Responsibility. Where a residential property passes to children or grandchildren, an additional nil-rate band of £175,000 applies, lifting the effective threshold to £500,000 for qualifying estates. Even so, an average family home in much of England is capable of triggering a liability on its own.

Duncan Mitchell-Innes, partner and deputy head of private client at TWM, argues that the penalty surge is only partly explained by more estates becoming taxable. A growing proportion of families are attempting to handle IHT returns themselves, misjudging the work involved. ‘People often underestimate the complexity of the UK’s IHT rules. What seems like a straightforward task can quickly become time-consuming and technically challenging, particularly when HMRC requires extensive supporting evidence. This can lead to penalties if deadlines are missed,’ he said.

The IHT400: 122 Questions, Dozens of Schedules

The main IHT400 form runs to 122 questions and, depending on the nature of the estate, must be supplemented by more than 30 separate schedules covering specific asset types and circumstances. The filing deadline is 12 months from the end of the month of death, though the payment deadline falls earlier, at six months, with interest accruing on any unpaid balance after that date. In practice, executors must settle the tax and submit the IHT400 before they can obtain probate, according to the GoFile IHT key dates guide.

The penalty structure escalates quickly. An initial £100 is charged at the deadline; by the six-month mark that rises to £200, and thereafter by £200 plus £400 for each further month or part-month, up to a maximum of £3,000, per the HMRC inheritance tax manual. For executors already dealing with probate, property sales, and grieving family members, the pace at which fines accumulate can catch them off guard.

Asset valuation is one of the most time-consuming elements. Residential property requires a professional valuation; a rough market estimate will not satisfy HMRC. Shares and other financial assets have their own specific valuation rules for IHT purposes. Tracing all bank accounts, investments and historical gifts, sometimes stretching back the full seven years relevant to the gift exemption rules, adds further delay, and many banks still communicate this information by post.

Reliefs compound the problem. Gifts made from surplus income, or made more than seven years before death, may be exempt, but claiming them requires evidence that can take weeks to assemble. ‘Reliefs aren’t applied automatically. People must actively claim reliefs and exemptions and find the evidence to support them where needed, which can be time-consuming. Without proper advice, families risk penalties and leaving valuable reliefs unclaimed,’ Mitchell-Innes said. A reduced rate of 36% applies where 10% or more of the net estate above the threshold is left to charity, but that too must be claimed and evidenced.

April 2027 and the Pension Complication

The trajectory of inheritance tax late penalties is set to steepen further after 6 April 2027, when unused pension pots will be drawn into the IHT net. Under the incoming rules, a Pension Scheme Administrator can become directly liable to HMRC for IHT where it pays out benefits in breach of a withholding notice or fails to comply with a request to pay under the direct payment arrangements, according to an analysis by A&O Shearman. Primary legislation is already in place, with draft regulations on information-sharing under consultation and further guidance expected in spring and autumn 2026.

For executors and pension scheme administrators alike, the 2027 change means more estates will cross the threshold for submitting a full IHT400, and more parties will carry exposure to penalties for errors or delays. Willday Wealth Management notes that the interaction between pension death benefits and IHT is already one of the more complex areas of estate planning, before the new rules take effect.

The April 2027 deadline is the next hard test for a system that is already generating more penalty revenue for HMRC than at any point in recent years. Executors of larger or pension-heavy estates who have not yet reviewed the process would do well to start now.