Inheritance Tax Late Penalties Surge as 5,200 Estates Hit in 2024/25

Inheritance tax late penalties issued by HMRC rose 35% over five years, reaching 5,200 in the 2024/25 tax year and generating £3.1m in fines, according to data released under a Freedom of Information request obtained by TWM Solicitors. Five years earlier, the figure stood at 3,850.

The trend reflects two forces running in parallel: a frozen nil-rate band that has drawn more estates into the tax net, and a growing number of families attempting to complete complex HMRC returns without professional help.

Why Inheritance Tax Late Penalties Are Rising

The standard nil-rate band has been fixed at £325,000 per person since 2009. A residence nil-rate band of £175,000 per person also applies when a qualifying home passes to direct descendants, giving a couple a combined threshold of £1m, according to Ask Accountants UK. Beyond those thresholds, the estate is taxed at 40%, as confirmed in HMRC’s own IHT400 rates tables. An average house alone can now push an estate over the nil-rate band, particularly for those who do not qualify for the residence nil-rate band.

Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, said the increase in late penalties is also being driven by families underestimating what completing an IHT return actually involves. ‘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 penalties escalate quickly. An initial fine of £100 can grow to £3,000 after 12 months. Under the HMRC Inheritance Tax Manual, for estates with tax liability between £100,000 and £1m, the statutory penalty under s.245(2)(a) and (3) is £200, plus a further £200 for each month or part month the account is six months late.

The main IHT400 form runs to 122 questions and frequently requires supplementary schedules, of which there are more than 30. Valuations add further friction: residential property must be professionally valued, and shares carry specific IHT valuation rules. Executors must also trace bank accounts, investments and historical gifts, sometimes going back seven years or more, with many banks providing information only by post.

Reliefs That Go Unclaimed

Mitchell-Innes said the complexity also means families handling returns themselves often miss reliefs they are entitled to. Gifts made from surplus income, or those made more than seven years before death, may be exempt from IHT, but substantiating the exemption requires evidence that can take time to gather.

‘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,’ he said.

Some families do not claim reliefs simply because they are unaware they exist. That gap between entitlement and awareness is where a proportion of the £3.1m in annual penalties is likely being generated.

The Pension Trap Arriving in April 2027

The number of inheritance tax late penalties is set to rise further when unused pension funds enter the IHT net from 6 April 2027. Under government proposals published by HMRC, personal representatives, rather than pension scheme administrators, will be liable for reporting and paying any IHT due on unused pension funds and pension death benefits.

The scope is broader than many realise. A technical note from HMRC confirms that notional pension property held within qualifying non-UK pension schemes and section 615(3) schemes will also fall within scope. Personal representatives, pension scheme administrators and scheme managers will need to determine the value of a member’s notional pension property immediately before death. HMRC has committed to providing interactive tools to support personal representatives by April 2027, though the underlying compliance obligation remains with the estate.

Adding pension valuation to the IHT400 process will increase the administrative burden on executors who are already struggling with the current form. The 35% rise in late penalties over the past five years suggests many are already at the edge of what they can manage unaided. The pension changes will test that further, and the next hard deadline is 6 April 2027.