HMRC IHT penalties have risen for the third time — what it means for families and estate planning

How HMRC IHT penalties work

When someone dies and their estate is liable for inheritance tax, the personal representatives (executors) are required to submit an IHT return to HMRC and pay any tax due within 12 months of the date of death — with interest accruing on unpaid tax from six months after death. Failure to file on time, or errors in the return, can attract penalties.

HMRC has progressively increased both the level of late filing penalties and its willingness to apply them. Current penalties for late IHT returns can reach up to £3,200 per estate — on top of any interest charges on unpaid tax — and HMRC has signalled that it is investing in compliance resource specifically targeting IHT underpayments. Deliberate errors or omissions can attract penalties of up to 100% of the unpaid tax in the most serious cases.

For estates that are also subject to the new 2027 pension IHT rules — where pension administrators and HMRC interact on the tax due from undrawn pension funds — the reporting complexity increases further, and the window for errors widens.

Why many estates still face avoidable IHT bills

A significant proportion of IHT paid each year is on estates where more planning could have been done — but was not, either because the homeowner delayed, because the complexity of the rules was not understood, or because the right advice was never sought. The most common missed opportunities are:

• Unused annual gift exemptions. The £3,000 per year annual gift exemption (with one year carry-forward) is one of the simplest IHT planning tools available, yet many people never use it systematically. Over a decade, a couple could gift £60,000+ outside their estates through annual exemptions alone.
• Failure to update Wills. A Will that does not reflect the current family structure, does not use spousal exemptions efficiently, or fails to direct pension nominations appropriately can result in avoidable IHT. Wills should be reviewed every five years or after any major life event.
• Not using the residence nil-rate band correctly. The additional residence nil-rate band (RNRB) — up to £175,000 per person where a property passes to direct descendants — is available but must be claimed correctly. Estates where the RNRB is tapered away (for total estates above £2 million) or where the property does not pass correctly to qualifying beneficiaries can lose some or all of this allowance.
• Ignoring property wealth in planning. For homeowners with significant equity, property is often the biggest IHT-exposed asset — yet it is frequently excluded from planning conversations that focus only on pensions and savings. Tools such as equity release, combined with gifting strategies, could reduce property-related IHT exposure materially.

The 2027 pension IHT change adds urgency

From April 2027, defined contribution pension funds remaining undrawn at death will be brought within the IHT calculation. This changes a fundamental assumption that many people have been operating on — that their pension pot is an efficient vehicle for passing wealth to beneficiaries free of IHT. From next year, that assumption no longer holds.

For homeowners with both significant property equity and a pension pot, the combined IHT exposure is now larger than it has ever been. The window to plan ahead of the 2027 change — by restructuring the order in which assets are drawn down, by making gifts, or by using equity release to reduce the net estate value — is narrowing. Action now, rather than after April 2027, preserves more options.

How equity release fits into the response

A lifetime mortgage reduces the net value of your property in your estate — directly reducing IHT exposure on the property side. Cash released could then be gifted (starting the seven-year potentially exempt transfer clock), used for living expenses (reducing the need to draw on savings or pension, which may be more IHT-efficient to preserve), or placed into a trust structure.

None of this removes the need for a Will, for pension nomination review, or for coordinated tax and legal advice. But it adds a property dimension to the planning conversation that is often missing. Verity Home advisers work alongside solicitors and independent financial advisers to ensure that the property side of your estate plan is properly structured.