James Ward, a private client lawyer with 18 years of experience and a partner at the London law firm Kingsley Napley, once spent two days labeling items in an inherited house with Post-it Notes amid disputes between his clients.

“I was labeling everything, even coffee mugs, knives, forks, and plates,” Ward said, costing his clients £3,000 at £200 per hour.

The estate took four years to administer due to sibling disagreements, during which time their inheritance tax (IHT) bill accumulated significant interest, benefiting HM Revenue & Customs (HMRC).

Ward explained: “All that time, HMRC was owed millions in inheritance tax, accruing a large interest bill.”

A £100,000 IHT bill from 2020 left unpaid for four years would now total £19,270 in interest.

Inheritance tax disputes are increasing as more families fall into the IHT bracket.

The Rising Cost

Inheritance tax, initially targeting the wealthy, now affects more families. Over 4% of deaths incurred IHT in the 2020-21 tax year, projected to rise to 7% by 2033, per the Institute for Fiscal Studies.

The tax-free allowance is £325,000 (£500,000 if including a family home left to a direct descendant). Any excess can incur a 40% tax.

There is no IHT on anything left to a spouse or civil partner, who inherits any unused IHT allowance. A married couple can pass on up to £1 million free of IHT. Gifts made more than seven years before death are exempt.

“Inheritance tax disputes are rising as people try to avoid it,” said Mark Stubberfield of Taylor Rose. “The rules are complex and often misunderstood.”

In one case, a mother’s property gifts to her children resulted in her son facing a £50,000 IHT bill due to miscalculated allowances.

The siblings eventually agreed to share the IHT burden fairly from their mother’s estate.

Some families go to great lengths to avoid tax, including giving away cash and downsizing property, but not all methods succeed, according to Emily Robertson of Burgess Mee.

Who is Paying the Most?

IHT bills are substantial. In 2021-22, more than 2,200 estates worth between £300,000 and £400,000 paid an average of £13,500 each, while 170 estates worth £10 million or more paid an average of £3.91 million.

If IHT is unpaid within six months of death, interest accrues at the Bank of England base rate plus 2.5%

The £325,000 IHT allowance has been frozen since 2009, and rising property prices, especially in London, have led to more estates facing significant IHT bills. In 2021-22, Kensington estates paid £103 million in IHT, the highest of any constituency, followed by Hampstead and Kilburn at £81 million, and Chelsea and Fulham at £76 million.

• South West Hertfordshire and South West Surrey also faced high IHT bills, at £61 million and £49 million, respectively.

Common Disputes

Many IHT disputes involve whether to sell properties to cover tax bills, particularly contentious in cases of holiday homes, James Ward noted.

“Disagreements only benefit HMRC as the IHT bill increases,” Ward said.

Lawyer Matt Briggs from Irwin Mitchell, who handles estates up to £1 billion, emphasized early planning to prevent disputes and delayed estate administration, which incurs penalties and interest on IHT bills.

Briggs added that sometimes he acts more like a therapist, helping clients through emotional and stressful estate issues.

Ways to Lower Your IHT

April Leeson from The Private Office suggested several strategies to reduce IHT liability:

1. Pensions

Pension savings are outside your estate and thus IHT-free. Pensions can be left to anyone and split among multiple recipients.

2. Allowances

Utilize the annual £3,000 gift exemption and other allowances, such as the wedding allowance, to reduce your estate’s value.

3. Life Insurance

A small life insurance policy can cover the IHT bill, reducing the need to liquidate estate assets. Ensure it’s in a trust to remain outside the estate.

4. Alternative Investments

Investing in stocks on the alternative investment market (Aim) offers IHT benefits if held for two years, qualifying for business relief.