Families feared they had unnecessarily paid an extra £600 million in inheritance tax

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An exemption allowing spouses to transfer assets between each other tax-free saved families £500m less than HMRC expected.

Another, the residential zero rate band, cost the taxpayer £1.3bn in 2019-20, £100m less than previously estimated.

Chris Etherington of the RSM tax office said the difference between the estimated and actual savings shows that many taxpayers do not understand the rules of the RNRB and are missing out on this £175,000 exemption.

He said: “The rules regarding the zero-rate residency bracket are overly complex and it is widely believed in the legal and accounting industries that they need to be simplified for taxpayers. This view was echoed by the Office of Tax Simplification in their report on estate taxes in July 2019.

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The RNRB is an additional tax-free allowance worth £175,000 available to homeowners who pass their principal holdings on to a direct descendant.

Mr Etherington said an issue that is particularly complex is when this exemption is available after a person has been reduced or moved into a care home, adding: “Many estates and taxpayers may simply not realize they are entitled to the residence zero rate bracket.”

Another reason taxpayers miss out on IHT deductions, he said, is because they may not have reviewed their wills since the RNRB was introduced in 2017.

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He said: “Many people will have drafted their wills so that their assets are transferred to a discretionary trust and to qualify for the exemption required to be inherited by children or direct descendants.

“In addition, couples will often bequeath their assets to their surviving spouse. Such transfers are usually not subject to inheritance tax and may result in the unused zero-rate bracket being transferred to the surviving spouse. This means that it can potentially be used upon their later death and therefore costs are deferred to the treasury and claims are deferred.

It comes as HMRC ramps up its efforts to recover IHT from families it believes have underpaid the charges following a lull in investigations during the pandemic.

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In 2021-2022, HMRC seized £326 million from families through its compliance activities. As of 2019, more than 13,000 taxpayers have been subject to an IHT investigation.

HMRC said the actual cost of IHT lighting could differ from estimates for a variety of reasons, such as a reduced number of claimants, changes in the housing market and other economic conditions, or average claims diverging from expectations.

A spokesman for HMRC said: “Predicting the future cost of anything will always be a challenge. Differences between estimated and actual costs should not be attributed to one simple reason.”

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