Inheritance Tax - New Rules
This year has seen the introduction of new rules for inheritance tax reporting on estates where no tax is payable. Partner and Head of Private Client Elaine Lightfoot explores the changes.
The arrival of 2022 brought with it changes by the Office of Tax Simplification for estates where no inheritance tax is payable under the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations. This means, in practice, that many non-tax paying estates will no longer require the completion and submission of an account to HMRC when applying for Probate. Previously such estates required the completion of HMRC’s form IHT205. The new regulations mean, subject to a number of thresholds and conditions not being exceeded, reporting will be limited for deaths after 1 January 2022.
Under the old regulations, it was possible to apply for Probate using form IHT205 if the estate had a gross value under the inheritance threshold of £325,000 or up to £1 million and there was no inheritance tax to pay due to spousal, civil partner or charity exemption (such values included any lifetime gifts made in the last seven years after taking into account annual allowances). The new regulations will increase the value to estates claiming spousal, civil partner or charity exemptions to a gross value of £3million (subject to other conditions being met). In addition, it will be easier now to claim the transfer of inheritance tax nil rate band from the estate of a first spouse or civil partner even if only a partial transfer is available (i.e. where the first to die partly used their inheritance tax allowance by way of gifts to non-exempt beneficiaries).
In simple terms, estates for those domiciled in England with a value of £325,000 or less will not need to be reported in a HMRC form IHT205 even if a Grant of Probate is needed. This figure will be raised to £3 million if there is a surviving spouse or civil partner who inherits the vast majority of the estate or the deceased leaves the necessary proportion of their estate to charity. That said, there are other factors to be taken into account in addition to these figures. Lifetime gifts in the last seven years must be assessed and added to the value of the estate after reviewing the deduction of appropriate allowances. No reporting to HMRC will be required if the value of those gifts is under £250,000 (previously a limit of £150,000) and the value of such gifts does not take the estate over the qualifying exempt amount. In addition, if the estate includes foreign assets further reporting to HMRC is required if the value of such assets is over £100,000. If the estate includes an interest in a single settlement of more than £250,000 (previously £150,000) it will be necessary for the Executors to report fully to HMRC by way of a full inheritance tax account (Form IHT400).
Whilst the changes will make matters more straightforward for a great number of estates, I believe that Executors must be cautious and a full review of a deceased’s estate carried out (along with a review of any lifetime gifting undertaken) to ensure the estate does not require further reporting to HMRC. In addition, it is still possible for HMRC to request further information as the Probate Registry may pass information on to them for consideration. Accurate valuation of the deceased’s assets is as important as it ever was. A lot of Executors understandably look at the position at the date of death without reference to financial transactions carried out in the deceased’s lifetime. Such transactions need to be reviewed before dispensing with the need to report to HMRC. In addition, we deal with a lot of estates where lifetime trusts or foreign assets are involved, which again requires detailed assessment or advice before assessing what reporting is necessary. Executors are advised to continue to obtain full and accurate valuations of the estate’s assets at the date of death in case there are enquiries by HMRC and in case assets sell for more than expected and assessment of capital gains tax is required. We are happy to assist and guide all Executors through this process so they can be certain they are fully compliant with HMRC’s requirements.