The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021
These regulations update which estates are excepted from the need to provide a full IHT account (the IHT 400) on a person’s death. They can be found at https://www.legislation.gov.uk/uksi/2021/1167/contents/made
They are in response to a recommendation made by the Office of Tax Simplification when commenting on the bureaucracy around IHT and the fact that an unnecessary burden was placed on non-taxable estates in that a form IHT 205 was required to be completed.
These new regulations are aimed at reducing this burden for most non-tax paying estates which require probate (or a confirmation in Scotland) and ensure that estates are not excepted from delivering IHT accounts where the deceased was never domiciled in the UK and IHT is due. They also align the period in which HMRC may make enquiries into estates where accounts are not required at 60 days from the date of probate or confirmation (in Scotland). Currently, the period is 35 days following which automatic clearance is obtained.
This measure applies to deaths on or after 1 January 2022.
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The basis of the Regulations
Before April 2004, there was a monetary limit below which an estate might qualify as an Excepted Estate. After that date, the excepted estate limit was linked to the Nil Rate Band (NRB). Currently, s.256 of the Inheritance Tax Act 1984 provides HMRC with powers to make regulations dispensing with the delivery of IHT accounts as specified in or determined under the regulations.
The regulations for this purpose are the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004 (SI 2004/2543) (as amended). Broadly, they provide for 3 categories of excepted estate:
- low value excepted estates (regulation 4(2))
- exempt excepted estates (regulation 4(3))
- foreign domiciliaries (regulation 4(5))
Regulation 6 prescribes the information to be produced instead of an IHT account, and regulations 8 and 9 provide for when a person providing such information is discharged from tax.
This has meant to date that form IHT 205 is completed to provide the information required by regulation 6. This will still be required for deaths up to and including 31 December 2021.
The current requirements to use IHT 205
Guidance on valuing the estate of someone who has died with no IHT to pay can be found here: https://www.gov.uk/valuing-estate-of-someone-who-died/no-inheritance-tax-to-pay
1. Low-value estates
These are estates whose gross value does not exceed the NRB or twice the NRB if the TNRB can be used. The following conditions must be met for the IHT205 to be used:
- The deceased dies domiciled in the UK
- The gross value of the estate does not exceed the NRB
- If the estate includes any assets held in trust, they are held in a single trust and the gross value does not exceed £150,000
- If the estate includes foreign assets, their gross value does not exceed £100,000
- If there are any specified transfers, their chargeable value does not exceed £150,000
- The deceased had not made a GROB
- Gifts out of income totalling more than £3,000 in any year must be shown in full
- No charge arises on the individual’s death under any provisions relating to alternatively secured pensions
For claims to transfer the unused NRB from the estate of a deceased spouse/ CP, the following additional conditions apply:
- The full NRB must be available to transfer from the earlier death so that the deceased’s NRB is increased by 100%
- There is only one predeceased spouse/ CP
- A suitable claim is made to transfer the unused NRB
2. Exempt estates
An estate will be ‘exempt’ for the purposes of using IHT205 if there is no liability to IHT because the gross value of the estate does not exceed £1 million and there is not tax to pay because one or both of the following exemptions apply:
- Spouse/ CP exemption
- Charity exemption — but only if the deduction is by way of absolute gift to the charity concerned
No other exemption or relief will be taken into account in deciding if the estate is exempt for the purposes of the IHT205.
The following conditions apply for the IHT205 to be used in relation to these estates:
- Deceased and deceased’s spouse/ CP have always been domiciled in the UK
- The gross value of the estate does not exceed £1 million and the net chargeable value of the estate after deduction of liabilities and spouse/ CP and/ or charity exemption only does not exceed the IHT threshold
- If the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000 (unless the settled property passes to a spouse/CP, or to a charity, in which case the limit is waived)
- If the estate includes foreign assets, their gross value does not exceed £100,000
- If there are any specified transfers, their chargeable value does not exceed £150,000, and the deceased had not made a GROB
- Gifts our of income of more than £3,000 in any year must be shown in full
- No charge arises on the individual’s death under any of the provisions relating to alternatively secured pensions
3. Foreign domiciliaries
This applies to estates where there can be no liability to IHT because the gross value of the estate in the UK does not exceed £150,000. If the estate qualifies in this category the IHT207 is used. The conditions to be applied are:
- The deceased died domiciled outside the UK
- The deceased was never domiciled in the UK or treated as domiciled in the UK for IHT purposes
- The deceased’s UK estate consisted only of cash or listed shares and securities passing under a Will or intestacy or by survivorship
The new Regulations which apply from 1 January 2022
For deaths on or after 1 January 2022 the IHT 205 and IHT 217 are abolished.
Currently, it is not possible to have a TNRB if the first spouse/cp to die used some of their own NRB. The new regulations permit the threshold to increase in the second estate by any amount of the NRB which can be transferred from the first spouse/cp to die.
For low value and exempt excepted estates, the information to be produced instead of an IHT account is simplified, and the relevant monetary limits are increased as follows:
- the limit for the aggregate of chargeable transfers and exempt ‘normal out of income’ transfers made prior to death, is increased from £150,000 to £250,000
- the limit for chargeable trust property is increased from £150,000 to £250,000
For exempt estates, the value limit in relation to the gross value of the estate is increased from £1 million to £3 million with the total amount of trust property including exempt amounts being limited to £1 million.
For estates of foreign domiciliaries, the revisions make clear that the estate is not an excepted estate if chargeable gifts over £3,000 in any year were made in the 7 years before the death, or it contains overseas property with value attributable to UK residential property.
It will therefore still be necessary to obtain all the relevant information to determine whether or not the excepted estates regulations apply.
How will tax information be reported in future?
With the abolition of the IHT 205 and 217 forms reporting will be part of the probate process instead. HM Courts & Tribunal Service (HMCTS) will be updating MyHMCTS between 1 – 12 January 2022 to enable you to provide the relevant information to them as part of the probate application process. HMCTS have asked that during this time you avoid submitting probate applications for estates which are impacted by the new regulations.
The information needed by HMRC – the gross and net estate for IHT purposes – will be added as a section to the probate application form as follows:
- the net value of the estate for IHT purposes
- the gross value of the estate for IHT purposes
- the net qualifying value of the estate
- if applicants are claiming the nil rate band (if the deceased had a late spouse or civil partner and the net qualifying value of the estate was between £325,000 and £650,000).
Please note, the gross and net amounts for probate purposes differ from those for IHT as for IHT purposes you must take into account lifetime gifts which have become chargeable, the value of assets passing by survivorship and the value of a qualifying interest in possession trust. A full explanation of this and why the gross and net estates for IHT purposes and probate purposes differ, will be included in the probate application.
It will be the responsibility of the HMCTS to pass on the IHT information to HMRC and not the taxpayers. HMCTS will have one month to provide the details.
It is anticipated that the effect of these changes should relieve the burden of reporting in about 145,000 estates per year.
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