Inheritance tax reporting changes

Previously, an excepted estate was generally one where:

The deceased was UK domiciled and the estate is not subject to IHT because either:

• The value of the estate is less than the nil rate band (currently £325,000); or
• On the death of the surviving spouse/civil partner, the value of the estate is less than £650,000 (2 x the nil rate band) so, where 100% of the unused allowance of the first spouse or civil partner to die can be claimed; or
• The deceased left their whole estate, worth less than £1,000,000, to their spouse or civil partner, or to a charity;

and none of the following apply:

• The deceased held a qualifying interest in possession in a single trust where the gross value exceeded £150,000 or in more than one trust (regardless of value);
• The deceased made lifetime gifts within seven years before they died, the total value of those gifts exceeded £150,000;
• If the estate includes foreign assets, their gross value exceeds £100,000;
• The deceased had made a gift with reservation of benefit.

An estate was also treated as an excepted estate if the deceased person was a ‘foreign domiciliary’, i.e. they lived permanently outside of the UK, they died abroad, they did not make any gifts from their UK assets of more than £3,000 per year within seven years of the date of death and the value of their assets in the UK was under £150,000.

If the estate fell into the excepted estate category the executors were not required to submit an IHT400 form but a shorter less onerous form – IHT205 or C5 for Scotland.

For deaths occurring on or after 1 January 2022, it is no longer necessary to file a short-form return for excepted estates. The executors will now only need to make a declaration to confirm the value of the estate as part of the application for probate. 

An excepted estate, for deaths occurring on or after 1 January 2022, is one where:

The deceased was UK domiciled and the estate is not subject to IHT because either:

• The value of the estate is less than the IHT threshold – so below the nil rate band or any unused transferable nil rate band; or
• The deceased left their whole estate, worth less than £3,000,000, to their spouse or civil partner, or to a charity;

and none of the following apply:

• The deceased held qualifying interest in possession(s) in a single trust where the gross value exceeded £250,000 or in more than one trust (regardless of value);
• The deceased made lifetime gifts within seven years before they died, the total value of those gifts exceeded £250,000;
• If the estate includes foreign assets, their gross value exceeds £100,000;
• The deceased had made a gift with reservation of benefit.

The new rules remove the excepted estate status for a ‘foreign domiciliary’. If a property was owned in the UK or lifetime gifts of UK assets were made in excess of £3,000 in any tax year within seven years before the foreign domiciliary died, the full IHT400 form will be required.

The changes in the gross value of the estate mean that more estates will be classified as exempt and will therefore fall within the simplified reporting process – it is estimated that these measures should benefit more than 145,000 estates each year. So, many executors who were previously required to submit an IHT400 form, will now be able to make a simple declaration as part of the probate application. This will significantly reduce both the cost and time required to administer many estates.

Even though the new regime will simplify reporting on a first death, this could lead to difficulties on the death of the surviving spouse/civil partner in terms of reporting of their estate unless appropriate records have been kept.

And a full IHT return will continue to be necessary for high value and/or sophisticated estates – for example, for those including foreign property, significant trust assets, or a number of lifetime gifts, so it will be essential to keep accurate records and seek advice to ensure the correct reports are made to HMRC.

Finally, in England, Wales and Northern Ireland, HMRC will now have 60 days instead of 35 days from the issue of the grant of probate to ask for additional information about the estate. This brings the rules in England, Wales and Northern Ireland into line with Scotland’s regulations.