Old money, new rules

The inheritance tax (IHT) rules have been subject to several revisions since being introduced in 1986. The rules have often been described as unnecessarily complex and difficult to understand, with complicated calculations and substantial record keeping requirements for taxpayers. 

Why did the regulations change? 

A review of the existing rules started in January 2018, when the then chancellor, Phillip Hammond, wrote to the Office for Tax Simplification (OTS) acknowledging the OTS’ interest in the IHT regime. The OTS was asked to review the administrative and technical aspects of IHT and the process surrounding submission of returns and paying tax due, and issues around estate planning and disclosure. The OTS was also asked to consider the interaction with current gift rules, and whether the framework caused distortions to taxpayers’ decisions surrounding transfers, investments, and other relevant transactions.

Following a consultation exercise the OTS produced its first report in November 2018. This report was highly critical of the existing regime. The consultation highlighted that many areas of IHT were poorly understood and counter-intuitive. 

The report also highlighted the number of reportable estates requiring returns against the number of taxable estates. The information available at the time of the report was based on data for the 2015/16 tax year. Out of the 590,000 recorded deaths, 275,000 returns were submitted and only 24,500 were tax-paying estates. The most recent data available is for the 2018/19 tax year. For this period, out of the 592,000 recorded deaths, 263,100 returns were submitted and only 22,100 were tax-paying estates. This meant that over 91% of estates in 2018/19 were non-tax-paying. 

The OTS produced a second report in July 2019, which looked at the substantive aspects of IHT and included recommendations that the OTS considered would make IHT easier to understand and simpler to manage. 

Following this report, HM Treasury wrote to the OTS to confirm that the government strongly supported changing the reporting regulations from 1 January 2022 so that the 90% of non-tax-paying estates would no longer have to complete IHT forms. It also supported making permanent the ability for those dealing with trusts and estates to provide IHT forms without requiring a physical signature. 

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 now apply to all deaths on or after 1 January 2022. 

What do the changes mean for low value and exempt excepted estates?

The new regulations have relaxed the requirements for low-value and exempt–excepted estates. 

The requirement that the deceased must have died on or after 6 April 2004 and be domiciled in the UK at the time of death has not changed. 

There has also been no change to the existing restrictions on qualifying as an excepted estate. This means there can still only be an interest in possession in one item of settled property, the deceased cannot have made gifts with reservation, and the deceased cannot be regarded as deemed domiciled under section 267 of the Inheritance Tax Act 1984 (IHTA 1984). If there is an alternatively secured pension (1 September 2006 to 5 April 2011, and since defunct), or the deceased elected that property should be treated as part of their estate for IHT rather than a pre-owned asset charge, the estate will not qualify as an excepted estate. 

The changes made by the regulations relate to the monetary limits introduced for specified transfers, interests in settled property and the gross estate value for exempt excepted estates. The table below sets out limits which shall apply for deaths on or before 31 December 2021 and deaths on or after 1 January 2022. 

Conditions	Deaths on or before 31 December 2021	Deaths on or after 1 January 2022
Foreign assets	£100,000	£100,000
Specified transfers	£150,000	£250,000
Interest in settled property	£150,000	£250,000
Gross estate value (exempt-excepted estates only)	£1 million	£3 million

What do the changes mean for foreign domiciled estates?

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2002 detailed the conditions to be satisfied so that it would not be necessary for a full IHT account (IHT400) to be delivered. There has been no relaxation of the rules, but the introduction of two further conditions. These are that the deceased must not have made any gifts from their UK assets of more than £3,000 per year, within seven years of the date of death, and the deceased must not have owned any indirect interests in UK residential property. 

Prior to the new regulations, it was possible for non-domiciled individuals to avoid a charge to IHT by holding UK residential property through a company incorporated outside of the UK, as company shares would have been classed as excluded property. The changes will not apply to other UK or foreign assets owned by offshore companies or partnerships. 

Changes to the ‘IHT threshold’ definition 

The new regulations changed the definition of ‘IHT threshold’ to include cases where some of the available threshold was used when the first of the married couple / civil partner died and a claim is made for the unused percentage to be used against the second estate.

For any deaths on or before 31 December 2021, the estate could only qualify as an excepted estate when the transferable nil-rate band (TNRB) of the predeceased spouse / civil partner is 100%. Unfortunately, the new definition does not include reference to the residence nil-rate band (RNRB). This means that you are still required to submit an IHT400 if you wish to claim the RNRB or transferable RNRB. 

What changes have been made to the reporting requirements?

The short forms IHT205 and IHT217 have been withdrawn for deaths on or after 1 January 2022 but remain for any deaths on or before 31 December 2021. 

The online submission and paper applications now contain declarations that the estate is an excepted estate. You will also need to include whether you are claiming the unused proportion of the NRB for a predeceased spouse / civil partner.

Regulation 6 provides further detail around the information that will need to be provided as part of the application process. There has also been a change to the values that must be provided. For deaths on or after 1 January 2022, you are now required to include three additional values. 

The first value is the gross value of the estate for IHT. This is made up of the total of all the assets of the deceased’s estate before any debts are deducted, plus any specified transfers (after deduction of exemptions) and/or any specified exempt transfers by the deceased in the seven years prior to the date of death.

The second value is the net value of the estate for IHT. This is the gross value of the estate less any allowable debts that the deceased owned when they died. This would include funeral expenses, household bills, uncleared cheques for goods and services provided before the death, credit card debts and a mortgage or share of a mortgage on a property or land for which a grant of representation is required. 

The final figure required is the net qualifying value of the estate. This is the net value of the estate for IHT, less any spouse / civil partner / charity exemption.

HM Revenue & Customs (HMRC) has provided a basic example of how these figures are to be established: 

• The person died on 2 January 2022 leaving an estate worth £285,000 (below the IHT threshold). The estate was left to their daughter and a small amount to charity (£1,000). The deceased’s assets include a home worth £250,000, £15,000 in stocks and shares, £6,000 in cash and £4,000 in household and personal items. 
• They gave away £10,000 above the tax-free allowances in the two years before they died. The gross value of the estate is £285,000. This is the value of the assets plus the gift.
• The deceased had a mortgage for £15,000 and funeral costs of £5,000. The net value of the estate is £265,000. This is the gross value of the estate less debts of £20,000. They left £1,000 to a registered charity. The net qualifying value of the estate is £264,000. This is the net value of the estate minus the exempt gift to charity.  

Time limits

The normal time limits apply for claiming a TNRB, so the forms must be delivered to the probate registry within 24 months after the end of the month in which the death occurred. Any late claim for the TNRB can only be made at the discretion of HMRC and by delivering an IHT400 and the appropriate supplementary pages. 

The time frame in which HM Courts & Tribunal Service is required to provide information to HMRC has increased from one week to one month (regulation 7(3)).

HMRC will also have 60 days instead of 35 days from the issue of the grant of representation to ask for additional information (regulation 2).

All qualifying excepted estates will be discharged from any IHT liability after 60 days (regulation 8(1)), unless HMRC requests any additional information within those 60 days or in the case of fraud or failure to disclose material facts. 

Further considerations

While we shall see an increase in the number of excepted estates following the simplification of reporting requirements, personal representatives will still need to obtain valuations and make enquiries regarding the estate value. HMRC has guidance on valuing assets and when it is acceptable to use estimated values. 

With the increase in the exempt excepted estate limit, we are also likely to see an increase in values that have not been ascertained for the purposes of capital gains tax (CGT). Ascertaining a value is covered by section 274 of the Taxation of Chargeable Gains Act 1992, which confirms that where IHT is chargeable on an estate and the value of the asset has been ascertained for the purposes of IHT, this is the value that shall be used as the acquisition value for CGT. Depending on the circumstances, personal representatives should consider obtaining professional valuations of property and stocks and shares to ensure that the correct CGT base cost is known. 

When establishing if an estate is excepted, when the deceased had made specified and/or specified exempt transfers, the value of the gift before the exemption must be added to the estate and other specified transfers. The overall total must then be below the relevant limit for low value and exempt estates to qualify. Business property relief and agricultural property relief must also be ignored.

Personal representatives will, therefore, still need to retain records when dealing with the death of the first spouse or civil partner, as well as records relating to lifetime gifts that may affect the estate of the second spouse.  

While the IHT rules remain complex, the regulations mark a welcome step in the right direction towards simplification.