New excepted estates regulations

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004 (SI 2004/2543) set out the conditions that have to be fulfilled for an estate to be excepted from the need to deliver an inheritance tax account (IHT 400).

Where an estate is excepted, currently limited information is provided to HMRC using an IHT205 form unless HMRC requests a full account within 35 days from the date of the grant. If no request is made, there is automatic clearance at the end of that period.

The Office of Tax Simplification in its first report on inheritance tax (IHT) published on 23 November 2018 criticised HMRC for requiring too much information where no tax was payable.

HMRC agreed to simplify the process and finally we have the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 (SI 2021/1167) which will apply to deaths on and after 1 January 2022.

There are three categories of excepted estate:

1. low value estates, broadly those with a gross value below the IHT threshold, after including chargeable lifetime transfers
2. exempt estates, broadly those with a gross value not exceeding £1m after including chargeable and exempt lifetime transfers. where the chargeable value of property passing to non-exempt beneficiaries does not exceed the IHT threshold
3. estates of non-UK domiciliaries with limited UK assets

The changes

1. The ‘IHT threshold’

The IHT threshold is increased where transferred nil-rate band is available but, the current regulations only treat the threshold as increased where one whole nil-rate band is transferred to the deceased from one deceased spouse or civil partner.

The threshold is not increased if only a proportion of a nil-rate band is transferred or if the deceased had a whole additional nil-rate band made up of portions transferred from more than one deceased spouse / civil partner.

The new regulations allow the threshold to be increased by any proportion of nil-rate band transferred.

2. Low value estates

As well as the requirement that the gross value of the estate falls below the IHT threshold, there are currently the following limitations:

• the estate can include a qualifying interest in possession in a single settlement of no more than £150,000, and
• the deceased must not have made lifetime chargeable transfers (disregarding any business or agricultural property relief) exceeding £150,000

These limits are both increased to £250,000.

The requirement that the estate must not include more than £100,000 of foreign property remains unchanged.

3. Exempt estates

• Importantly the current limit for the gross value of the estate plus chargeable and lifetime transfers is increased from £1m to £3m.
• As with low value estates, the limit on lifetime transfers (disregarding reliefs) is increased to £250,000 and the limit on foreign property remains unchanged.
• Currently the estate can include a qualifying interest in possession in a single settlement of no more than £150,000. However, this limit does not apply to settled property which is passing to a UK domiciled spouse or civil partner or to a charity.

Under the new regulations, the limit for interests in settled property is increased to £1,000,000 but no more than £250,000 of that settled property must pass to anyone other than a UK domiciled spouse or civil partner or charity.

4. Estates of foreign domiciliaries

Currently the only requirements are that the deceased must never have been domiciled in the UK (or deemed domiciled here under IHTA 1984, section 267), and the value of the estate in the UK must be wholly attributable to cash or quoted shares or securities, passing under his will or intestacy or by survivorship in a beneficial joint tenancy, the gross value of which does not exceed £150,000.

Two extra requirements are inserted. The deceased must not have:

• been beneficially entitled to any UK residential land owned through a close company or partnership, and
• made any chargeable transfers in the seven years before death.

5. The information required

The IHT205 will be withdrawn and the information HMRC require will be significantly reduced for those who are UK domiciled. Personal representatives will simply provide the following as part of the probate process:

• (a) the deceased’s full name and date of death; and
• (b) the following details in relation to the deceased’s estate:
  • the gross value of the estate for inheritance tax;
  • the net value of the estate for inheritance tax;
  • the net non-exempt value of the estate; and
  • a declaration that the estate is an excepted estate.

HMCTS will have one month to pass the information to HMRC.

Personal representatives of non-UK domiciliaries will have to provide rather more information.

6. Increased time for HMRC to check

HMRC will have 60 days instead of 35 days from the issue of the grant of representation to ask for additional information.

Conclusions

Simplification is always welcome. However, there will be consequences for capital gains tax (CGT).

The Capital Gains Tax Act 1992, section 274 provides that where IHT is chargeable on an estate and the value of an asset has been ‘ascertained’ for the purposes of IHT, that value shall be taken as the acquisition value for CGT.

Value is not ascertained where no tax is payable and HMRC simply accept the figures submitted. If an asset is later sold, the taxpayer will have to reach agreement with HMRC.

This means that it will be necessary to have a formal valuation at the date of death of any assets which are likely to be sold with CGT consequences.

Taxpayers who are concerned about future problems agreeing a valuation for CGT purposes can apply for a post-transaction valuation check, using form CG34 ‘Post-transaction valuation checks for capital gains’.

It is not obligatory to use this procedure but where it is clear that there will be some difficulty in reaching agreement, it is sensible to try to agree values before submitting the tax return.

In the case of sales of UK residential property where gains have to be reported and tax paid within 60 days of completion (30 days if completion was before 28 October 2021), a check may not be feasible. Identify your figures as estimates to avoid HMRC charging interest in cases of underpayment.