Changes to Inheritance Tax Reporting

From the start of 2022, HM Revenue & Customs have changed their requirements for reporting the value of what is known as an “Excepted Estate”.  Before we look at the changes, it is useful to review what is an Excepted Estate for Inheritance Tax purposes.

The duty of the Personal Representatives of an estate is to ascertain the full extent of the assets and liabilities as at the date of death in which the deceased held in interest, whether in their sole name, in joint names or held in certain types of trust.  Once they are aware of these values, they can then work out whether or not a full Inheritance Tax return needs to be submitted to HMRC.

The three types of Excepted Estate where a full return is not required are: –

• The total gross value of the taxable estate is less than the Nil-Rate Band in force at the date of death. This currently stands at £325,000; or
• The gross value of the taxable estate is less than twice the Nil-Rate Band where the full Transferable Nil-Rate Band of a spouse or civil partner who predeceased is available. Here, the allowance is currently £650,000 being the deceased’s Nil-Rate Band of £325,000, plus the 100% transfer of the spouse’s unused Nil-Rate Band, being a further £325,000; or
• The gross taxable value of the estate is less than £3 million and there is no Inheritance Tax to pay due to spouse, civil partner or charity exemption (or a combination of these).

There are some caveats to this rule, as if the deceased made significant gifts (in excess of £250,000) in the seven years before they died, or continued to benefit from the gifts they may have purported to make, had only a partial Nil-Rate Band transfer from their spouse, was deemed domiciled in the UK for tax purposes, has foreign assets in excess of £100,000 (or had one or two other provisions relating to life insurance policies with annuities or pension lump sums), then a full return to HM Revenue & Customs must be made, even if no Inheritance Tax is payable.

Prior to 1 January 2022, if the estate qualified for Excepted Estate status, then the Personal Representatives were still required to complete an Inheritance Tax form which was submitted to the Probate Registry.  This detailed the total values of the various types of assets in the estate (e.g. total value of all bank accounts and cash, total value of all investments etc.), together with the total liabilities which gave the gross and net value of the estate for Inheritance Tax purposes.

As from 1 January 2022, this form is no longer required for Excepted Estates.  Therefore, no IHT return needs to be made to the Probate Registry for this type of estate.

However, this does not exempt the Personal Representatives from properly ascertaining the value of the assets at the date of death.  They are under a legal duty to do so even if they do not need to report them to HMRC or the Probate Registry, and it is also important to ascertain the date of death values of assets for several reasons, including:-

• Ongoing tax purposes in the estate administration (Income Tax and Capital Gains Tax);
• Accounting purposes, in order that the Personal Representatives can fully account for post-death movements on all assets to confirm the exact amount due to each beneficiary in the Estate Accounts; and
• The Court retains an inherent jurisdiction to require Personal Representatives to produce any and all documentation in relation to an estate should any dispute arise.

This means that although the actual paperwork which needs to be sent to the Probate Registry for an Excepted Estate has reduced, the background work in calculating the value of the estate gross and for Inheritance Tax remains.  Personal Representatives should therefore be on their guard to ensure that they have the necessary details at their fingertips to prove that they have fully complied with their duties.