For deaths on or after 1 January 2022, the IHT reporting requirements are being simplified for low value and exempt estates. This follows recommendations from the Office of Tax Simplification.
Current rules
When an individual dies, certain forms may need to be submitted to HMRC. The IHT205 form is used where an estate falls into one of the “excepted estates” rules, otherwise the longer IHT400 form is required. These need to be submitted within 12 months of the end of the month of death. The IHT400 form can be long and tedious and sometimes needs to be submitted even when there is no tax to pay.
Excepted estates
Low value estates and exempt estates are two types of excepted estate with various qualifying conditions. In both cases the individual must have always been resident in the UK. The current conditions are:
Low value estates
These are estates for which the gross value does not exceed the available nil rate band (currently £325,000) and no IHT is due.
The other conditions to be met are:
- Any assets held in trust cannot exceed £150,000 and can only be held within a single trust
- The gross value of foreign assets cannot exceed £100,000
- If there are ‘specified transfers’ (chargeable gifts of cash, quoted shares, land, personal possessions) cannot exceed £150,000
- The deceased cannot have made any gifts with reservation.
Exempt estates
These are estates where there is no IHT due because the gross value of the estate does not exceed £1m and with the exclusion of spouse/civil partner/charity exemption reduced by any liabilities, the net value of the estate remains below the available nil rate band.
The additional conditions applying to low value estates also apply to the exempt estates category. In addition, the spouse/civil partner must have always been UK domiciled.
Changes from 1 January 2022
From 1 January 2022, some of the thresholds are being extended. The changes will allow more estates to fall within the excepted estates thresholds and the shorter IHT205 form will be available to the executors or personal representatives to use.
- For low value estates, the limit on trust assets and the limit on specified transfers in the seven years before death is increasing from £150,000 to £250,000
- For exempt estates, the gross value of the estate limit is being increased from £1m to £3m, with the total amount of property held in a single settlement being increased from £150,000 to £1m (subject to some conditions). The limit on specified transfers in the seven years before death is increasing from £150,000 to £250,000.
As well as the thresholds extending, the requirement for the full transferable nil rate band to be available on second death is being removed.
What does this mean?
More and more estates are falling into the IHT net and the current system can be difficult to understand when families are going through an already tough time. These increased thresholds for the excepted categories should be welcomed by those smaller estates.
There are currently many cases where IHT400 forms must be completed even though no IHT liability has arisen, which costs both clients and HMRC time and money. The increased thresholds should mitigate these cases.
Overall it is expected that these changes will reduce the reporting requirements for 90% of non-taxpaying estates requiring probate or confirmation, which should be a welcome relief to many families.
Keep a copy
Although completion of IHT forms can be a time-consuming exercise, the process can be useful, especially after the first death in a marriage/civil partnership as it ensures key information is recorded. On the second death, which could occur many years later, having copies of the IHT forms means that key information is to hand.
