Tax Day on 23 March 2021 announced that the excepted estates rules would be changed. The aim is that from 1 January 2022 more than 90% of non-taxpaying estates will no longer have to complete a full inheritance tax (IHT) account when probate or confirmation is required.

The changes are delivered by amending the Inheritance Tax (Delivery of Accounts)(Excepted Estates) Regulations 2004, SI 2004/2543, with the amending regulation (SI 2021/1167) made on 21 October 2021 for deaths on or after 1 January 2022.

The excepted estate regulations dictate when a return of estate information can be made to HMRC (on form IHT205 or IHT207/C5 (OUK) for foreign domiciliaries) instead of a full IHT account (IHT400).

The excepted estate rules fall into three categories:

• low value excepted estates (Table 1);
• exempt excepted estates (Table 2); and
• foreign domiciliaries (Table 3).

The primary relaxations are to the first two categories. However, the rules for foreign domiciliaries are also updated to reflect the introduction of the indirect interests in UK residential property in Finance (No. 2) Act 2017.

The new regulations also introduce differing reporting requirements for UK and foreign domiciliaries.

Key definitions are set out at the end of this article

New reporting requirements for UK domiciled persons

The following must be supplied to HMRC in respect of the deceased:

• full name; and
• date of death.

The following information must be supplied to HMRC in respect of the deceased’s estate:

• the gross value of the estate for IHT (GV);
• the net value of the estate for IHT (NV);
• the net qualifying value of the estate; and
• a declaration that the deceased’s estate is an excepted estate.

New reporting requirements for foreign domiciliaries

The following information in relation to the deceased must be supplied to HMRC:

• full name;
• date of death;
• marital or civil partnership status;
• occupation;
• any surviving spouse or civil partner, parent, brother or sister;
• the number of surviving children, step-children, adopted children or grandchildren;
• domicile and address;
• details (including value) of all cash and quoted shares or securities in the UK to which the deceased was beneficially entitled; and
• the liabilities of the estate that fall to be discharged in the UK.

Extension of enquiry period

Currently, the period that the board of HMRC can ask the personal representatives to provide additional information to confirm compliance with the excepted estates regulations is 35 days from the grant of probate or 60 days after confirmation is granted in Scotland.

However, from 1 January 2022, the period will be extended to 60 days following the grant of probate in England, Wales and Northern Ireland.

Table 1: Low value excepted estates

The following conditions must be met to qualify as a low value excepted estate. (Key changes are in bold.)

Table 2: Exempt excepted estates

The following conditions must be met to qualify as an exempt excepted estate. (Key changes in bold.)

Table 3: Foreign domiciliaries

The following conditions must be met to qualify as an excepted estate of a foreign domiciliary. (Key changes are in bold.)

Key definitions

Some definitions (or the effect of them) are unchanged. But regulations now gather three definitions in one place:

• GV;
• NV; and
• net qualifying value of the estate.

Gross value of the estate for IHT (GV)

The GV is the aggregate of:

• the gross value of their estate (including the deceased’s share of any jointly owned assets);
• any ‘specified transfers’ (agricultural property relief and business property relief are ignored when determining the value transferred); and
• any ‘specified exempt transfers’.

Net value of the estate for IHT (NV)

The NV is GV – L. L is the total liabilities of the estate excluding:

• liabilities that will not be repaid from the estate;
• liabilities prevented from being deducted for inheritance tax; and
• liabilities attributed to financing excluded property.

Net qualifying value of the estate

This is NV – EVT. EVT is the value transferred covered by the spouse or civil partner exemption and/or the charity exemption (subject to any restriction for legitim or rights claimed in Scotland).

IHT threshold

This is linked to the IHT nil rate band (NRB). Generally, the NRB used is the one at the date of death. However, where the deceased dies on or after 6 April and before 6 August in a tax year (ie, within four months of the start of the tax year) and a probate application is made before 6 August, the band for the previous tax year applies. As the NRB is currently frozen, this rule is largely irrelevant.

For the purposes of these regulations, the IHT threshold may be increased where a claim to transfer an unused NRB is made. This is subject to various conditions and prior to 1 January 2022 could only be made where the survivor’s NRB would be increased by 100%. For deaths on or after 1 January 2022, this latter restriction is removed. Provided the other conditions are met, from 1 January 2022 the IHT threshold can be increased to reflect the relevant percentage of the transferred NRB.

Specified transfers

These are chargeable lifetime transfers of the following within the seven years before death:

• cash;
• personal chattels or corporeal moveable property;
• quoted shares or securities; and
• an interest in or over land (unless there is a reservation of benefit).

Where there has been a chargeable transfer of any other property in the previous seven years, the excepted estate rules cannot apply.

When valuing chargeable transfers, relief for normal expenditure out of income is limited to £3,000 per tax year. Where this limit is exceeded, the full value of the transfer is included for the purposes of applying the excepted estates rules. Agricultural property relief and business property relief are also ignored when determining the value transferred.

Specified exempt transfers

These are transfers of value within the seven years prior to death that are exempt transfers by reason of the following exemptions:

• transfers between spouses or civil partners;
• gifts to charities;
• gifts to political parties;
• gifts to housing associations;
• maintenance funds for historic buildings, etc; and
• employee trusts.

For these purposes a transfer is not treated as a spouse transfer if either party was not domiciled in the UK prior to the transfer. Similarly, a transfer is not a charity transfer where the property becomes comprised in a settlement as a result of the disposition.

About the author

Lindsey Wicks, Technical editor, ICAEW