Inheritance Tax reporting: streamlining the probate process

The Government’s updated regulations for excepted estates came into force on 1 January this year. The aim is to simplify the inheritance tax (IHT) reporting requirements and thereby reduce the administrative burden of dealing with inheritance tax. However, the amendments have also broadened the criteria for excepted estates, thereby bringing many more estates within the regime.

Bryony Cove, one of the Partners in our Private Client team who specialise in the probate process, commented as follows: “We at Farrer & Co welcome the updated regulations, because they will make the probate process (slightly) quicker and easier for families following the death of a loved one. We would note, however, that the changes apply only to the most straightforward estates – and higher-value matters involving more complex assets and / or family dynamics will continue to require both detailed reporting and sophisticated, strategic professional advice.”

Richard McDermott, Amy Newhall and Lucy Sharp summarise the key changes below.

There are three categories of excepted estates:

1. Low value excepted estates (where the gross value of the estate does not exceed the IHT threshold – currently £325,000, and also known as the “nil-rate band”);
   
   
2. Exempt excepted estates (where the gross value of the estate is below a set threshold (previously £1m) and there is no IHT to pay due to the 100 per cent spouse or charity exemption); and
   
   
3. Foreign domiciled excepted estates (where the deceased was never domiciled in the UK).

Until now, executors of estates that met certain qualifying criteria and therefore fell into the above categories were required to prepare and submit a short-form IHT return to the Probate Registry when making an application for a Grant of Probate.

What has changed?

For deaths occurring on or after 1 January 2022, it will no longer be necessary to file a short-form IHT return for excepted estates. The executors will now only need to make a declaration to confirm the value of the estate as part of the application for probate. This is good news because it simplifies the process.

HMRC will also now have 60 days instead of 35 days from the issue of the grant of probate to ask for additional information about the estate.

Additionally, the qualifying criteria for excepted estates have been extended.

The key amendments for exempt excepted estates are as follows:

1. The upper limit of the estate’s gross value has increased from £1 million to £3 million.
   
   
2. The limit on trust property within the estate has increased to £1 million (previously it was necessary to file a longer return where there was trust property worth more than £150,000). In addition, chargeable trust property is limited to £250,000.
   
   
3. The limit on lifetime gifts in the seven years before death has also been increased from £150,000 to £250,000.

For low value excepted estates, the limits on the value of both trust property and lifetime gifts have been increased to £250,000 (from £150,000).

The limit on foreign property for both exempt and low value excepted estates is remaining at £100,000.

For foreign domiciled excepted estates, until now the only requirements have been that the value of the deceased’s estate in the UK does not exceed £150,000 and consists of cash or quoted shares. However, the new regulations have introduced two further requirements. To qualify as an excepted estate, the deceased must not have:

1. Held an indirect interest in UK residential property; and / or
   
   
2. Made any lifetime gifts of over £3,000 in any one year, during the seven years before death.

The IHT threshold

The IHT threshold for an excepted estate is the deceased’s available nil-rate band (NRB), ie up to £325,000. Previously, this could only be increased where the full nil rate band of a predeceased spouse or civil partner had not been used up on the first death. In those circumstances, the transferable nil rate band (TNRB) could be claimed to increase the IHT threshold from £325,000 to £650,000.

However, under the new regulations, it will also be possible to claim the TNRB where only some of the predeceased spouse or civil partner’s NRB remains available. This amendment will increase the number of estates qualifying as low value excepted estates.

What does all this mean?

The above amendments are welcome; not only will they simplify the probate process for deaths occurring on or after 1 January 2022, but the changes will also increase the number of estates that fall within the excepted estates criteria. Many executors who previously would have been required to submit a long form IHT return, will now be able to make a simple declaration as part of the probate application. This will significantly reduce both the cost and time required to administer many estates.

However, although the new regime will simplify reporting on a first death, this could lead to difficulties on the death of the surviving spouse/civil partner in terms of reporting or their estate unless appropriate records have been kept.

Nevertheless, the regulations remain fairly narrow and a full IHT return will continue to be necessary for high value and/or sophisticated estates – for example, for those including foreign property, significant trust assets, or a number of lifetime gifts, proper care should be taken to ensure the correct reports are made to HMRC. Our specialist probate practitioners are extremely well-versed in dealing with the most complex estates, and in resolving matters quickly – and with the minimum of fuss – with HMRC.

If you require further information about anything covered in this briefing, please contact Richard McDermott, Amy Newhall and Lucy Sharp or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2022