Written by Alistair Robertson-Göpffarth, Associate Solicitor, Tax, Trusts and Estate

Changes in inheritance tax regulations will reduce reporting requirements for many estates.

The Government has announced significant changes to the way in which certain estates need to report to HMRC for inheritance tax (IHT) purposes. The changes apply to deaths occurring anywhere in the UK from 1 January 2022 and are aimed at excusing more low value and simple non-tax paying estates from completing a full IHT account in order to obtain probate.

The changes are brought about by amendments to the Excepted Estates Regulations, which were first introduced in April 2004. These Regulations allow certain estates to qualify as ‘excepted’ either because they are of sufficiently low value (‘low value excepted estates’) or certain IHT exemptions apply (‘exempt excepted estates’) whilst meeting other qualifying criteria. Certain estates of ‘foreign domiciliaries’ are also able to qualify as ‘excepted’. The amendments to the Regulations make several significant changes.

First, the information that must be reported to HMRC has been simplified so that qualifying excepted estates will only need to complete a probate application (rather than an IHT short form return, which is currently the case).

Second, the qualifying criteria for ‘low value’ and ‘exempt’ excepted estates have been relaxed. For example, the maximum gross value of a ‘exempt’ excepted estate has been increased from £1,000,000 to £3,000,000 and, in the case of both ‘low value’ and ‘exempt’ excepted estates, the maximum value of ‘specified transfers’ made by the deceased during their lifetime (very broadly, certain gifts made by the deceased in the last seven years of their life) has increased from £150,000 to £250,000.

Third, the Regulations have been amended such that estates where some of a pre-deceased spouse’s ‘nil rate band’ was used on the earlier death (but not all) can still qualify as excepted. Previously, estates making use of a ‘transferred nil-rate band’ could only qualify as excepted where the spouse’s earlier death made no use of this allowance.

Fourth, the changes prohibit estates of foreign domiciliaries from qualifying as excepted where the deceased either owned indirect interests in UK residential property or made gifts of UK assets above £3,000 in the seven years before death (unless no IHT is due).

Finally, the amended Regulations extend the period during which HMRC can ask the personal representatives for additional information to show that the estate qualifies as excepted. This has been extended from 30 days to 60 days, after which the estate is discharged from any IHT liability.

It should be noted that these are not the only changes to the Regulations and wider criteria must be satisfied for an estate to qualify as excepted. Professional advice should always be sought.

HMRC expects the amendments will mean that most non-taxpaying estates will no longer have to complete an IHT form in order to obtain probate, as well as significantly reduce the costs for businesses, charities and voluntary bodies that administer estates. The amendments are the result of recommendations made by HM Treasury's Office for Tax Simplification earlier in 2021 and will be welcomed by personal representatives and practitioners alike.