March 2022 – Inheritance Tax “Excepted Estates” expanded from January 2022 PART 1

Author: Willie Grant
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Note: references below to a “spouse” include a civil partner

Introduction to IHT accounts & “excepted estates”

  • Following a person’s death Inheritance Tax (“IHT”) may be payable. So that HMRC can keep tabs on this the deceased’s executor has to deliver an IHT account to HMRC and pay any IHT that is due.
  • The general rule is that an executor must deliver a fairly complex account by way of a 16-page form called an “IHT400” (plus supplementary schedules as required).
  • But HMRC does not want to receive a whole load of IHT accounts in cases where no IHT is actually payable. So, for many smaller estates and estates where all or most is left to a beneficiary who counts as “exempt” for IHT (primarily a surviving spouse or charity) the requirement to complete an IHT400 is relaxed. Such estates are (unimaginatively) called “excepted estates” i.e. excepted from the need to send in an IHT400.
  • On the other hand, HMRC does not want to lose out on tax by being too relaxed and so the conditions as to which estates may qualify as “excepted estates” are remarkably intricate.
  • Two examples may indicate some justification for the intricacy. First, suppose someone dies with an estate of £10,000 but who has made lifetime gifts of, say, £500,000 within seven years of death. IHT at 40% may well be due on their estate on death even although only worth £10,000. Secondly, suppose someone dies with an estate of £10,000 but having been entitled to income from a trust worth £500,000. IHT may well be due on their “free estate” on death even although only worth £10,000.
  • For deaths from 1 January this year the rules about which estates qualify as “excepted estates” have been made more generous so that many more estates will count as “excepted estates” and avoid the need to complete an IHT400 account.  Instead, a much-simplified IHT account forms part and parcel of the form which an executor must lodge with the sheriff court (a “C1 form”) in order to get “Confirmation” to the deceased’s estate (i.e. the official document required to give the executor the authority to deal with the deceased’s estate).
  • This note outlines certain key features of the excepted estates rules for deaths on or after 1 January this year.

Three categories of excepted estates

  • There are three categories of excepted estates: (1) so-called “low value excepted estates”, (2) “exempt excepted estates” and (3) “foreign domiciled estates” where the deceased was never domiciled in the UK and the gross value of the estate in the UK is no more than £150,000.
  • Categories (1) and (2) i.e. “low value excepted estates” and “exempt excepted estates” are the more common and so this note ignores “foreign domiciled estates”.
  • There are no fewer than 11 conditions which all have to be satisfied before an estate qualifies as a “low value excepted estate” and no fewer than 13 conditions which all have to be satisfied before an estate qualifies as an “exempt excepted estate” – although many of the conditions are common to each category.
  • Nevertheless, owing to the intricacy of the conditions we focus in this note exclusively on “low value estates” and will pick up on the conditions for “exempt excepted estates” next month.

Low value excepted estates – outline of key conditions

  • For IHT purposes, if the deceased was entitled to income from a trust the capital value of the trust may be deemed to be part of their “estate” for IHT. In such a case the value of the trust property must be no more than £250,000.
  • If the deceased’s estate includes property abroad its value must be no more than £100,000.
  • If the deceased made any lifetime chargeable gifts these may only have been gifts of (i) cash, (ii) household or personal effects, (iii) quoted shares or (iv) land gifted to an individual. And the overall total of such gifts must be no more than £250,000. (For these purposes any “business property relief” or “agricultural property relief” is ignored.)
  • In general, for IHT purposes, the “normal expenditure out of income” exemption may apply to exempt what would otherwise have been a lifetime chargeable gift. But for the purposes of the excepted estates rules this exemption is limited to £3,000 per tax year.
  • Chargeable lifetime gifts meeting the above conditions are referred to in the rules as “specified transfers”.
  • Some lifetime gifts are “exempt” from IHT: in particular gifts to spouses or charities. For the purposes of the excepted estates rules such gifts are referred to in the rules as “specified exempt transfers”.
  • The final condition listed in the rules is that the total of (i) the gross value of the estate (i.e. before debts) plus (ii) the value of any “specified transfers” plus (iii) the value of any “specified exempt transfers” does not exceed “the IHT threshold”.
  • “The IHT threshold” is defined in the rules over two full pages! In general however it will mean the “nil rate band” of £325,000 or £325,000 as increased by any unused “nil rate band” of a predeceasing spouse.

 

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Sarah Parker: email sap@mitchells-roberton.co.uk

Willie Grant

About Willie Grant

Willie graduated from Cambridge University with an M.A. in English Literature in 1978. He then undertook Basic Army Training, passing the Regular Commissions Board before embarking on a legal career by sitting the Law Society of Scotland exams. In his Diploma in Professional Legal Practice Willie won the Law Society Prize in Wills, Trusts and Executries and the Joseph Mellick prize in Advocacy and Pleading. He first joined Mitchells Roberton as a private client partner in 1991 remaining there until 2002 before being called to the Bar. In 2005 Willie returned to Mitchells Roberton as a full time consultant and knowledge management adviser. He provides in-house advice to Partners and staff, drafting letters of advice for clients and bespoke drafting. Willie is a member of the Society of Trust and Estate Practitioners; a part-time tutor on the Diploma in Legal Practice at Glasgow University; a member of the Law Society of Scotland Trust and Succession sub-committee; a member of the Advisory Group for the Scottish Law Commission Trust Review Project; and co-authored, with James Kessler QC, the recently published Drafting Trusts and Will Trusts in Scotland described in its foreword by Lord Tyre (one of the Senators of the College of Justice) as “a milestone in the expression and development of Scots trust law.” A review of the book as appeared in the May 2014 edition of the “Scottish Private Client Law Review” (published by W Green) can be found here. Email: wmcg@mitchells-roberton.co.uk

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