Inheritance Tax and the ‘Excepted Estate’ Rules

In her latest Timms Blog, Sara Hilliard, discusses Inheritance Tax and the ‘Excepted Estate’ rules…

What Is Inheritance Tax?

Inheritance tax is a tax that is charged on the value of a deceased persons estate.

An estate includes assets owned either in the deceased’s sole name or their share of any joint assets. This includes property, savings, investments, and personal effects.

The value of gifts made by the deceased in the seven years before their death (subject to several exemptions including the annual exemption of £3,000) is also considered when assessing the inheritance tax calculation.

What Is An Excepted Estate?

An excepted estate is an estate where a full inheritance tax account (IHT400) is not required when applying for a grant of representation. There are currently three types of excepted estate:

1. Low value estates. These are estates where the deceased died on or after 6 April 2004, where the deceased was domiciled in the UK, and where the gross value of the estate (including the deceased’s share of jointly owned assets and any gifts made during the past 7 years) does not exceed the inheritance tax nil rate band. The nil rate band is currently £325,000.

This threshold may be higher if the deceased was married, and their spouse died before them. This is because married couples can combine their nil rate band allowances if they are not fully used by the first to die.

2. Exempt estates. These are estates where the gross value of the estate does not exceed £3m and there can be no liability to inheritance tax, because of a spouse or civil partner exemption, or charity exemption, which brings the estate below the inheritance tax nil rate band.
3. The estate of a deceased who died on or after 6 April 2002 and who:

• Was domiciled outside the UK at the date of their death;
• Had never been domiciled in the UK during their lifetime; and
• Where the gross value of their estate in the UK consists only of cash or quoted shares or securities passing under their will (or intestacy or survivorship) does not exceed the limits set out by HMRC.

Changes

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 came into force on 1 January 2022 and made the following changes:

• Increased the gross threshold value of an excepted estate from £1m to £3m.
• Increased the threshold an estate’s chargeable trust property from £150,000 to £250,000
• Increased the lifetime gifts threshold from £150,000 to £250,000.
• The inclusion of estates where the unused percentage of a deceased spouse’s nil rate band is being claimed.
• A simplification of the information needed to report a simple or exempted estate.
• Changes to the what is considered an excepted estate for non-UK resident and non-UK domiciled persons who owned residential property in the UK or made lifetime gifts here over £3,000.

So, What Does This Mean?

The changes mean that more estates will not need to file an inheritance tax form and the current form for excepted estates (IHT205) will effectively be abolished.

Despite these changes, it is still important to seek legal advice following a death. It is essential to fully understand your role as an Executor and the terms of the Will. It is also still a possibility that a Grant of Probate will be needed.

For further information, please contact me at s.hilliard@timms-law.com or on 01332 364436. Alternatively, visit our website here.