Most people believe Inheritance Tax is a tax only payable on death, however, that is not the case. Inheritance Tax must be considered whenever someone makes a ‘transfer of value’, this could be giving away assets to a child in your lifetime for example.
When a person dies, there is a deemed transfer of value of their assets and Inheritance Tax (IHT) must be considered when dealing with the administration of the estate. The Personal Representatives will need to consider: -
o Whether a Grant of Representation is needed;
o If so, how should this be applied for; and
o What are the reporting requirements to HMRC?
The effect of The Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004 is to excuse low value and simple non-taxpaying estates which meet specific rules from completing a full IHT account.
For deaths on or before 31 December 2021, when there was a need to apply for a Grant of Representation (Probate/Letters of Administration), the rules were that if the deceased’s estate was an excepted estate (a low value estate or one which is exempt from IHT and meets certain other requirements) then a simple tax return could be completed on Form IHT205 and submitted to the Probate Registry, along with an application for a Grant of Representation.
If the estate was not an excepted estate, then the more complicated Form IHT400 had to be completed and submitted to HMRC for approval. HMRC would then authorise the Probate Registry to release a Grant.
The regulations allow HMRC to require the Personal Representatives to provide information required under the regulations in “such form as they prescribe”. As mentioned above, this was previously on form IHT205 for excepted estates.
HMRC have changed this prescribed method to “simplify” reporting. For deaths on or after 1 January 2022 where the deceased lived permanently in the UK. Excepted estates will no longer have to complete an IHT205 to obtain a Grant of Representation. They will instead only be required to complete the application for a Grant of Representation and deduce three significant values when applying. These are: -
o a Gross Value of the Estate for IHT purposes;
o a Net Value of the Estate for IHT purposes; and
o a Net Qualifying Value.
There have also been changes to the excepted estates qualifying criteria that will increase the number of non-taxpaying estates who do not have to complete an IHT form. These other qualifying criteria can often catch out non-professionals and should be carefully considered.
On the face of it, these rules seem to be helpful and, arguably, may enable non-professional executors to make an application for a Grant of Representation of their own accord as there is no longer a need to complete a tax return. I would advise caution against this attitude to the system.
It should always be remembered that a Personal Representative of an estate is personally liable for all aspects of the administration. Any negligence in their dealings could have consequences on them and they may be required to remedy them personally. For example, if it transpires that an estate is not an “excepted estate” and a full IHT400 form was required, if timescales are missed for submission then fines can be imposed on the Personal Representatives.
Although these new rules seem to make the system clearer, the previous tax form IHT205 had mandatory questions to be answered. This form was also very handy as it served as a useful checklist to consider whether the estate being administered met the criteria of being an “excepted estate”.
Without proper knowledge of what constitutes an “excepted estate” (together with the confusion added by the changes of the rules). I would always recommend that a legal professional is consulted to apply for a Grant of Representation on your behalf. This means as a Personal Representative you have peace of mind that an experienced professional ensures that the correct applications are made.
The importance of valuation
The other trap I can see from these new rules is that the application now only requires three values. Where as previously on Form IHT205, the values were broken down and more detailed.
Again, whilst this seems simple, a non-professional may see this as an opportunity to rely on estimates; and important figures may become “muddied in the wash”.
For deaths on or before 31 December 2021 the HMCTS are required to transmit the information produced to them to HMRC within one week of the issue of the grant of representation.
The period from which an estate will be discharged from any IHT liability has been increased from 35 days to 60 days after the first grant of representation.
However, this remains subject to HMRCs ability to request additional information in the case of negligent return, fraud or failure to disclose material facts (regardless of their innocence).
It is of the utmost importance to ensure that all estate property is properly valued with the correct level of due diligence, not only for Inheritance Tax purposes, but for the purposes of the administration of the estate. This means that you can then ensure that the correct values are returned and avoid any potential investigation by HMRC.
These values may also have future bearings of Capital Gains Tax (CGT), so it really is very important to get them right from the start.
In returning the valuations, it is important that a Personal Representative also understands what assets form part of an estate and those that do not, for IHT purposes.
Further, the third value to return ‘Net Qualifying Value’ may not be properly understood by a non-professional, as this relies on the the correct distinction between what is an exemption and what is a relief and correctly deducing the final figure.
You can see how important it is then not to rely on estimates, which is a trap people could easily fall into with these new rules.
Summary
I do often hear people say that they feel they could administer an estate themselves and that because the estate is such a low value there is nothing to worry about. However, amongst other personal liability and responsibilities, the need to report to HMRC and in the correct manner is one which should not be taken lightly. Although they are headlined as being “reduced” and “simpler”, they should be treated just like any other tax return and properly considered to avoid any issues.
Please feel free to call me if you have an estate you wish to discuss.
Telephone Matthew Ainsworth – 01677 422422
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