Less bureaucracy and faster probate for executors and beneficiaries: Excepted Estates

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Suppose you are an executor or beneficiary struggling with probate. In that case, you’ll want to know that there may no longer be a need to make specific reporting to HMRC if an estate meets the ‘Excepted Estates’ Rules.

Excepted Estates

Revised ‘Excepted Estates’ rules mean executors may not be required to submit certain Inheritance Tax (IHT) reporting if the estate meets specific criteria on death.

These changes mean less bureaucracy and faster probate processing for executors and beneficiaries.

(Your ‘estate’ is the value of your property, possessions, and assets, which may be subject to Inheritance Tax on your death.)

A reminder of Inheritance Tax allowances

In recent years, more families than ever before are caught in the IHT net primarily due to a freezing of the Inheritance Tax Nil Rate Band and the recent escalation in property and other asset values.

The Nil Rate Band

This band is the allowance of the estate’s value before Inheritance Tax may be payable.

Currently, the Nil Rate Band is £325,000 per individual; for a married couple/civil partnership, this is doubled to £650,000.

These amounts (£325,000 and £650,000) have been static since 2009, and the allowances are frozen until at least 2026.

Property and Asset Values

The frozen allowance is just one side of the equation; rising wealth is the other side.

A frozen allowance coupled with increasing asset prices is a potent combination.

An estate worth £650,000 in 2009 could easily be worth £1 million today, even at modest asset growth rates.

The UK stock market has risen around 53% between 2009 and 2020, with average UK property prices around 60% higher over the same period.

The Residence Nil Rate Band

A new extended band was introduced on 6 April 2017. Known as the Residence Nil Rate Band, this additional £175,000 allowance is only allowed against residential property.

This Residence Nil Rate Band means homeowners, in many cases, will get an extended allowance taking the combined Nil Rate Band up to £500,000. (The amount over which Inheritance Tax will likely be payable).

  • This extended allowance can be only used where residential properties (e.g. buy-to-let properties are excluded) are left to direct descendants (e.g. children)
  • BUT, the allowance is progressively withdrawn once a joint estate, including their primary residence, is worth £2,000,000 or more. The withdrawal is at £1 for every £2 over the £2,000,000 limit.

What is an ‘Excepted Estate’?

An ‘excepted estate’ is one where a complete inheritance tax account (IHT400) is not required to be submitted by the executors to HMRC.

These requirements changed last year, and we hope for less paperwork and faster probate administration.

(Inheritance Tax may still be payable, depending on the allowances described above, it’s simply the reporting requirements that have changed.)

An excepted estate is when.

  • Below threshold. The estate’s value is below an individual’s current Inheritance Tax threshold of £325,000, so no IHT is payable.
  • Threshold transferred. The estate’s value is £650,000 or less, and any unused threshold is transferred from a spouse or civil partner who died first.
  • Beneficiaries are spouse/charity and estate <£3m. The deceased left everything to a spouse or civil partner living in the UK or to a qualifying charity. The estate is worth less than £3 million.
  • Deceased living outside the UK. The deceased was living permanently outside the UK (a ‘foreign domiciliary’) when they died, and the value of their UK assets is under £150,000.

What Are The Changes?

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 came into force on 1 January 2022.

The regulations made the following changes.

  • The threshold of an ‘excepted estate’ was raised from £1,000,000 to £3,000,000.
  • Although the total amount of trust property, including exempt amounts, is limited to £1,000,000, each asset in trust has its own separate identity depending on its purpose. There has been a rise in the threshold of the estate’s chargeable trust property from £150,000 to £250,000.
  • There is an increase in the threshold concerning lifetime gifts (gifts given by the deceased person prior to their death) from £150,000 to £250,000.
  • They now allow the inclusion of estates where the unused proportion of a deceased spouse’s nil rate band is claimed.
  • Excepted status has been removed from estates of foreign individuals where the deceased owned indirect interests in UK residential property and made lifetime gifts of UK assets above £3,000 in the seven years before death unless the estate is not liable for IHT.

What are the implications?

In many more cases, there will be no need to file an inheritance tax form (IHT400), reducing officialdom and accelerating probate, which helps executors and beneficiaries.

Probate advice is still essential

Seeking advice following the death of a loved one is still essential to ensure that the terms of the Will, especially if a Trust is involved, are correctly understood, and Inheritance Tax accurately calculated. Irrespective of HMRC form filling.

If you are an Executor or Beneficiary and need help, contact us for advice on Probate and Inheritance Tax reporting.

Please note this article is a summary and is for guidance only, and does not constitute advice. Please precisely check with your Probate adviser your obligations when calculating an IHT liability and reporting to HMRC; other taxes may apply, e.g. CGT, regulations can change, and personal circumstances vary.