BR Q1 2022

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Government streamlines IHT reporting requirements

   t is often the case that an estate that does not have to pay Inheritance Tax (IHT) still must complete an Inheritance Tax return.  The IHT400 is a long and complex form requiring significant work and gathering of information to complete.  It also must be approved by HMRC before being sent to the Probate Registry to obtain a Grant of probate.

This can add cost, and perhaps more importantly time to the process even if no IHT is payable.  HMRC uses an Excepted estate system whereby if certain classes of assets remain below a prescribed threshold, the smaller IHT205 form can be used.  On this form you can provide estimates and it is sent directly to the Probate Registry, making costs and time taken much lower.

To qualify, the gross value of the estate must be below the available nil rate band (amount up to which no IHT is payable.  This is currently £325,000 (£650,000 for a surviving spouse who can use their late spouses unused allowance).

In addition, certain conditions must be met.  These conditions relate to categories such as assets held in trust, foreign assets, lifetime gifts.  If any of these categories exceed a prescribed threshold, even if the estate is not liable for IHT, an IHT400 must be completed.

HMRC announced that for deaths after 1 January 2022 these thresholds have been increased, ensuring that far fewer estates will be required to complete IHT400.  The table below shows the threshold prior to 1 January 2022 and the new threshold from that date.

- RUPERT WEST, INVESTMENT DIRECTOR, PUMA INVESTMENTS

PAUL MOUNCE

PARTNERGOSSCHALKS SOLICITORS

The new rules mean that a lot more estates will fall within the simpler process, saving families time and money when it comes to dealing with an estate after death.

THRESHOLD TO 31/1/21

THRESHOLD AFTER 1/1/22

CONDITION

£150,000 (andheld within asingle trust)£100,000£150,000

£250,000 (and held within a single trust)£100,000£250,000

ASSETS HELD IN TRUST BY THE DECEASEDGROSS VALUE OF FOREIGN ASSETSLIFETIME TRANSFERS

Further, if an estate is worth more than the nil rate band but considering the spouse/civil partner or charity exemption (any assets passing to those parties is exempt from tax) it would also be exempt, but only if the gross value did not exceed £1million. For deaths after 1 January 2022, the gross estate value must not exceed £3million, a significant increase.

It must be remembered that the changes do not impact the rates or levels of IHT payable. This change only relates to reporting requirements. Neither does it remove the need to complete an IHT400 to claim Business Property Relief (BPR) or Agricultural Property relief. As these are both reliefs that must be claimed the revenue have to approve the application and the only way to do this is using the IHT400.

However, what it will do is allow many smaller to medium size estates to use a much simpler and faster reporting system. HMRC has also now incorporated form IHT205 into the online probate process so if an estate qualifies as an Excepted or Exempted estate, they no longer complete a form, simply capturing tax information in their probate application.

If an estate qualifies as an Excepted or Exempted estate, they no longer complete a form, simply capturing tax information in their probate application.

CASE STUDY

Mr & Mrs Smith have a property held jointly worth £500,000, savings of £150,000 and they own equally all shares in a BPR qualifying business worth £1million. Mr Smith dies and leaves his estate to his wife. No Inheritance Tax is payable but prior to 1 January 2022 Mrs Smith would have completed form IHT400 as the estate is more than £1million despite all passing to a spouse. From 1 January 2022 this would no longer be required as the threshold is increased to £3million. Mrs Smith would make an application for probate and provide the details there.

If Mr Smith had left his shares in the family business to his son, a common IHT planning tool to preserve BPR, form IHT400 would have been needed to claim BPR and ensure the shares passed without any tax payable.

While it is not sensible to carry out tax planning with an eye on the reporting requirements, if an estate can be structured in a way that avoids lengthy and costly applications it should always be considered. The new rules mean that a lot more estates will fall within the simpler process, saving families time and money when it comes to dealing with an estate after death.

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19

IHT: no longer a tax for just the super-wealthy (was it ever meant to be?)

- RUPERT WEST, INVESTMENT DIRECTOR, PUMA INVESTMENTS

Paradoxically, surveys suggest that opposition to inheritance and estate taxes is even stronger among the poor than the rich. Now ‘the most hated tax in the country’ is slowly making its way down the income brackets, hitting hardworking families who may have thought of it as the scourge of the super-rich.

Property inflation: boosting taxable estate value

Spurred by the limited supply of new housing stock, UK house prices continue to outstrip growth in earnings. Data from Halifax Bank show that house prices reached a record high in January.

The price of the average UK home reached £276,759 in January, up £24,500 over the year, and £37,500 higher than two years ago.

The rising prices are also linked to the stamp duty holiday and record lows in interest rates in 2021, which enabled buyers to purchase property without having to pay as much extra taxes. As a result, the market has been buoyant, and last year saw the largest increase in house prices since before the financial crash in 2007.

This sustained property price growth and asset price inflation has pushed up the value of estates, translating into higher IHT receipts for the government. For homeowners, it means that the value of your home is increasing; it also means that they now need to consider IHT.

A recent Freedom of Information request, conducted by financial firm Continuum, exposed that residential properties in the UK make up one-third of the value of assets held by estates that are potentially liable for inheritance tax.

Inheritance tax (IHT) is charged at 40% on the amount by which a person’s estate exceeds a certain value. Your estate is basically everything you own, including your home, any other properties, cars, boats, savings or investments, life assurance policies not written in an appropriate trust and other investments, as well as personal effects such as jewellery.

The current boom in IHT is reflected in the soaring tax receipts of Her Majesty's Revenue and Customs (HMRC). Receipts for April 2021 to February 2022 are £5.5 billion, which is £0.7 billion higher than in the same period a year earlier.

The tax agency said the record high IHT receipts could be partially attributed to the higher volumes of wealth transfers that took place during the peak of the Coronavirus pandemic, though it is still waiting for the full data in order to confirm this.
Other drivers of the upsurge in the inheritance levy include soaring house prices and frozen allowances.

AVERAGE HOUSE PRICE, UK: JANUARY 2005 TO JANUARY 2022

IHT RECEIPTS AND PROPORTION OF UK DEATHS RESULTING IN IHT, TAX YEAR 2001 TO 2002 TO TAX YEAR 2020 TO 2021

£m300,000280,000260,000240,000220,000200,000180,000160,000140,0000

£m63,00058,00053,00048,00043,00038,00033,00028,00023,00018,000

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

2017-18

2020Jul

2005Jul

2007Jan

2008Jul

2010Jan

2011Jul

2013Jan

2014Jul

2016Jan

2017Jul

2019Jan

2022Jan

2018-19

2019-20

2020-21

2021-22

Source: Office for National Statistics

Source HMRC

Fixed nil rate bands: drawing in more ‘ordinary’ families

The current Inheritance tax threshold, the nil-rate band (NRB), has been frozen in value at £325,000 since April 2009 and will continue to be frozen until at least April 2026. All income above that tax-free allowance is normally subject to 40% tax. The residence nil rate band (RNRB) will also be frozen at £2 million until that time.

The effect of the frozen allowances is much greater than it may first appear. It means that people who are not currently affected by the IHT will be in the future. For the government, it will generate more IHT in itself as more deceased person’s estates are drawn into paying inheritance tax.

To appreciate the true impact of the frozen allowance, remember that without the freeze, the NRB would rise in line with inflation every year. Prior to 2009 the NRB increased annually.

Instead, for those who are potentially impacted by IHT, a frozen allowance means an extra amount of tax payable every year, simply because the allowance has not increased.

In short, by freezing the allowance, the government has created an increased tax burden on the estate and brought more ‘ordinary’ families within the scope of the inheritance tax.

The IHT tax take is increasing, but with planning it doesn’t need to. Clients can invest in the UK economy and reduce their IHT liability at the same time.

Dominique Butters, Executive Business Development Manager, Blackfinch Investments

ASSETS BY RANGE OF NET ESTATE VALUE, TAX YEAR 2018 TO 2019

80706050403020100

£14£12£10£8£6£4£2£0

The result: IHT paid by families more than doubles in a decade

Total receipts from IHT have increased from £2.7 billion in 2010 to £5.4 billion, according to a review of Treasury documents by The Mail on Sunday. The Treasury is forecast to rake in £7.6 billion a year by 2027.

Critics have argued that the government is undertaking a programme of tax by stealth. As a result of freezing the IHT allowances, it is predicted that the government will raise an extra £985 million.

Value of assets and tax liability (£bn)

Number of estates requring a grant of representation (000s)

£0

£50,000

£100,000

£200,000

£300,000

£500,000

£1,000,000

£2,000,000

Value of next estate (lower limits)

Number of estates (RHS)

Securities (LHS)

Cash (LHS)

UK residential building (LHS)

Other assets (LHS)

Tax Liability (LHS)

Source HMRC

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4. Industry Analysis

IHT: no longer a tax for the super-wealthyGovernment streamlines IHT reporting requirements