When a person dies, one of the key responsibilities of the personal representative appointed under the will or under an intestacy (when a person dies without a will) is to properly account for all of the deceased’s assets and liabilities before making an application to the Probate Registry for the Grant of Representation (commonly referred to as probate). Probate is the document that enables executors to collect in someone’s assets and distribute them to beneficiaries.
When someone leaves their estate to a spouse/civil partner or charity and its value is under £1 million, there is no Inheritance Tax to pay, a short-form application (known as IHT205 or in the case of non-UK domiciled individuals IHT207) can be made direct to the Probate Registry to get the Grant of Probate.
Where there is Inheritance Tax to pay or the estate has complex features, the personal representative must prepare a long-form account (known as IHT400) and send it to HMRC. This form can run to over 60 pages and is complex and time consuming. It also requires a two-stage process. IHT account to HMRC first, and then a 20 working day wait before you can submit the probate application to the Probate Registry. Many of our clients have suffered lengthy waits in this process with documents being mislaid or the fact that it extends the process by 4-5 weeks, sometimes longer. At the end of the process, an application for IHT clearance is made - the latest timeframes for turning around these applications at HMRC is currently a whopping 100 days (although HMRC should tell the personal representatives that it intends to raise queries or conduct a compliance check within 12 weeks issuing its receipt of the IHT400).
You may think these long-form accounts are really for those who are significantly wealthy, or with very complex affairs. Unfortunately and might I even say bizarrely, that is not the case. Even where there is no Inheritance Tax to pay, under current rules, where the value of the assets passing under the will exceeds £1m, the long-form route is automatically triggered. The estate is then reportable to HMRC and adds time, cost and unnecessary complexity.
This anomaly together with other Inheritance Tax administration curiosities was examined by the Office of Tax Simplification. The OTS issued their recommendations to HMRC earlier this year, with an aim to reduce the administrative barriers suffered by individuals and practitioners dealing with Inheritance Tax.
This has obviously gained traction at Government. From 1 January 2022, this significant burden on personal representatives is set to be alleviated. The new rules are as follows:
- If the estate value is under £3 million and all assets over the nil-rate band of £325,000 pass to a spouse/civil partner or to charity, the personal representatives (subject to meeting all other short-form reporting criteria) can apply to the Probate Registry for the Grant of Probate without making an initial report to HMRC;
- If the deceased was a beneficiary of a trust at the date of their death, the value of the trust property that can be reported via the short-form route has been increased to £250,000 from £150,000;
- If the deceased made lifetime gifts in the seven years before death which have failed and now become chargeable to Inheritance Tax, the value of the gifts that can be reported via the short-form route has been increased from £150,000 to £250,000;
- Where the deceased was a widow or widower and in addition to their own nil-rate band of £325,000, their husband, wife or civil partner left some of their estate to them (rather than all of it), the personal representatives will not be forced to use the long-form route as a result of not having the full nil-rate band to transfer; and
- The new regulations introduce a requirement to submit the long-form report to HMRC, where a non-UK domiciled individual dies holding indirect interests in UK residential property (i.e. through a company structure) or made gifts of UK property in excess of £3,000 in the seven years before their death.
It is estimated that this will mean that over 90% of non-taxpaying estates each year will not have to send IHT forms to HMRC, where a Grant of Probate is needed.
An important point to note is that the new rules will not affect existing estates or deaths that take place up to and including New Year's Eve 2021. However, I hope that these new year reforms will encourage further modernisation and accessibility of the Inheritance Tax system.
The challenge for many is that despite the streamlined service there are still significant delays at the Probate Registries as they grapple with crippling cuts and new online systems. This has resulted in delays of six months or more in some cases. Ensuring that the application is correct at the outset is crucial otherwise the applications go to the back of the queue. In some cases, they sit in a pile with applications that were submitted 6 months ago.
If you or your family members need help to navigate these new systems, please do not hesitate to get in touch.