One of the most common misunderstandings about probate is that, if no Inheritance Tax is due, there is no need to complete a full Inheritance Tax return. Unfortunately, it is not always that simple.
HMRC has recently issued a specific reminder to professional advisers about this, after identifying mistakes being made with estates close to the Inheritance Tax thresholds.
The £325,000 and £500,000 thresholds are not the same thing
Everyone has a basic Inheritance Tax allowance, known as the nil-rate band, which is currently £325,000.
There is also an additional residence nil-rate band, currently up to £175,000. Broadly, this may be available when someone leaves their home to their children or other direct descendants. This is why you will often hear that a person can leave an estate of up to £500,000 without paying Inheritance Tax.
That is perfectly true — but it does not necessarily mean that an estate worth less than £500,000 can be dealt with as a simple “excepted estate”.
An estate can owe no tax but still require an IHT400
HMRC has specifically reminded professional advisers and clients that the residence nil-rate band must not be taken into account when deciding whether an estate qualifies as an excepted estate.
Take a simple example.
Someone who is single or divorced dies leaving:
- a house worth £400,000; and
- savings worth £75,000.
Their estate is worth £475,000.
They leave their house to their children.
Provided all the necessary conditions are met, the residence nil-rate band may mean that no Inheritance Tax is payable.
However, the estate is above the ordinary £325,000 nil-rate band. The residence nil-rate band cannot simply be used to treat it as an excepted estate. A full Inheritance Tax account (IHT400) may therefore be required in order to claim the additional allowance.
In other words, no Inheritance Tax to pay does not necessarily mean no Inheritance Tax return to complete.
What if the person who died was widowed?
This can change matters.
If a husband, wife or civil partner died previously without using all of their basic Inheritance Tax allowance, the unused proportion may potentially be transferred to the survivor’s estate.
That can increase the basic nil-rate band available to the survivor’s estate — potentially from £325,000 to as much as £650,000.
This means that two estates of exactly the same value can have quite different reporting requirements depending upon the deceased person’s circumstances.
Why does this matter?
For many straightforward excepted estates, the probate process is now relatively accessible. Executors can often obtain the information they need and make the probate application themselves online.
A full IHT400 is complex and a rather different proposition.
It is a detailed Inheritance Tax account covering the assets and liabilities of the estate and, where relevant, lifetime gifts, trusts, exemptions, reliefs and the allowances being claimed.
So it is worth establishing at the beginning of the administration which route applies, rather than assuming that an estate is excepted simply because you expect the eventual Inheritance Tax bill to be £0.
Do I need professional help with an IHT400?
There is no requirement to use a solicitor or other professional to complete an Inheritance Tax return, and some executors choose to deal with the forms themselves.
However, a full IHT400 is a very substantial piece of paperwork. Although the main IHT400 form itself is a mere 19 pages long, it is routinely accompanied by a large number of supplementary schedules. Depending on the assets and circumstances of the estate, a completed Inheritance Tax account can easily run to 50 or 60 pages.
It is therefore very common for executors to seek professional help with estates where a full Inheritance Tax return is required, even where no Inheritance Tax will ultimately be payable.
What happens if you get it wrong?
This is not just a technical distinction, and it is an area that HMRC are currently showing an active interest in.
HMRC has recently identified cases where estates have incorrectly been treated as excepted estates when a full IHT400 should have been submitted. It is now writing to professional advisers specifically to highlight the problem.
Executors are responsible for making sure that an estate really does meet the conditions for an excepted estate. If an IHT400 should have been submitted but was not, the executors may have to correct the position later and penalties can apply. In some circumstances, penalties for failing to submit the required Inheritance Tax account on time can reach £3,200.
As a result, it is important not to make the mistake of assuming that an estate is an excepted estate simply because no Inheritance Tax is payable.
How Chiltern Wills can help
Chiltern Wills can prepare the Inheritance Tax return and probate application on behalf of executors, including identifying the relevant allowances and reliefs, drafting the IHT400 and supporting schedules and assisting the executors with submitting the necessary information to HMRC and paying any tax due.
Please get in touch and we will be glad to advise you on the appropriate next steps, and to give you a no-obligation quote for the work involved.