Enter Your E-mail

Capital Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Context

The overall limit for an excepted estate has been increased to £285,000 for deaths on or after 6 August 2006. Other changes to the regulations take effect for deaths on or after 1 September 2006, as follows.

The qualifications

Apart from the gross value, other conditions are:

• any trust assets in which the deceased had an interest in possession were held in a single trust and do not exceed £150,000 (increased from £100,000);
• non-UK property does not exceed £100,000 (increased from £75,000);
• any chargeable lifetime gifts made within seven years before death were only of cash, quoted shares or securities or land and buildings (and contents given at the same time) which did not exceed £150,000 (increased from £100,000) in total; and
• the deceased had not at any time made a gift with reservation of benefit.

Where the deceasd died non-UK domiciled (and had never been domiciled or treated as domiciled in the UK), the estate will be excepted if the value of UK assets does not in total exceed £150,000 (increased from £100,000) and consists only of cash or quoted shares or securities.

Any estate where a charge arises on an alternatively secured pension fund under IHTA 1984 s 151A-C is excluded from qualifying as an excepted estate.

Excepted estates with no liability to IHT

The changes made to the excepted estate regulations over the last couple of years should minimise the number of estates which need to deliver an IHT 200 where there is no IHT liability – yet last year HMRC received around 18,000 returns from such estates. They have looked carefully at these returns, which break down into three distinct groups:

• estates where the gross value exceeds the IHT threshold; but exemptions, reliefs or liabilities keep the chargeable estate below the threshold;
• estates where the gross value is below the IHT threshold; but the estate is not within the conditions to qualify as an excepted estate; and
• estates which do qualify as excepted estates; but form IHT 200 is delivered in any event.
  While HMRC balance the risk to the Exchequer, there is little they can do about the first group and they hope that the net effect of the changes from 1 September will cut back further the second group of estates.

But with regard to the third group (around 5,500 cases per year), HMRC urge taxpayers and agents to use the correct process to apply for a Grant of Probate/Confirmation as an excepted estate and use form IHT 205 (or C5 in Scotland) rather than form IHT 200. Doing so will mean that the agent can get on with administering the estate without needing HMRC’s sanction.

(HMRC IHT Newsletter August 2006 p 3)

Comment

The first alternative condition for being an excepted estate, namely that the gross value of the estate does not exceed the nil-rate band (introduced in 2004), also requires satisfaction of the four conditions as to limits of settled property, non-UK property, chargeable lifetime gifts and no gift with reservation of benefit.

Note that form IHT 207 has a misleading question. The Form must be completed if the answer to either of the following questions is affirmative:

• Were you born in the UK? or
• Have you ever lived in the UK?
• It is perfectly possible to say yes to both or either without being (or ever having been) UK domiciled!
  

A further point touching on the gross estate being less than £1 million is apparently that the charitable relief applies only if the gifts are made to named charities and not for example to a charitable trust, which is a catch.

Matthew Hutton MA, CTA (fellow), AIIT, TEP

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.