HMRC explains inheritance tax changes – what you need to check

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Inheritance tax explained by Interactive Investor expert

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An excepted estate is a privately owned area of land which does not require inheritance tax to be paid on it. This means that full details on a IHT400 form do not need to be completed for excepted estates.

IHT205 or IHT207 forms can be used instead.

In accordance with the new changes, if a person has died on or after 1 January this year, only the value of their estate needs to be reported when applying for a probate.

A probate is the legal process of dealing with a deceased person’s estate, which generally requires the clearing of their debts and distributing assets in accordance with their will.

If the person died on or before 31 December 2021, no IHT205 form needs to be completed if it is an excepted estate or they do not need a probate.

Overall, there are three types of excepted estates.

This includes low value estates, exempt estates and foreign domiciliary.

People do not have to pay tax on an estate as long as it is passed to the spouse or civil partner of the person who died, a charity or if its value is below the inheritance tax threshold of £325,000.

If the person who died was widowed, the tax threshold can be higher.

This is because married couples can combine their individual tax-free thresholds.

There’s also a residence nil rate band if the home of the person who has died is being left to their children or grandchildren.

If the deceased was living abroad, inheritance tax might not be due in England and Wales.

This is known as a foreign domiciliary, whereby the person who lived outside of the country on a permanent basis died abroad and held few assets in the UK.

People only need to report the value of the estate if they are applying for probate.

Part of the probate process is getting a grant of representation which confirms legal authority to administer the estate.

Valuing an estate can take several months or even longer if it involves trusts, is a large estate or there’s tax to pay.

Estimating the estate’s entire value is imperative in order to determine if there’s inheritance tax to pay, but not all estates need probate.

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Before applying for a probate, people need to calculate the estate’s gross value – the total value of all the person’s assets and any gifts they gave in the 7 years before they died, minus any funeral costs.

The estate’s net qualifying value needs to be determined too.

This would be net value minus any assets left to spouses, civil partners, charities or assets that are exempt for other reasons.

Another crucial aspect is to identify assets related to bank accounts, savings and pensions, as well as household goods and personal items.

Debts such as utility bills, mortgages and money owed on credit cards also need to be identified.

Once this has been calculated, people can complete an online probate form.

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