New inheritance tax accounts rules have wider implications

By Gillian Coverley, a specialist Tax, Trusts and Estates Partner at Irwin Mitchell

At the moment every estate that needs Probate requires completion of an inheritance tax (IHT) account.

There are certain thresholds which determine whether or not you need to complete the IHT205 account or the longer and more detailed IHT400 account.

The government has said 90% of non-IHT paying estates should not have to complete the usual estate returns under new rules due in October, to take effect for deaths from 1 Jan 2022.

As ever with what seems like a procedural change, I can already see there are wider implications to consider.

IHT205 may disappear entirely

It’s anticipated that the IHT205 will disappear entirely and we wait to hear under what circumstances the full IHT 400 accounts are needed.

Having been involved in probate applications and inheritance tax returns for quite some time, this is “back to the future” with just one form of full account, or nothing, as it was before 2006.

Steps may be skipped

Personal representatives (PRs) of estates are “self-assessment taxpayers” like any other and while these new rules may remove the necessity to complete a return, there is still a need to go through the exercise of valuing the estate. All the relevant information will need to be collated too, to determine whether or not you should be completing a return.

There could well be a tendency to skip this vital step if a return is thought on face value not to be required.

Issues in the future

It also appears that this new approach may cause issues down the line.

PRs (and those advising them) will still need to keep careful records, especially on the death of a first spouse, which may be needed on a later death.

Careful planning is the key

Once the new rules are known, I’m sure many will try to plan to avoid the expense and effort of completion of the full IHT400 return if it can be avoided.

In any such planning, it’s important not to forget any wider impact on estate planning. For example, it may well be better under the new rules for spouses to hold assets in joint names, but the practical advantage of joint names could well conflict with wishes about what happens on death.

It’s also important to consider whether assets are held in the most effective form for tax purposes, to ensure effective use of IHT allowances and also to achieve specific objectives in wills.

Find out more about our inheritance tax planning team and how they can help.