Understanding Inheritance Tax: A Guide to Completing Form IHT400, Study notes of Law

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Inheritance Tax Toolkit

Effective for deaths occurring from 6 April 2020 - Inheritance Tax Account Form

IHT

Published April 2020

Index

• Introduction
• Areas of risk for Inheritance Tax
• Using links within this document
• Checklist for Inheritance Tax........................................................................................................
• Explanation and mitigation of risks

Valuations

Valuations are the biggest single area of risk, accounting for a large part of HMRC's compliance checks. It is important to properly ascertain the value of assets. For assets with a material value you are strongly advised to instruct a qualified independent valuer, to make sure the valuation is made for the purposes of the relevant legislation, and for houses, land and buildings, it meets Royal Institution of Chartered Surveyors (RICS) or equivalent standards.

Some issues are easily overlooked when instructions are given. For example, the potential for the development of the land, the existence of tenancies or occupancy by people other than the deceased. Copies of relevant agreements, or full details where only an oral agreement exists, are often not given to the valuer so misunderstandings arise. Where we are satisfied that all the relevant information has been considered by the valuer, we are less likely to challenge the valuation.

Applying the correct legislation, rules and practices

Every year we receive form IHT400 in estates where it is clear that the information submitted does not meet current requirements. Keeping up-to-date with legislative changes is not easy and searching through guidance is time consuming. We appreciate that applying the rules correctly can be difficult, particularly where they are complex or unfamiliar. However, it is important that rules are being applied as they should be.

Record keeping

Good record keeping is essential. The absence of records can mean that information provided to you is not accurate and these mistakes are in turn passed on to us. Events may have occurred in the past yet still affect the Inheritance Tax payable. We appreciate that when completing form IHT400 it is the deceased’s records which you are required to obtain and rely on. We would therefore suggest that you advise your clients about the importance of lifetime records when they visit you for other issues, for example, to have a will drafted.

The type of records which it would be helpful for your clients to retain include, for example:

• Gifts made. Although it is generally gifts within seven years of the date of death which are important, it is advisable for your clients to keep records at all times
• Circumstances that affect the amount of nil rate band available for transfer to the surviving spouse or civil partner.

Keeping careful and detailed notes and valuations of lifetime transfers and having access to detailed histories of assets makes it easier for personal representatives and their agents to gather the relevant information to complete form IHT400 correctly and in full.

Using links within this document

Blue underlined text are links within this document.

Green bold text are hyperlinks to external documents on the internet (access to the internet is necessary to view these).

We have a range of services for people with disabilities, including guidance in Braille, audio and large print. Most of our forms are also available in large print. Please contact any of our helplines if you need these services.

Dealing with HMRC if you have additional needs

Giving HMRC feedback on toolkits

HMRC would like to hear about your experience of using the toolkits to help develop and prioritise future changes and improvements. HMRC is also interested in your views of any recent interactions you may have had with the department.

Send HMRC your feedback

Information gathering continued

Has the deceased disposed of property on their death that qualifies their estate for the residence nil-rate allowance (RNRA) that came into effect on 6th April 2017?

Has it been identified whether the deceased had a spouse or civil partner who died before them and if so, have their details been obtained?

Has the domicile of the deceased and surviving spouse or civil partner been established?

Assets

Have all items referred to in the will (or in any other relevant document) been included in form IHT400?

Have all assets that the deceased held jointly on their death been identified?

Have all assets been identified that are either due to the deceased from someone else’s estate, which have not yet been received, OR that have been received by the deceased from someone else’s estate in the last five years?

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Gifts and debts

Have all gifts or other transfers of value made within the seven years of the date of death been identified?

Have any gifts with reservation of benefit been fully considered and identified?

Value and calculation

Has evidence been gathered to substantiate claims for debts owed by the deceased?

Pensions, life insurance and trusts

Have all pension scheme lump sum death benefits been included on form IHT409?

Have the deceased's pension arrangements been checked to establish whether there have been any transfers, disposals, contributions or other changes in the two years before death?

Has the correct valuation of any life policy included in the estate been checked?

Have the terms and ownership of any joint life policies been checked?

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Explanation and mitigation of risks

Information gathering

1. Has consideration been given to the rules for excepted estates?

Risk We receive many unnecessarily completed forms IHT400 where an IHT205 (C5 for Scotland) or an IHT205 or C5 with an IHT217 would suffice. We also receive many excepted estate forms when an IHT400 should have been completed. Completing the wrong form can cause considerable extra work for personal representatives, agents, bereaved relatives and HMRC and can also lead to unnecessary delays in finalising and dispersing estates.

Mitigation Check the guidance to see whether the estate is within one of the three categories of excepted estates and within the limits of what qualifies as an excepted estate. See Inheritance Tax Manual (IHTM) IHTM.

If appropriate complete an IHT205 or C5 attaching an IHT217 if necessary.

Consider whether a full form IHT400 needs to be submitted even if there is no Inheritance Tax to pay.

Explanation New legislation was introduced in 2010 which expands the definition of excepted estates for deaths on or after 6 April 2010 and so increases the circumstances in which an IHT205 (C5 for Scotland) can be completed. It also introduced a new form IHT217 to claim a transfer of unused nil rate band in excepted estates.

For further guidance on the rules from 6 April 2010 see IHTM.

A further amendment was made with effect from 1 April 2014 altering the rules dealing with deducting liabilities in connection with exempt excepted estates in certain circumstances.

For guidance as to what qualifies as an exempt excepted estate see IHTM.

For guidance on the changes to the exempt excepted estates rules from 1 April 2014 see IHTM.

Whether an estate is an excepted estate is not solely dependent on whether the estate is tax paying or not.

For further information see Valuing the estate of someone who's died.

This toolkit may also be helpful when completing the excepted estates forms IHT205 or C5 as many of the considerations, such as valuation, also apply to these.

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2. Has sufficient time been given to research and prepare form IHT400?

Risk We recognise that personal representatives want to obtain probate quickly and dealing with an estate can be complicated and time consuming. However, not allowing sufficient time to speak with the relevant people and gather all the necessary information can lead to errors and omissions and the use of unrealistic estimates when completing the return.

There is a risk that the tax payable date (six months from the end of the month in which the death occurred) is mistaken with the form IHT400 submission date (12 months from the end of the month in which the death occurred).

Mitigation To enable you to gather all the necessary information and valuations and to submit as complete a form IHT400 as possible, use as much of the allowable time for submission of the form as necessary. If there is still a problem and, for example, you are unable to get exact values, you can enter a reasonable estimate of value. But you must tell us which figures are estimates. Tell us how you have arrived at the values and why you had to use them, preferably on pages 15- in form IHT400, or in a covering letter or note. You should only use estimates on form IHT400 if you have no other option.

To mitigate interest charges, it is possible to make a payment on account if Inheritance Tax is due on the estate. However, this does not absolve you of the requirement to submit a form IHT400 on time.

To make a deposit or payment on account of Inheritance Tax you will require a reference number. You must apply for a reference number at least three weeks before the date you expect to make payment. Only apply for a reference if you are absolutely certain that Inheritance Tax is due.

If there are problems with the completion of the account, let us know. It may be that a special type of grant will solve the immediate problem, but you will need to talk to your Probate Registry initially about it.

Explanation We receive a lot of forms IHT400 that are not correctly or fully completed but have been submitted either to avoid interest charges or due to the pressure to obtain probate.

If you or your clients want to avoid penalties for late submission, the deadline for submitting a form IHT400 is 12 months from the end of the month in which the death of the deceased occurred. The date of submission of form IHT400 is often confused with the date interest starts to run (six months from the end of the month in which death occurred) on any unpaid Inheritance Tax. This results in large numbers of incomplete or incorrect forms being submitted within six months of the date of death.

Reference numbers can be applied for online on the HMRC website if the deceased had a National Insurance number. If they did not, then form IHT422 Application for an Inheritance Tax reference needs to be completed. This can be downloaded from the HMRC website.

For further guidance on when a penalty may arise for an account delivered after the deadline see IHTM36021+ , and for an account where tax has been under declared because reasonable care has not been taken to get it right see CH80000+.

For further information see Pay your Inheritance Tax bill.

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3. Have the will and associated documents been obtained and reviewed and have

copies been enclosed with form IHT400?

Risk Failure to review and provide copies of the will and other essential information with form IHT is a common mistake and results in unnecessary delays. In particular there is often a failure to review and provide details about beneficiaries when this affects the Inheritance Tax position of the estate, such as where money is left to charity or to any other exempt beneficiary. Enquiries may be raised if we do not receive copies of any wills, codicils, deeds of variation or other relevant documentation.

Tax. Safety deposit boxes often contain valuable information regarding assets, for example, share certificates and gilts. Insurance policies may also provide a list of other valuable assets not mentioned elsewhere.

Foreign assets are commonly overlooked resulting in the estate being undervalued. Ownership of overseas assets (in particular holiday homes, related household goods and bank accounts) has increased substantially over the last 20 years as people live and/or work abroad and travel more.

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5. Have close family and past or present business and personal associates been

consulted and have they understood the terminology used?

Risk Information relevant to the estate may be missed. Words and phrases that are commonly used by HMRC and agents may not be understood or may be misinterpreted by clients and others. Misunderstandings can arise and opportunities to gain information and clarification can be missed. In particular, gifts and assets may remain overlooked and undisclosed.

Mitigation It is important for you to obtain details from those who have knowledge of the deceased’s affairs, especially family members and anyone with a power of attorney. Solicitors, accountants, financial advisers and business associates should also be approached.

It is easy to assume that your clients understand what details are required because they do not question a statement or ask for clarification. Try to avoid ambiguity and misunderstanding by explaining the requirements and processes of Inheritance Tax and probate in terms and language that the personal representatives and other non-practitioners understand.

Examples of commonly misunderstood phrases: 'Joint property' - often interpreted as referring only to houses, land and buildings. The meaning is far wider and also includes things such as syndicates sharing race horses, jewellery, bank and building society accounts.

'Beneficial interest' - is often a phrase that lay people do not understand and do not appreciate that it can include assets which are held or registered in another person’s name.

Explanation You and your clients may not easily be able to locate all the deceased’s papers and documents which are often lost, forgotten or destroyed. Information, assets and details of gifts frequently come to light after form IHT400 has been submitted. We are aware that people keep details of their finances private or their personal and business information separate. This is why it is important to consult with anyone who may have knowledge of the deceased’s affairs. More information about gifts can be found at Q13.

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6. Have any disputes or court actions which may affect the estate been identified?

Risk Court actions, family disputes or any type of challenge to the estate can make a significant difference to its value.

Mitigation If you are aware of a court action, claim, dispute, or potential dispute, let us know what the circumstances are, who is involved and, if possible, details of the timescale. It could be that

there was a court action in existence before the death of the deceased. If you become aware of anything unusual which you suspect may impact on the value of the estate, keep us informed.

Explanation There are many reasons why disputes arise, they may include:

• a lack of clarity in the drafting of the will
• a perceived injustice
• the deceased was pursuing an outstanding debt
• a claim for damages
• a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

For further guidance see IHTM35000+.

In some of these situations family dynamics can be very complex and difficult with parties reluctant to reveal or release details. Any information we receive is treated in strictest confidence. Early notification of ongoing disputes or court action may mean we can take action to limit further delay. For example, we may ask the District Valuer to inspect informally any houses, land or buildings in order to obtain a valuation while waiting for the outcome of any dispute or court action.

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7. Has the deceased disposed of property on their death that qualifies their estate

for the residence nil-rate allowance (RNRA) that came into effect on 6th April

Risk An incorrect claim for RNRA is made where the conditions for its availability have not been satisfied, or where they have, the RNRA has been incorrectly applied.

Mitigation Refer to the guidance at IHTM46000+ and the RNRA calculator.

Explanation Careful consideration should be given to available guidance if you consider the estate qualifies for RNRA.

Basic overview:

Broadly, a residence nil-rate amount (RNRA) is available, for deaths on or after 6th^ April 2017, if a person’s estate includes a home which is their residence ( IHTM46031 ), and this is left to their direct descendants. A direct descendant means a lineal descendant of the deceased such as their child, grandchild, great grandchild etc., but the legislation has extended the scope to include others ( IHTM46034 ). Details of the RNRA being claimed can be provided on form IHT435.

If the deceased qualifies for RNRA, their estate may also be entitled to any unused RNRA from the earlier death of their spouse or civil partner ( IHTM460 40 ). This is called the ‘brought-forward allowance’.

The legislation also provides for an adjustment to the RNRA in situations where a person has downsized or disposed of their residence after 8th July 2015, and on their death they leave a less valuable residence or other property to their direct descendant ( IHTM46050+ ). The adjustment is called a ‘downsizing addition’.

A claim for brought-forward allowance, or the downsizing addition, must be made by the deceased’s personal representatives within 24 months, starting from the end of the month in

Consideration will need to be given to the domicile of the pre-deceased spouse or civil partner as well as the deceased as at the date of the first death as this could affect the amount of the spouse or civil partner exemption that was then available.

For further guidance see IHTM.

Check that the spouses were legally married or that the civil partnership was registered at the date of the first death.

For UK civil partnerships the first death must have occurred on or after 5 December 2005, the date the Civil Partnership Act (CPA) became law.

For further information on equivalent overseas relationships see Schedule 20 CPA 2004. Prior to 22 March 1972 there was no spouse exemption and so the entire estate would be taxable even if it passed to the surviving spouse.

Between 22 March 1972 and 12 November 1974 the spouse exemption was limited to £15,000. This limitation applied to both absolute and life interests.

On considering a grant issued when Estate Duty was applicable, you need to look at the details contained on the grant carefully. If the grant shows duty as being paid then there is no nil rate band available to transfer. Even if the amounts shown on the grant are under the threshold, the value of the assets subject to Estate Duty may be substantially more.

If Estate Duty is not shown as payable on the grant, you still need to consider whether there were any assets not passing under the grant which need to be included in your calculation.

If the pre-deceased spouse was a member of the armed forces and died prior to 12 March 1952, you need to check which of the two schemes for providing relief from Estate Duty applies.

For further information see Transferring Inheritance Tax thresholds.

For further guidance on the transferable nil rate band see IHTM43000+.

For further information on nil rate bands (thresholds) see Inheritance Tax thresholds.

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9. Has the domicile of the deceased and surviving spouse or civil partner been

established?

Risk The term domicile is often misunderstood and is frequently confused with nationality or residence. Spouse/civil partner relief is limited if the deceased is domiciled in the UK but the spouse or civil partner is not.

Mitigation If there is any uncertainty about the deceased’s domicile find out as much information as possible about the life of the deceased from birth to death. If it is claimed that the deceased was not domiciled in the UK complete form IHT401 Domicile outside the United Kingdom as fully as possible providing all supporting evidence you have collected. Explain how the estate is to be distributed if the deceased is non-UK domiciled and did not leave a will.

If there is any uncertainty about the domicile of the surviving spouse or civil partner, find out as much information as you can and provide supporting evidence as their domicile can also have an effect on the availability of reliefs.

For further guidance see IHTM11031 and IHTM.

Explanation The law of 'domicile' is of fundamental importance in the determination and application of Inheritance Tax and has a major impact on available relief or exemptions with the surviving

spouse or civil partner particularly affected. Increased global mobility has meant establishing domicile status for Inheritance Tax purposes has become more difficult.

For further guidance see IHTM13001 and IHTM13021+.

The deceased may still be deemed UK domiciled for Inheritance Tax purposes even if they have a foreign domicile ruling from HMRC for Income and Capital Gains Tax purposes during their lifetime.

For further guidance see IHTM.

The Channel Islands and the Isle of Man are considered outside the UK for Inheritance Tax purposes.

If the deceased is UK domiciled, then their worldwide assets are chargeable to Inheritance Tax. Where the deceased was domiciled in the UK, but their spouse or civil partner is not then, for deaths before 6 April 2013 the relief is limited to £55,000. Where the deceased died on or after 6 April 2013 the relief is limited to the Inheritance Tax nil-rate band (threshold) that applies at the date of death - currently £325,000. Where the deceased died on or after 17 July 2013 it is possible for the surviving spouse to elect to be treated as domiciled in the UK for Inheritance Tax purposes.

For further guidance on these elections, including how an election should be made, see IHTM13040+.

For further information on foreign aspects see Inheritance Tax: Double Taxation Relief.

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Assets

10. Have all items referred to in the will (or in any other relevant document) been

included in form IHT400?

Risk Assets referred to in the will may be incorrectly omitted from form IHT400, for example, where the deceased no longer owned them at the time of death.

Mitigation Care should be taken to identify all the items referred to in the will and ensure that they are referred to in form IHT400 even if the deceased no longer owned them at the date of death. Special attention should be paid to the following:

• If the asset is a shareholding and the company’s name has changed tell us what the new name is
• If the deceased no longer owned the asset(s) at the date of death, what happened to the asset(s)? Tell us if the asset(s) were: - sold (tell us when, and say where the proceeds of sale are included on form IHT400) - gifted (if within seven years make sure the asset is included on form IHT403 Gifts and other transfers of value )
• lost or stolen - in which case we need full details of any insurance claim.

Where there are items referred to in the will that are not included in form IHT400 we suggest that you provide a full explanation of the missing items in a covering letter or on page 15.

Explanation All assets mentioned in the will or other relevant documents need to be accounted for. If there is any information which is not clear to us we will ask you for clarification.

Sometimes it is not recognised that bank and building society accounts held jointly with the deceased to enable, for example, a child to assist with the payment of bills and day to day expenses remain part of the deceased’s estate and should be reported in full. Checks also have to be made where the accounts are held in joint names to see whether the co-owner has merely been added on as a signatory rather than them actually having an interest in the funds within the account.

If the deceased has transferred assets into joint names but continued to receive all the income, then you need to consider if a gift with reservation is involved. However, you need to be aware that even if all the owners declared their share of the income for Income Tax purposes, and indeed paid that tax, it may still be classed as a gift with reservation. You will have to consider exactly how the asset was used during the lifetime of the deceased.

For further information see a case example.

For further guidance on gifts with reservations see Q14 and IHTM.

The intentions of the joint owners are not always obvious. It is easy to jump to the wrong conclusion about the correct share enjoyed by the deceased. It could be that the deceased held the asset on trust for the other owner(s) and only had a life interest.

For further guidance see the introduction to form IHT404 at IHTM15021+.

For further guidance on lifetime transfers see Q13 and IHTM.

For further information see Valuing the estate of someone who's died.

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12. Have all assets been identified that are either due to the deceased from

someone else’s estate, which have not yet been received, OR that have been

received by the deceased from someone else’s estate in the last five years?

Risk Assets that the deceased has inherited are easy to overlook if the other estate has not been fully administered.

Assets due to be inherited can be incorrectly valued.

Quick succession relief may be available and may be overlooked.

Mitigation You should complete form IHT415 Interest in another estate as fully as possible. Revalue any assets yet to be distributed as at the date of the deceased’s death, taking account of any related property. For example, if the deceased owned a half share of a house and inherited the other half, you are required to value the entirety, no discount being allowed for shared ownership.

You should ensure that assets received are accounted for in the deceased’s estate. If they are not, find out what has happened to them and, if they have been passed on, ensure they are declared as gifts on form IHT403 Gifts and other transfers of value.

Explanation The value of assets due to be received are often returned at the value from the previous estate instead of the value as at the date of the deceased’s death. The value of assets can increase or decrease significantly between the date of inheritance and the date of the deceased’s death.

For further guidance see IHTM22001+.

The calculation of quick succession relief is not based on what the deceased actually received, but on the chargeable estate in which the inheritance arose. The calculations for quick succession relief do not take account of the costs of administration, although the costs incurred

against the deceased’s entitlement up to their date of death are allowed as a deduction against the assets still to be received.

For further guidance see IHTM.

For further information see Valuing the estate of someone who's died: valuing gifts.

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Gifts and debts

13. Have all gifts or other transfers of value made within the seven years of the

date of death been identified?

Risk All gifts and transfers of value made in the seven years to the date of death need to be included in the calculation of Inheritance Tax. Transfers of value can be overlooked as they occur not only when property or money is gifted to a friend or family member, but can arise in a variety of other circumstances, such as:

• where an asset is sold for less than its full open market value, such as a sale of a house to a family member below the open market value
• where a debt has been written off
• where an asset is acquired by more than one person, but they hold that asset in different proportions to their contributions
• where property is transferred into a trust or settlement
• where someone has an interest in a trust but that interest ceased before the person died.

Mitigation It is strongly recommended that you check all bank and building society statements for the seven years prior to death to see what transactions have taken place which may be regarded as ‘gifting’. We would suggest initially checking at least the previous three years statements; this will provide you with a good indication of the gifting history of the deceased. If you find any withdrawals and transfers which seem unusual in their amount or regularity, then you should consider a review of the bank statements for the full seven years.

Ensure that associates of the deceased, particularly the family, are asked whether they have received anything from the deceased, including gifts for birthdays, Christmas or other religious festivals, and on marriage.

Also check whether the deceased paid for anything on someone else’s behalf, for example holidays, bills, or loaned them money which has been waived.

Check whether the deceased owned any property jointly with anybody else. If they did, check whether the contributions to the purchase and other costs matched their respective interests in the property. You will also need to check how the joint owners funded their shares of the purchase price. It is quite common, for example for parents to give their children money to fund the children’s shares, and that money is often not declared as a gift.

You need to consider any ancillary costs of the purchase of a joint asset, for example, fees and Stamp Duty. If they were not paid in the same shares, then a gift will have been made.

Check whether the deceased disposed of any property or assets within seven years of their death. If they did, check whether or not they were sold for full market value and the sale proceeds were received by the deceased. If they were not, then the disposal by the deceased may have included some element of gift which you need to tell us about.