August 11, 2022

Update on British Inheritance Tax Changes in 2022 – Melbourne Capital Group

Update on British Inheritance Tax Changes in 2022 – Melbourne Capital Group

Tax simplification that reduces the administrative burden of the British inheritance process.

From the 1st of January 2022 new rules have come into effect, which mean it will no longer be necessary to file a “short-form” IHT return for excepted estates upon death, and the executors of the Will now only need to make a declaration to confirm the value of the estate as part of the application for probate. This will be a welcomed simplification to the process for all.

Until now, the executors of an estate which met certain qualifying criteria were still required to prepare and submit a short-form IHT return to the Probate Registry when making an application for a Grant of Probate.  We note that the short-form IHT return is often not a straightforward filing to make.  

Inheritance Tax is levied upon anyone who holds British Domicility at the time of their death. Domicility is quite separate to Residency, and it is very easy to retain British Domicility despite having not lived in or even travelled to the U.K. for decades. Inheritance Tax is levied upon the worldwide assets of anyone who holds British Domicility, which means stock portfolios and real estate held in any country are potentially subject to these taxes.

The British government has made some provisions, such as allowing assets to be passed between spouses without applying taxes, and exempting the first GBP 325,000 of a person’s estate from Inheritance Tax. In almost all other circumstances, the United Kingdom will tax 40.00% of all worldwide assets.  

For example, an estate with a value of GBP 1,000,000 will generally have a tax of 40% on GBP 675,000 (after the GBP 325,000 nil rate band has been applied), which is approximately GBP 270,000. An estate with a value of GBP 10,000,000 will generally have a tax of 40% on GBP 9,675,000 (after the GBP 325,000 nil rate band has been applied) which is approximately a tax bill of GBP 3,870,000.  

If parts of the estate are transferred to children, grandchildren, or even close friends, HMRC may also apply a tax to 40% of the value of those transfers. For example, transferring the title deed of a house before death will not exempt that asset from inheritance tax unless the transfer meets specific qualifying “gifting” criteria.

It is important to note that HMRC has extended the time period in which they can request more information from the executor, from the current 35 days to 60 days from the issue of grant of probate. This is something that clients should also be aware of when considering Inheritance Tax and the time involved in settling the estate.

Further to the administrative changes mentioned above, the qualifying criteria for all ‘excepted’ estates have been extended.

For an estate to be excepted it must meet any of the following criteria:

  • The value of the estate is below the Inheritance Tax threshold (GBP 325,000)
  • The estate is worth GBP 650,000 or less, and the unused threshold is being transferred from a spouse or civil partner that died first.
  • Estates worth less than GBP 3,000,000 where the entire estate has been left to a spouse or civil partner living in the United Kingdom, or a qualifying charity.
  • The deceased was living permanently outside the United Kingdom when they died, and their assets in the United Kingdom are worth less than GBP 150,000

While the simplification of the Inheritance Tax reporting requirements is a positive change, these recent changes also highlight the complexity of Inheritance Tax rules in the United Kingdom. Understanding these rules can be difficult at times, and there are often ongoing changes to the rules which make it important to be up to date.

Planning for Inheritance Tax, Estate, and Legacy are some of the most important areas in which we assist our clients. This starts with Melbourne Capital Group taking simple steps, such as helping our clients ensure they have an up to date Will which is both legally valid, and considers every country they have assets in.

Should you wish to better understand your current inheritance tax situation, and review your estate planning options, please do not hesitate to reach out to our Private Wealth Team. They will be more than happy to arrange a no-obligation conversation with one of our specialised Private Wealth Managers.

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