There have been significant changes to reporting requirements over the past two years for trusts and estates. On the one hand, those relating to trusts have become more onerous while on the other, those for estates are due to be significantly reduced.
The major change for estates came into force on 1 January this year. The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 has been put in place to implement the government’s commitment to reduce the administrative burden for those dealing with inheritance tax following recommendations from the Office of Tax and Simplification (OTS).
This means that from 1 January 2022 over 90% of non-tax paying estates will no longer have to complete inheritance tax forms when an application for a grant of probate is required for deaths after 1 January 2022. Specifically, the regulations now detail that the definition of ‘small estates’ has increased from £150,000 to £200,000 and the exempt estates threshold has been increased from £1m to £3m. Other thresholds have also been raised.
This will mean that, particularly between married couples, there will be a significant reduction in the need to complete an IHT205 – the return of estate information form. Instead, there will be amended probate application forms – PA1A for an intestacy or PA1P if there is a will. The full forms are currently being prepared by the Probate Registry.
Personal representatives – either executors or administrators – will only be required to provide the full name and date of death of the deceased and declare that the estate is an excepted estate, an excepted estate is one on which no inheritance tax is due. They will also need to declare whether they are claiming any unused proportion of the inheritance tax nil rate band of a predeceased spouse or civil partner.
The personal representative will also need to complete the details of the gross estate for inheritance tax, the net value of the estate for inheritance tax (less any allowable debts) and the net qualifying value of the estate. This is the net value of the estate for inheritance tax less any spouse, civil partner or charity exemptions. These new regulations don’t apply if the deceased didn’t live in England and Wales.
In the HMRC Inheritance Tax: Reporting Requirements Policy Paper published on 29 October 2021, it was noted that the measure is not expected to have an exchequer impact. But it will have a positive impact on an estimated 230,000 non-tax paying excepted estates by simplifying the information to be provided to HMRC. The report estimates around 40% of the estates impacted by these changes are administered by personal applicants, with the remainder using solicitors and probate practitioners.
Reducing the impact of the legal process on families suffering a bereavement is to be welcomed. However, there is concern that this may mean that fewer personal representatives will seek the assistance of a solicitor. In reality, the completion of an IHT205 is a very small part of the overall retainer. The disadvantage of less interaction with solicitors is that there more trusts created under wills will be missed.
We regularly see, on the death of the survivor of a couple that when the will of the first partner is reviewed, that nil-rate band discretionary trusts or life interest trusts have not been properly dealt with. We then have the complications of trying to establish whether the nil rate band discretionary trust was ever created. This can impact on the ability to transfer the nil rate band from the first partner to the second partner to die.
We also find that life interest trusts are not properly dealt with and there can be a difficulty in establishing what has happened to the assets, for example if the property has been sold. This can mean that disputes can arise as to the value of the assets that are held in trust.
In contrast to the policy above, increased reporting for trusts is now required. The Trust Registration Service (TRS) has detailed that all estates which incur a tax liability must be registered with themselves. This has now been extended to include all express trusts – i.e. those created in writing – with a list of exclusions. If these aren’t registered, HMRC will then impose a penalty of £100.
The list of excluded trusts is surprisingly narrow and many trusts will not be registered because the trustees simply do not know that they have to do so. For example, if there is a declaration of trust over a property, in some circumstances this will have to be registered and the process is not simple or cheap. Some trusts will have been in place for a number of years, such as life interest trusts put in place for care home fees protection planning.
While I understand the need for compliance and the need to have trusts registered it seems that policy-driven legislation is both reducing reporting requirements and increasing them.
Trusts are not just put in place to avoid tax. They can be used to protect minors, hold funds for people who are in receipt of means-tested benefits due to disabilities and provide asset protection. They can also offer care home fee protection. So, the clients that will be helped by the inheritance tax changes may well be the same clients who will be caught by the TRS regulations.
Is it one rule for trusts and one rule for estates and, if so, why? Reducing the reporting requirements for estates while keeping the onerous reporting requirements for trusts will have a direct impact: lay trustees will not know they need to take advice; trusts will be overlooked and registrations not complied with.