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Guide to New Inheritance Tax Laws in 2022

Posted: 8th February 2022
Written by: Newtons Wills, Trusts and Probate Team

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In 2021, the government implemented changes to the inheritance tax nil-rate band, saying that current nil rate bands would remain at existing levels until April 2026. In January 2022, inheritance taxes have changed again to simplify the process of reporting an estate.

We know inheritance tax law can be complicated, so we’ve put together this guide to the inheritance tax changes in 2022.

Who Pays Inheritance Tax?

Inheritance tax refers to the amount of tax paid on the estate of a deceased person. The standard tax rate for inheritance tax is 40%, and that is paid only on the value of the estate that is over the nil rate band – currently £325,000.

The estate will not typically be taxed if:

  • The value of the estate is below the nil rate band
  • The testator leaves everything above the nil rate band to their spouse, civil partner, a charity or a community amateur sports club

Paying the inheritance tax falls to the executor or administrator of the estate, with the funds taken from the value of the estate – beneficiaries do not normally pay inheritance tax on the assets or funds they are left although it is possible.

 

Inheritance Tax Law Changes in 2022

The 2022 inheritance tax changes have removed the requirement for estates that are valued below the nil rate band to file any paperwork – these estates are now known as ‘excepted estates’.

This has been implemented with a view to simplifying the reporting as estates below the threshold will no longer have to report the value of the estate using the IHT205 form.

Under the 2022 inheritance tax changes (applicable from 1st January), the estate will be considered excepted if:

  • Its value is below the nil rate band
  • It’s worth £650,000 or less, with any amount over the nil rate band having been transferred from a spouse or civil partner who died first
  • It’s worth less than £3m, but everything was left to a spouse, civil partner, or qualifying registered UK charity
  • The estate has assets in the UK worth less than £150,000, and the deceased had been living outside of the UK permanently when they died.

 

Changes to Probate Fees

While the executor(s) do not have to file the IHT205, they must still apply for Grant of Probate or letters of administration. However, there has been a change to the cost of applying for probate.

The previous system meant that if you used a professional probate service, you had to pay £155 to apply and, if you did it yourself, you would pay £215. However, that has since been replaced by a flat fee of £273 (presuming the estate is valued at over £5,000).

Proposed Inheritance Tax Changes

The inheritance tax law changes come following reports made by the Office of Tax Simplification, which made several recommendations for the improvement of the inheritance tax system.

Other proposed inheritance tax changes included:

  • Shortening the seven-year period prior to a testator’s death wherein all gifts are subject to inheritance tax
  • Ensuring that death benefit payments from term life insurance (a type of life insurance that covers only a specific period, rather than a permanent policy) are inheritance tax-free on the death of the life assured, without the need for them to be added to a trust.

While these other proposed inheritance tax changes have not yet been implemented, they are under consideration and could radically alter the inheritance tax process.

 

If you have any questions about the changes to inheritance tax in 2022, please don’t hesitate to get in touch with the expert wills, trusts and probate team at Newtons Solicitors. Whether you are an executor, beneficiary or are interested in creating your own will, we can help guide you through the process.