Feature

posted 26 May 2009 in Volume 14 Issue 4

The IHT400 form

The new IHT400 inheritance tax (IHT) account

The new IHT400 account was introduced on 17 November 2008 as a replacement for the form IHT200. Delivery of an IHT400, instead of the IHT200, will be compulsory from 9 June 2009 for all deaths on or after 18 March 1986, where a full account is required. Until that date, either form will be accepted by HMRC inheritance tax.

The IHT400 suite of forms follows a similar format to the IHT200 and consists of a main account and schedules numbered IHT401 to IHT423 to replace forms D1 to D22 and other IHT forms and guidance.

All the new forms and guidance and links to the old IHT200 suite of forms can be found at www.hmrc.gov.uk/inheritancetax/more-iht400.pdf

Main changes in the IHT400

For those who are familiar with the old form, it is worthwhile looking at what has changed with the introduction of the IHT400.

Deleted schedules

Form D1 (the will)

As a copy of the will is required in all cases where one exists, the questions that used to appear on form D1 have been incorporated into the main account IHT400.

Form D17 (additional information)

This has been replaced with a new schedule IHT406 for listing bank and building society accounts and National Savings Investments. Additional information space is now on pages 15 and 16 of form IHT400.

Form D3a (gifts made as part of normal expenditure out of income)

This now forms the last page of schedule IHT403 – gifts and other transfers of value.

New schedules

The following new schedules have been introduced:

IHT406 – bank and building
society accounts and National Savings Investments;
IHT412 – unlisted stocks and shares, and control holdings; and,
IHT420 – National Heritage assets, conditional exemption and offers in lieu of tax.

Other major changes

Instalment and non-instalment option property

Pages 6 to 10 of form IHT400 are divided into two columns: column A for non-instalment option property and column B for instalment option property. This is so that the deceased’s assets can be listed in a logical order with joint assets first, followed by the most common assets of house, bank accounts, cash and so on.

Each asset can only be put into one box, with the exception of traded-unlisted and unlisted shares that should be put in box 65 unless they (unusually) qualify for instalments, and so should be put in box 66.

Jointly-owned assets

The deceased’s share of jointly-owned assets should be listed on schedule IHT404. For the purposes of the IHT calculation, it doesn’t matter whether they are held as tenants in common or as joint tenants. Box 49 form IHT400 is for the net value of the deceased’s share of jointly-owned instalment option property (copied from box 5, form IHT404) and box 50 form IHT400 is for the net value of the deceased’s share of jointly-owned non-instalment option property (copied from box 10, form IHT404).

The probate value of the deceased’s estate does not include jointly-owned assets passing by survivorship. This is dealt with by listing such assets in box 11 form IHT404. The total is then deducted from the probate summary, form IHT421.

Transfer of unused nil-rate band

The claim form for claiming a transfer of unused nil-rate band, form IHT402, is now a schedule to the IHT400. The declaration on page 12 of the IHT400 includes a clause relating to the claim, if one has been made.

The number of documents that HMRC needs to see with the IHT402 has been reduced to photocopies of:

The grant of representation (or confirmation) to the estate of the
first spouse or civil partner. If no grant was taken out, a copy of the death certificate;
The spouse or civil partner’s will, if there was one; and,
The deed of variation or similar document, if one was executed on the first estate.

Household and personal goods

HMRC has reduced the amount of detail required for most household and personal goods on form IHT407. The only household and personal goods that need to be listed individually are:

Items of jewellery valued at over £500;
Vehicles, boats and aircraft; and,
Antiques, works of art or collections.

All other household and personal goods such as general furniture, white goods and jewellery valued at less than £500 should be totalled up and the total value of such items entered at box 4 form IHT407.

Stocks and shares – schedules IHT411 and IHT412

There are now two schedules for stocks and shares:

IHT411 for listed stocks and shares, including UK government and municipal securities; and,
IHT412 for unlisted, traded
unlisted and control holdings of stocks and shares.

If business relief is being deducted from qualifying holdings of unlisted, traded unlisted and control holdings of stocks and shares, this should be shown on schedule IHT412 and not on schedule IHT413 –Business and partnership interests and assets.

Questions on schedules IHT401 to IHT419

The new schedules appear to ask more questions than the old ‘D’ forms. Many of the questions and details of the information HMRC requires, however, have been moved from the ‘D’ notes onto the schedules to make clear exactly what information HMRC is looking for.

IHT400 Notes

The IHT400 notes booklet contains all the notes that accompany the forms. Where there are additional notes to some of the schedules, these can be found in the booklet IHT400 notes on pages 18 to 42.

All the notes for the IHT400 calculation are on the form, except for an explanation of how to calculate interest on payments of IHT. This can be found on the IHT400 Help sheet.

Interest calculator

An IHT interest calculator is now on the HMRC website to assist with the calculation of interest on payments of IHT. Simply enter the start and end dates and the amount of tax and the calculation will be done for you: www.hmrc.gov.uk/tools/inheritancetax/interest-rate-calculator.htm

Submitting a full and accurate form IHT400

Submitting a full and accurate form IHT400 that HMRC can accept at the time it is delivered helps to minimise the amount of work needed for both the practitioner and HMRC. There may be more tax to pay if the instalment option has been taken, but if there are no enquiries raised into the return, a correct return helps speed up the administration of an estate and keep costs down for both sides.

Most forms are completed well. There are, however, a number of ways to reduce the likelihood of the estate being selected for enquiry.

The will

Following the extension of the excepted estate rules, an IHT400 is now only required for taxable estates, exempt estates where the gross value is more than £1mn and estates that otherwise fail to qualify as an excepted estate.

The contents of the will are more likely to have a bearing on the IHT position, so a copy of the will that is being submitted to probate should be included with every estate where you deliver an IHT400.

Please note that non-exempt estates that have a gross value of more than the threshold (even though they are not taxpaying after the deduction of liabilities) are still estates that otherwise fail to qualify as an excepted estate.

Form IHT403 – gifts and other transfers of value

Where lifetime gifts made in any one tax year are wholly covered by exemptions, as described in the guidance notes, there is no need to include them on form IHT403. This exclusion, however, only applies to outright gifts between individuals. If the deceased retained any interest in the gifted property, or the gift was made to trustees, it must be listed on form IHT403 and the exemption shown. In particular, the payment of an insurance premium where the policy is held for the benefit of another (as is usually the case) is not an outright gift as it is paid direct to the insurance company or policy trustees. Details of all such premiums paid are required for all estates, even if you are deducting relief as normal expenditure out of income. Where premiums are paid monthly, one figure for the total paid each year is sufficient.

If relief as normal expenditure out of income is deducted, page 6 of form IHT403 should be completed to give details of the deceased’s income and outgoings. While this form will help to show that the gifts were made out of income, if it is the case, and the deceased was left with sufficient income, there is still the question of the gift being part of the deceased’s normal expenditure. Make sure that you include sufficient information to show that this condition is met.

Form IHT404 – jointly-owned assets

This form sets out the information that is needed before HMRC is able to agree the extent of deceased’s interest in jointly owned assets. Given the complexities that can surround joint property, information about the history of the joint asset and who has benefited from it is essential. Complexities include:

Whether the deceased remained beneficially entitled to whole;
Whether there was an effective gift when the asset was put into joint names; and, if there was,
Whether that was a gift with reservation.

The kind or questions that are relevant are listed on form IHT404. Practitioners should take the time to find out the information that will enable them to respond to these questions. Failure to provide sufficient background to jointly owned assets is one of the most common reasons why HMRC need to take up an estate for enquiry.

Form IHT404 is required for all jointly-owned assets. It does not matter whether the assets were owned as beneficial joint tenants or tenants in common, or (in Scotland) were subject to a special destination; form IHT404 providing the history of the assets is required.

The deceased’s share of all jointly-owned assets, those passing by survivorship to the other joint owners and those that devolve under the deceased’s will or intestacy, should be included in pages 6 and 7 of the IHT400 account. The deceased’s share of those passing by survivorship should be deducted from the probate value of the estate on form IHT421 at box 2.

Form IHT405 – houses, land, buildings and interests in land

In a similar vein to household effects, ask valuers to provide an open market value for the property, not a probate value. While the personal representatives are entitled to rely on a professional valuation, it remains their responsibility to ensure that the valuer has taken account of all the information and circumstances that surround a property. So, if there is a possibility of development, make sure this is brought to the valuer’s attention. If two or three valuers are instructed and this results in a reasonable range of values, it is probably best to pitch for a figure within the range, although the personal representatives could use the figure at the bottom of the range if they so wish.

It is possible that firm offers to buy a property, which are significantly higher than a valuation, are made before form IHT400 is signed. If this happens, ask the valuer whether or not the valuation ought to be revised – and if the figure is changed, include that revised value in the IHT400.

Form IHT407 – household and personal goods

It is important to remember that the basis of valuation for IHT is the open market value, if the item concerned was offered for sale. A professional valuation is not essential, but the form groups the assets and asks you to put a value on each group. If the deceased had a large collection of items within a particular group, for example, antiques, you may need to attach additional sheets detailing all the items and their individual values.

If you are having the deceased’s chattels valued, ensure the valuer is aware that it is an open-market value of the items that is required. Be sure that the valuer has access to all the items that the deceased owned when they died, not just those that are in the deceased’s property when the valuer arrives.

Form IHT408 is for use where personal representatives have given items to charity. This does not mean they are worthless – a charity shop would be able to sell many of the items. Sometimes more valuable items, such as stair lifts and electric wheelchairs, are given to charity. Naturally, the personal representatives do not expect to pay IHT on items given to charity; however, unless they execute an instrument of variation, they are strictly required to do so. The IHT408 is designed to be used in these circumstances in order to facilitate a variation by providing a simple form that operates as an instrument of variation.

Form IHT409 – pensions

Pension entitlements can give rise to some less than straightforward IHT issues. This form aims to raise the profile of the four most common claims that can arise with pensions: guaranteed payments; lump sum benefits; disposals and changes within two years of death; and, contributions to a scheme when the deceased was in poor health. These are often misunderstood, and it is important that the personal representatives consider the deceased’s circumstances at death. In addition, the IHT409 covers the chargeable events that now arise due to changes in the rules for members of registered pension schemes from 6 April 2006 and the IHT legislation in the Finance Act 2006 regarding the IHT treatment of alternatively secured pensions.

Guaranteed payments

Any element of guaranteed payments are an asset of the estate and need to be included. This circumstance will arise where a pension is being paid for a guaranteed period, often five years, and the deceased dies before that period expires. The estate will continue to receive the balance of the payments, but the value needs to be discounted to reflect the fact that the payments will be made over time. HMRC has developed software to help with the calculation of the value of the right to receive payments under the guarantee after the deceased has died. This can be downloaded at www.hmrc.gov.uk.

If you use this software, print out the results it provides and attach it to form IHT409.

Remember that this does not apply to a pension that may be paid to the deceased’s widow, widower or surviving civil partner after the death; this is their own pension and the deceased had no entitlement to it.

Lump-sum payments

Take careful note of the circumstances that surround any lump-sum payment that may be made to the estate. In certain circumstances, even though the policy rules may have given the policy trustees the discretion to make a payment, that discretion may not, in reality, exist and the lump sum may be part of the estate. An example is where a single person dies, without a will or any children, and without having nominated a beneficiary to receive the lump sum. Many pension providers will expect that a lump sum being paid is not part of the estate and may say so in correspondence; it is important to look at the deceased’s personal circumstances and ensure that this is the case.

Disposals and changes within two years of death

Pension policies usually provide two mutually exclusive benefits: the pension benefit and the death benefit. If the deceased has altered their pension provision to shift value from one to the other, there may be a substantial transfer of value during their lifetime, especially if the alteration was made while the deceased was in poor health. The most important thing is to make sure this is flagged up on the return; HMRC will investigate it and discuss values with you once the grant has been obtained. For further information, see Tax Bulletin (February 1992, Dymond volume 3 at 11028, SP E3 and 10/98).

Contributions to a pension scheme when the deceased was in poor health

A claim can arise where there are contributions to an employer’s pension scheme made on behalf of an employee (the deceased) when they were in ill health. This is particularly relevant if

the contributions increase substantially in the two years before death – the increased contributions may be transfers of value.

Alternatively secured pensions

Pages 3 and 4 of form IHT409 cover the occasions when an alternatively secured pension fund or left-over pension funds in the hands of beneficiaries are chargeable to IHT. As the rules for this are relatively new and quite complicated, the questions will need careful reading to ensure that the correct chargeable event is identified.

Form IHT414 – agricultural relief

Like jointly owned assets, this form sets out the information HMRC needs so that a deduction for agricultural relief can be allowed. Provide as much information as possible about the agricultural activity being carried out on a farm, to what uses buildings were put and the purpose for which all the residential properties on a farm were occupied. Again, like jointly-owned assets, if insufficient information is given, it very likely that the estate will be taken up for enquiry.

In particular, words like ‘general farming’ and ‘grazing’ are not sufficient to explain the agricultural activity on a farm. Information about what crops were grown and/or what animals were raised provides a much better picture of the agricultural activity. Describing a person’s occupation of their property as ‘agricultural’ is equally unhelpful – a description of what the role the person concerned played on the farm is needed. It is always worth including a plan of farmland with form IHT400 as this can be used to identify any land or buildings that do not qualify for relief. Even though such items may exist, if the remainder of the property successfully qualifies for relief, and value for the non-qualifying assets keeps the chargeable estate well below the IHT threshold, it is possible the estate will be accepted without enquiry.

Janet Blow is IHT product and process manager at HMRC. She can be contacted at janet.blow@hmrc.gsi.gov.uk