Grants of representation - Excepted estates: small and exemp...

Learning Outcomes

This article outlines the statutory framework and exam-focused application of excepted estates in grants of representation, including:

• The criteria and statutory conditions for small and exempt excepted estates, with emphasis on category distinctions tested in SQE1.
• How inheritance tax thresholds, monetary limits, and the nil-rate band determine whether an estate can be treated as excepted.
• The procedural steps for obtaining a grant of representation without submitting a full inheritance tax account, and when that shortcut is unavailable.
• The main categories of excepted estates and the practical implications for personal representatives’ duties, risk management, and record‑keeping.
• The conditions imposed by the excepted estates regulations, including the treatment of specified transfers and specified exempt transfers within seven years of death.
• The role of the transferable nil-rate band in increasing applicable thresholds, contrasted with the non-availability of the residence nil-rate band for these tests.
• How non‑UK domiciled estates can qualify as excepted by meeting strict asset-type and value limits on UK-situated property.
• The forms, declarations, and information required in England and Wales following the 2022 regime changes, and the interaction with IHT400.
• HMRC’s continuing powers to call for a full inheritance tax account post-grant and the resulting importance of accurate valuations and documentation.

SQE1 Syllabus

For SQE1, you are required to understand the legal and procedural framework for excepted estates in the context of grants of representation, with a focus on the following syllabus points:

• the statutory definitions and categories of excepted estates (including small and exempt estates)
• the inheritance tax thresholds and exemptions relevant to excepted estates
• the procedural requirements for personal representatives, including forms and deadlines
• the implications of domicile and cross-border estates for excepted status
• the effect of excepted estate status on the need to file a full inheritance tax account
• the concept and treatment of specified transfers and specified exempt transfers within seven years of death
• the use and limits of the transferable nil-rate band and the interaction (or lack of it) with the residence nil-rate band when assessing excepted status

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the current nil-rate band threshold for an estate to qualify as a small excepted estate?
2. Which form must a personal representative submit for a small excepted estate in England and Wales?
3. True or false? An estate left entirely to a surviving spouse can be an excepted estate even if its value exceeds the nil-rate band.
4. What is the maximum value of UK assets for an estate of a non-UK domiciled deceased to qualify as an excepted estate?

Introduction

When a person dies, their estate may qualify as an excepted estate, meaning there is no requirement to submit a full inheritance tax account to HMRC before obtaining a grant of representation. Excepted estates are divided into categories, most commonly small estates (below the nil-rate band) and exempt estates (where exemptions apply, such as assets passing to a spouse or charity). Understanding the criteria and procedures for excepted estates is essential for efficient estate administration and compliance with statutory obligations.

Key Term: excepted estate
An estate that meets statutory criteria so that no full inheritance tax account is required for the grant of representation.

The excepted estates regime sets detailed quantitative limits and qualitative conditions. For UK-domiciled deceased, the rules look at the gross estate before deducting liabilities, together with values of certain transfers in the seven years before death. For non-UK domiciled deceased, the focus is on the value and type of UK assets. HMRC may still request a full account after the grant where the facts warrant it, so personal representatives must retain evidence and be able to justify values and the application of exemptions and reliefs.

Categories of Excepted Estates

Excepted estates fall into three main categories for SQE1 purposes:

1. Small Estates

A small estate is one where the gross value of the estate does not exceed the current nil-rate band for inheritance tax. For deaths in the 2023/24 tax year, this threshold is £325,000.

Key Term: nil-rate band
The inheritance tax threshold below which no inheritance tax is charged on an estate.

All assets owned by the deceased are included in the gross value, without deducting liabilities. If the total is at or below the nil-rate band, the estate is a small excepted estate.

For small excepted estates of UK-domiciled deceased, further conditions apply under the excepted estates regulations. Broadly:

• the estate must comprise only property passing under the will or intestacy, by survivorship in a joint tenancy (or special destination in Scotland), under a nomination, or under a single settlement in which the deceased had an interest in possession immediately before death
• immediately before death, no more than £150,000 of the estate can be settled property (in which the deceased had an interest in possession), and no more than £100,000 can be property situated outside the UK
• the deceased must not have made chargeable lifetime transfers in the seven years before death other than specified transfers, and the aggregate value of those specified transfers (ignoring business and agricultural relief) must not exceed £150,000
• the aggregate of the gross estate, plus the value of any specified transfers and specified exempt transfers within seven years of death, must not exceed the applicable nil-rate threshold (which may be increased by a transferable nil-rate band)

Key Term: specified transfers
Certain chargeable lifetime transfers made in the seven years before death, limited to cash, personal chattels or tangible moveables, quoted shares or securities, and interests in or over land (if not becoming settled and not subject to a reservation of benefit). For the excepted tests, business or agricultural relief is ignored when valuing these transfers.

Key Term: transferable nil-rate band
Where a predeceased spouse or civil partner left their nil-rate band unused on death, the surviving spouse’s estate can increase its nil-rate band by the same percentage, potentially doubling the threshold.

Note that the residence nil-rate band (RNRB) does not increase the nil-rate threshold for excepted estate tests. The excepted estate thresholds are assessed by reference to the standard nil-rate band and, where available, the transferable nil-rate band from a predeceased spouse or civil partner.

2. Exempt Estates

An exempt estate is one where, after applying exemptions (such as the spousal or charitable exemption), the net value does not exceed the nil-rate band. The most common scenarios are:

• All assets pass to a surviving spouse or civil partner (spousal exemption)
• All assets pass to registered charities (charitable exemption)

Key Term: spousal exemption
An inheritance tax exemption for assets passing to a surviving spouse or civil partner.

If, after deducting these exemptions, the estate is within the nil-rate band, it is an exempt excepted estate.

Under the regulations, exempt excepted estates also have a cap on the gross value. In outline:

• the aggregate of the gross estate, specified transfers and specified exempt transfers must not exceed £1 million
• after deducting liabilities and spousal and/or charitable exemptions, the aggregate of the net chargeable estate plus specified transfers and specified exempt transfers must not exceed the applicable nil-rate threshold (with any fully unused transferable nil-rate band)
• the same limits apply to settled property (£150,000) and foreign assets (£100,000), and only certain types of property can pass as outlined above

Specified exempt transfers include, for example, transfers within seven years of death that were exempt under statutory provisions (such as transfers to a spouse or charity). Gifts that relied upon the “normal expenditure out of income” exemption are treated as chargeable for these tests to the extent the annual gift exceeded £3,000 in a tax year.

Key Term: charitable exemption
An inheritance tax exemption for assets left to registered charities.

The two-limb test for exempt excepted estates is frequently tested: even if the net chargeable estate (after spouse/charity exemptions) is within the nil-rate band, the estate will not be excepted if the gross aggregate (including specified transfers) exceeds £1 million.

3. Estates of Non-UK Domiciliaries

If the deceased was domiciled outside the UK, only their UK assets are considered. The estate is excepted if the total UK assets do not exceed £150,000.

Key Term: domicile
A person's permanent home for legal purposes, affecting the scope of inheritance tax on their estate.

For non-UK domiciled decedents, qualifying UK assets for the excepted estate route are limited to cash and quoted shares/securities (passing by will, intestacy or survivorship). If UK assets include real property, unquoted shares, or other asset types, the estate will not qualify as excepted under this category even if the total value is below £150,000.

Procedural Requirements for Excepted Estates

Forms and Documentation

For excepted estates in England and Wales, the personal representative must submit the IHT205 form (or its online equivalent) to confirm that the estate qualifies as excepted. This form is submitted with the probate application and includes details of the deceased, assets, liabilities, and beneficiaries.

Key Term: personal representative
The person(s) responsible for administering the deceased's estate (executor or administrator).

In Scotland, the equivalent is the C5 form for small or exempt estates.

For deaths on or after 1 January 2022 in England and Wales, the excepted estates regime was simplified: the IHT205 and IHT217 were withdrawn, and most excepted estate information is now captured within the probate application (PA1P or PA1A) and accompanying declarations. If the estate is excepted, no IHT400 is filed at the grant stage. HMRC can still require a full inheritance tax account (IHT400) after the grant where it considers it necessary; historically HMRC has indicated it may demand an IHT400 within a period after the grant is issued. Where the estate is not excepted, the full account (IHT400) must be delivered, together with any relevant schedules (for example, IHT402 for claiming the transferable nil-rate band and IHT436 for claiming unused residence nil-rate band), and HMRC will issue form IHT421 (the probate summary) to the Probate Registry.

In practical terms, personal representatives should obtain valuations, collate lifetime transfer information for the seven-year period, and record how the estate meets the category conditions and thresholds. Even where no full account is required, HMRC may sample or query excepted estates, so robust supporting evidence is important.

Key Term: grant of representation
The legal document authorising a personal representative to administer the estate (probate or letters of administration).

Deadlines and Distribution

Personal representatives should not distribute the estate until at least six months after the grant of representation, as claims may be made under the Inheritance (Provision for Family and Dependants) Act 1975 during this period.

Key Term: grant of representation
The legal document authorising a personal representative to administer the estate (probate or letters of administration).

To protect against unknown creditors and beneficiaries, personal representatives can advertise for claims under section 27 of the Trustee Act 1925 and make reasonable searches. This gives protection against later claims of which they had no notice if they wait the specified period before distribution. If there are known but missing beneficiaries, consider indemnities, insurance, or applying for a Benjamin order. Whatever the protection adopted, distributions should be deferred until the basic statutory and prudent protection steps are completed.

Inheritance Tax and Excepted Estates

Nil-Rate Band and Residence Nil-Rate Band

The nil-rate band is currently £325,000. If the deceased was predeceased by a spouse or civil partner who did not use their nil-rate band, the unused portion can be transferred to the surviving spouse's estate, potentially doubling the threshold.

Key Term: residence nil-rate band
An additional inheritance tax allowance for estates passing a main residence to direct descendants.

The residence nil-rate band (RNRB) is an extra allowance (currently up to £175,000) when a main residence is left to direct descendants. For excepted estate status, the tests refer to the standard nil-rate band and transferable nil-rate band only. RNRB does not increase the nil-rate threshold used in the excepted estate calculations. RNRB remains relevant to the overall inheritance tax computation if a full account is required, but relying on RNRB to reduce or eliminate tax will not bring an estate within excepted status if it fails the excepted thresholds.

Tax Rates and Exemptions

If the estate exceeds the nil-rate band (and any available RNRB), inheritance tax is charged at 40% on the excess. If at least 10% of the net estate is left to charity, the rate is reduced to 36%.

Tax reliefs such as business property relief (BPR) and agricultural property relief (APR) can reduce the taxable value of particular assets. However, for the purpose of assessing whether an estate is excepted, business and agricultural reliefs are ignored when valuing specified transfers made within seven years of death.

Key Term: charitable exemption
An inheritance tax exemption for assets left to registered charities.

Worked Example 1.1

Scenario:
Sarah dies leaving an estate worth £300,000, consisting of a house (£250,000), savings (£40,000), and personal effects (£10,000). She leaves everything to her son.

Question:
Does Sarah's estate qualify as a small excepted estate?

Answer:
Yes. The gross value (£300,000) is below the nil-rate band (£325,000), so the estate is a small excepted estate. No inheritance tax account is required.

Worked Example 1.1

Scenario:
James dies with an estate worth £600,000, leaving everything to his wife.

Question:
Is James's estate an excepted estate?

Answer:
Yes. Although the estate exceeds the nil-rate band, all assets pass to the spouse and are exempt. The estate is an exempt excepted estate, provided the gross aggregate (including any specified transfers made within seven years) does not exceed £1 million and the other exempt estate conditions are met.

Worked Example 1.2

Scenario:
Maria, domiciled in Italy, dies owning a UK flat worth £120,000 and a UK bank account with £20,000.

Question:
Does Maria's estate qualify as an excepted estate?

Answer:
No. Although the total UK assets are £140,000 (below £150,000), the presence of UK real property means the estate does not meet the asset-type restriction for non-UK domiciled excepted estates. A full account would be required.

Worked Example 1.3

Scenario:
Omar dies in 2024, domiciled in England. His estate comprises a house (£450,000) and savings (£100,000). His spouse Fatima died in 2021 leaving her entire estate to Omar, and she did not use any of her nil-rate band. Omar made no lifetime transfers. He leaves his estate to his two children.

Question:
Can Omar’s estate qualify as a small excepted estate by using the transferable nil-rate band?

Answer:
Yes. Omar’s applicable nil-rate threshold is increased by 100% because Fatima’s nil-rate band was wholly unused, giving a threshold of £650,000. Omar’s gross estate is £550,000, which is below £650,000, and there are no specified transfers. The estate is a small excepted estate, subject to the settled property and foreign asset limits being met.

Worked Example 1.4

Scenario:
Lily dies, domiciled in England, with the following: jointly owned house (her half £400,000), quoted investments (£100,000), bank accounts (£50,000), personal chattels (£15,000). Two years before death, she made a gift of £100,000 cash to her son. Her will leaves £50,000 to her son, and residue to her husband.

Question:
Does Lily’s estate qualify as an exempt excepted estate?

Answer:
Likely yes. The gross aggregate is £400,000 + £100,000 + £50,000 + £15,000 + £100,000 specified transfer = £665,000, which is below the £1 million cap. After deducting liabilities (none stated) and spouse exemption on residue, the net chargeable estate (including the £50,000 legacy and the £100,000 specified transfer for the excepted test) must not exceed the nil-rate threshold (£325,000). On these figures, the two-limb test is satisfied, provided other regulatory conditions (limits on settled property and foreign assets, and qualifying modes of devolution) are met.

Exam Warning

For SQE1, remember that the gross value for a small excepted estate is calculated before deducting liabilities. Do not confuse gross and net values in exam questions. For exempt excepted estates, apply the two-limb test: check both the £1 million cap on the gross aggregate and that the net chargeable amount (after liabilities and spouse/charity exemptions), together with any specified transfers/exempt transfers, does not exceed the applicable nil-rate threshold. Do not assume the residence nil‑rate band increases the excepted thresholds—it does not.

Revision Tip

When revising, focus on the current nil-rate band and the main exemptions (spouse, charity). Know the categories, the additional conditions (settled property and foreign asset caps), and the treatment of specified transfers within seven years of death. Remember that transferable nil-rate band can increase the threshold for excepted status, but residence nil-rate band cannot.

Key Point Checklist

This article has covered the following key knowledge points:

• The definition and categories of excepted estates (small, exempt, non-UK domiciliary)
• The current nil-rate band and its application to excepted estates
• The main exemptions (spousal and charitable) and their effect on estate status
• The procedural requirements for personal representatives, including forms and deadlines, and the impact of the 2022 changes in England and Wales
• The inheritance tax implications for excepted estates, including transferability of nil-rate bands
• The importance of correctly identifying domicile and cross-border issues
• The additional regulatory conditions: limits on settled property and foreign assets, and the correct treatment of specified transfers and specified exempt transfers
• The distinction between excepted estate thresholds (which ignore RNRB) and the separate tax allowances and reliefs relevant to IHT computations

Key Terms and Concepts

• excepted estate
• nil-rate band
• spousal exemption
• domicile
• personal representative
• grant of representation
• residence nil-rate band
• charitable exemption
• specified transfers
• transferable nil-rate band