Valuing an Estate for Probate and Inheritance Tax
A question that many clients often ask is how do you value an estate where someone has died for probate and Inheritance Tax and what assets much actually be recorded.
Other queries that come up are whether the value of personal items need to be included, what happens about jointly held property and what to do about any assets held abroad. In this article I shall try and explain how an estate should be valued.
What assets should be included?
Simply put, all assets that have any value at all should be reported on either form IHT205 (the simpler return usually completed when there is no tax to pay) or on form IHT400 (the Inheritance Tax account that is completed when there is tax to pay or other criteria are met).
There is no minimum value that can be omitted when valuing an estate and therefore any assets with value should be included.
Any solely held bank accounts should be valued by taking the capital balance as at the date of death and adding any interest accrued but not credited. The simplest way of doing this is to ask the bank for this value in writing as at the date of death and they should, as a matter of course, add the interest accrued but not credited in their calculations.
Gifts in the last 7 years
If someone has made gifts in the last 7 years of their life, the value of these will need to be ascertained at the date they were given as they may well have an impact on the value of the available nil rate band as at the date of death. Likewise any gifts with reservation (the subject of which goes beyond the scope of this article) would need to be ascertained.
Land and buildings
It is usual in taxable estates for a Chartered Surveyor to provide a valuation on land and buildings as the Revenue can penalise personal representatives who submit inaccurate valuations when completing form IHT400. Where an estate is not taxable it may not be strictly necessary for a valuation to be carried out by a Chartered Surveyor but it is best to take advice in each case to ascertain what should be done.
Jointly held property
Often spouses will own joint property together such as bank accounts and maybe their own home. Jointly held assets need to be reported separately on forms IHT205 and IHT400 and a distinction is made as to whether the property passes by survivorship (usual for bank accounts and houses held as joint tenants) or whether in fact it passes under the terms of the deceased’s Will (usual when property is held jointly as tenants in common). Valuing this sort of property depends on a number of factors and sometimes if the property is jointly held, is land or a house and is owned with someone other than a spouse, there will be a joint ownership discount on the value. Ordinarily though, it would be a case of ascertaining what the deceased’s share of the property is and then taking this as a proportion of the overall value.
If the deceased had assets abroad then the value of any foreign property will need to be included. Valuations should be obtained in the usual way from the country that the deceased held assets in. If an estate is taxable by HM Revenue and Customs then it may well be the case that a discount can be obtained on the tax payable here equal to the tax payable abroad (if any).
Stocks and Shares
Shares in smaller companies should be valued by an accountant.
In publicly quoted companies there is a special formula for valuing shares on the date of death whereby the quarter up price is taken on the difference between the high and low values on the date of death. If someone died when the relevant stock exchange was closed, (ie, bank holiday or at the weekend) then the lower of the two days either side may be used.
Some shares attract reliefs depending on the exchange they are quoted on.
If the deceased did benefit from some form of trust during their lifetime then it is highly likely the details will need to be reported on form IHT400. Again, professional advice is likely to be needed to decide whether this will be necessary and how an interest in a trust should be valued.
Life insurance policies
If these are payable to the estate, the insurance company will usually be able to supply a letter confirming the value as at the date of death.
If a lump sum or ongoing benefits are paid to an estate after someone has died, the pension scheme will normally supply a letter giving these details so they can be reported.
Shares in private companies should be valued by an accountant as should other business interests. It is often the case that reliefs can be secured against such assets to reduce Inheritance Tax.
What liabilities can be deducted?
After all of the assets have been added together this will give you a gross figure for the estate. From this liabilities may be deducted. However, only liabilities of the deceased such as the funeral account, memorial expenses, monies owed at the date of death and any liability to personal tax may be deducted. Costs of the administration such as death certificates, executors’ expenses, Inheritance Tax, etc cannot be deducted.
After the deduction of liabilities, a net figure for the estate will then be produced.
This is not intended to be an exhaustive explanation of how an estate should be valued for Probate and Inheritance Tax after someone dies. I have, however, tried to outline the broad elements that should be taken into account when trying to create the snapshot of the deceased’s finances and their estate as at the date of death.
There is no substitute for professional advice when dealing with an estate and should you wish to explore the above matters or anything else in further detail, please do not hesitate to make contact.