In order to apply for probate, executors have to provide HMRC with details of all assets and liabilities (including joint assets) and any gifts made by the deceased during the seven years prior to death.
HMRC expect executors to make full enquiries into the deceased’s finances, check with the deceased’s family and review the deceased’s bank statements for the previous seven years. Failure to carry out their responsibilities could result in financial penalties against the executor.
Why do you need to value someone’s estate for probate?
You need to value the estate so that you know if there is any inheritance tax (IHT) to pay. Depending on the size and nature of the estate you will need to either complete an inheritance tax 205 form, which is relatively short and is sent to the probate registry when applying for probate, or the more lengthily inheritance tax 400 form which has to be sent to HMRC.
It is also important to know the value of a property when someone dies so that you know whether there is any Capital Gains Tax (CGT) due if the property is later sold.
You should be able to value some of the assets of the estate quite easily e.g. money in bank accounts or stocks and shares. But for property and contents it is not as straightforward and you may need the help of a professional valuer.
The value is the open market value i.e. the price the asset might reasonably fetch if it was sold on the open market at the date of death. This represents the realistic selling price of an asset, not the insurance value or replacement value.
How do you value property?
It can be complicated to value a property and it is recommended that you obtain a professional valuation. This can either by an informal valuation provided by an estate agent or a formal valuation carried out by a qualified valuer such as a surveyor.
Some estate agents carry out informal valuations for free and others will charge a relatively low fee for doing one. If you are going down the informal valuation route then it is recommended to get several valuations, say three, and take the average value. An informal valuation is more likely to be used if there is no inheritance tax to pay and if the property is a normal residential property.
If there ls likely to be inheritance tax payable on the estate then you should obtain a formal valuation. A formal valuation will cost more money than an informal one but it will be more detailed. You should also obtain a formal valuation if the property is not a straightforward residential property e.g. a farm, business premises or land with development value. The valuer will also be able to advise on the availability of agricultural property relief (APR) and business property relief (BPR).
The valuation should be an open market value at the date of death and should be made on the basis of the guidance provided in a manual by the Royal Institute of Chartered Surveyors (RICS) entitled the ‘Red Book’. The valuation should be in accordance with the conditions set out in s160 of the Inheritance Tax Act 1984, ‘the price which the property might reasonably expect to fetch if sold on the open market at that time.’
The executors must provide the valuer with a copy of the deeds so that they can check the ownership and extent of the property. The valuer should take into account any covenants or easements that may affect the value of the land and also check the planning permission if they think that there could be an agricultural tie. If the property is leasehold they should check the number of years left on the lease as this can affect the value. If the property is let they should obtain a copy of the lease to see the terms of the lease, the commencement and expiry dates, the rent payable and who is responsible for outgoings.
You can discount the value of a property if it is jointly owned by the deceased and others in order to reflect the difficulty in selling a share of the property when others have a share in it. However this is not available if the deceased owned the property jointly with a spouse or civil partner.
If tax is likely to be payable then HMRC will employ the district valuer at the local valuation office to value the property on their behalf. If the district valuer does not agree with the valuation submitted then it will be necessary for them and the person who carried out the valuation on behalf of the estate to negotiate and agree on a value for probate purposes.
Whether the valuation is formal or not it is important to be able to justify the value submitted to HMRC and they can raise a penalty if they consider that the executors have been negligent. If there is any indication before applying for the grant that the valuation is too low then you should obtain a new valuation.
How do you value contents?
Firstly you need to identify the personal contents that the deceased owned. This can include jewellery, vehicles, boats, caravans, aeroplanes, personalised number plates, works of art, china, silverware, glass, furniture, electrical goods, clothing and collections such as coins, stamps or wine.
The items may not necessarily be at the deceased’s house and they may be help in safe custody at the bank or building society and so you need to check whether they hold such items when notifying them of the death. Other items may be held for safe keeping by another member of the family, particularly if the deceased had been in hospital or had been living in a care home prior to their death.
To make sure that you have included everything you should check whether there are any items referred to in the will or included on the insurance documents. If they cannot be found then the deceased may have given them away during their lifetime.
You do not need to get a professional valuation if you can use publicly available data to estimate the value e.g. you can value a second hand car by looking on the internet for cars for sale which are the same model with similar mileage.
If the total value of the contents is expected to be less than £1,500 then you do not need a formal valuation and a reasonable estimate can be used. However HMRC do have the right to ask for further details and so it may be worthwhile taking photos before the property is cleared.
Any jewellery worth over £1,500 and any antiques, works of art or collections need to be listed separately on the inheritance tax 400 form and so if the estate consists of any of these items you should obtain a professional valuation. For the remaining items that do not need to be listed individually you can ask the valuer to give a valuation of the whole. Remember to ask for an open market valuation and not a probate valuation as historically such valuations discounted the open market by 10%.
When requesting a formal valuation it may be a good idea to ask the valuer to provide a valuation for insurance purposes at the same time so that you can check that the existing insurance cover is adequate.
How do you calculate inheritance tax?
You need to know the net value of the estate. You then have to check whether any assets in the estate qualify for exemptions e.g. spouse exemption, APR or BPR. You then need to calculate the deceased’s nil rate band. Everyone has a nil rate band which is currently £325,000 but if the deceased made any gifts over £3,000 per annum in the seven years before they died then this will use up some or all of their nil rate band. If the deceased had a spouse or civil partner that had predeceased them then it may be possible to transfer some or all of their nil rate band. For deaths on or after 6 April 2017 the deceased may also benefit from the residential nil rate band if they owned a residential property that passes to direct descendants.
Once you have applied any exemptions plus the nil rate band and transferable and residential nil rate bands (if applicable) to the net value of the estate then inheritance tax is charged at anything above that at 40%.
How long can valuing an estate take?
Executors should be able to obtain date of death valuations from the various financial institutions within 4 – 6 weeks. Where valuations for contents and property are required, most valuers should be able to complete the valuations within a month of being instructed, however this can take longer for the formal property valuations as they are more detailed. If HMRC decides to instruct the district valuer then it can take a number of months to hear from them and for the valuation to be agreed as it may involve a visit to the property by the district valuer.
Originally written for the Gazette: https://www.thegazette.co.uk/all-notices/content/103591