Inheritance Tax and Valuing Assets and Liabilities – part three
The umbrella term given to the person dealing with the estate is Personal Representative (PR); either the person who is named as the Executor in a Will or an Administrator which occurs when a person dies intestate. When somebody dies, the PR must value the estate to report to HMRC, with the result that the estate may be liable to IHT. To do so, the PR must obtain the value of everything the deceased owned (their assets) and owed (their liabilities).
Assets which will need to be valued for IHT:
The assets which pass through the deceased’s Will or intestacy rules such as:
- Assets owned in their sole name;
- Assets owned jointly as tenants in common.
Assets which pass to others, irrespective of the deceased’s Will or intestacy rules such as:
- Assets owned jointly as joint tenants;
- Accounts with friendly societies can be nominated for the benefit of an individual named by the deceased. The asset will pass in accordance with the nomination but will form part of the estate for IHT.
Assets which are subject to certain tax laws, such as:
- Assets in certain trusts, usually where the deceased had a qualifying interest in possession such as a right of occupation or income during their lifetime;
- Gifts with reservation of benefit where the deceased has seemingly given away assets but they kept an interest or continued to benefit from the asset.
Lifetime transfers will also be subject to IHT, these are defined as:
- Gifts or transfers at less than market value made within in the last seven years before someone died. If the deceased died within 7 years, the transfer will form part of their estate for IHT but may be subject to tapering relief;
- A transfer of assets into a Trust or a company is also a chargeable lifetime transfer and may use up some available IHT nil rate band.
What assets are not included in the estate for IHT?
Assets that the deceased did not benefit from in their lifetime, will generally not form part of their estate for IHT, for example:
- A discretionary lump sum payment from the deceased’s pension fund or death in service payments;
- A life assurance policy written in Trust for a named beneficiary who is not the deceased.
Valuing Assets General Principles
The basis for valuing each asset in the estate for the purpose of IHT is based on the price the asset might reasonably be expected to achieve if sold on the open market immediately before the deceased died.
When valuing estate assets, the fact that it may not be possible to sell the property on the open market is ignored, as are any restrictions which limit sale potential (such as pre-emption rights) which may apply to the asset.
Assets should be valued separately except if; they have a greater value as one unit rather than individually or assets are related to one another.
Where the deceased died domiciled in the UK, it is necessary to value their assets and liabilities worldwide, not just in the UK.
Land, buildings and interests in land
In cases where there is no IHT to pay and the market value is easily ascertainable the value can be obtained by taking the average of three estate agent valuations. In other cases, a red book valuation by a qualified RICS surveyor is the best route to ascertain the value of the property at the time of death. Where the property is jointly owned, to allow for the difficulty in selling a share of land or property, its value may be discounted by 10 – 15%.
Cash, Bank and Building Society Accounts, ISA’s, Unit Bonds & National Savings Products
Cash is often found among the deceased’s possessions at their home. The PR should take custody of this money and include the value within the estate for IHT. Balances in bank and investment accounts at the date of death should be obtained from the organisation where the accounts were held.
Quoted Stocks and Shares
It will first be necessary to contact the share Registrar to confirm the shares held at the date of death. The number of shares held are then valued for IHT using the mid-price between the highest and the lowest recorded share prices for the day of valuation. Whilst this information is available online, the calculations can be complex and if in doubt a stockbroker valuation should be obtained, particularly if the value of shares is likely to be substantial.
If the deceased held shares in a limited company or an interest in a partnership the interest will need to be valued. The valuation must take into account a number of factors such as the size of the shareholding or interest and the company or partnership profits or assets. The initial consideration will be to consult the latest business accounts and get in touch with the company accountant. It is important to note that, depending on the nature of the business and the size of the deceased’s interest, the business may qualify for Business Property Relief. Where an estate includes a business interest it is advisable to seek professional advice.
Household and personal goods
This includes furniture, artwork, antiques, jewellery, clothing, vehicles, boats, mobility scooters etc. In most cases a reasonable estimate of the whole value of these items can be made. Any items worth over £500 may need to be reported separately for the purpose of IHT. If necessary, these items should be valued and it is important to note that a valuation for insurance purposes may produce a value which is too high. We would recommend that a local auction house provide a contents valuation for all household items. Where items are jointly held only the deceased’s share of the items need to be included and it is worth noting that the jointly owned discount above for land is not available for personal items.
Employment-related payments and benefits
Salary payments, including payment of accrued holiday rights at the date of death need to be ascertained. The PR should ask for details from the deceased’s employer.
Pensions and annuities
Lump sum payments due as a result of someone’s death will usually be exempt from IHT unless they are payable to the estate. In either case they need to be declared to HMRC as will any pensions varied in the two years before the someone died. Valuations will be provided by the pension administrator.
Life insurance policies
As with pensions, while they are usually exempt, any value not written into Trust for a named beneficiary and therefore payable to the estate will form part of the value of the estate for IHT. Valuations will be provided by the policy administrator.
Miscellaneous refunds and money owed to deceased
Subscriptions, utility and other account refunds of payments made by the deceased before their death will be part of the value of the estate. In addition, other money owed to the deceased, for example, if the deceased made a loan to family members the unpaid balance will be an asset of the estate. This also applies to any unpaid director loans owed to the deceased.
Checking for unknown assets
If the PRs are unsure whether the deceased may have had more assets, then it is advisable to complete a Financial Asset Search, check the Unclaimed Assets Register and the BBA, BSA and NS&I tracing services.
Liabilities are valued on the date of the deceased’s death, including any interest that may have accrued to the debt at that time. Liabilities that may be deducted from an estate include debts and funeral expenses.
In order for a debt to be deductible for IHT tax purposes the following conditions must be met:
- The debt is incurred before the deceased died;
- The debt is legally enforceable; and
- The debt is not created artificially.
Ascertaining known creditors
Some liabilities of the deceased may be easily identifiable through the deceased’s papers. Some liabilities may come to light through the deceased’s bank statements, for example direct debit or standing order payments from the deceased’s accounts. Any payments clearing the account shortly after the deceased’s death should be investigated as they may be a liability of the estate at the date of death. For example, a cheque drawn by the deceased may have cleared his account after his death. Provided it was not a gift, it is a liability of the estate.
Bank statements may also show funds received before the deceased died, for example, the deceased’s personal pension or state pension. If the pension is paid wholly or partly in advance, it may need to be returned to the pension provider. Whatever requires repayment is a liability of the estate.
Reasonable funeral expenses of the deceased may be deducted for IHT. Although there is no statutory definition of “reasonable”, allowable costs include the funeral director’s costs, church and other ceremony fees, the cost of floral tributes, gravestone expenses and the cost of the wake. Usually, memorial plaques, travelling and accommodation expenses of mourners are not deductible.
When enquiring about liabilities it is important to remember that they are debts incurred by the deceased. They should not be confused with expenses arising as a result of dealing with the estate, such as a valuation of an asset for the purposes of IHT or a tax adviser’s fees for assessing the deceased’s tax affairs up to the date of their death. These are administration expenses, not liabilities of the estate and they are not deductible from the value of the estate for IHT purposes
There is a statutory procedure by which a PR may obtain protection against personal liability to creditors of the deceased. This informs people of the death and requests any persons who are owed money from the estate to come forward within two months from the date of the notice. If someone makes their claim known to the PR before the PR distributes the estate, the PR should still repay any debt due. Where a PR has not placed a notice and distributed the estate they may be personally liable to a creditor of the estate for wrongful distribution.
We hope this guide has been helpful in identifying the steps to take in valuing an estate. The next blog in this series will look at how to report the value of the estate to HMRC, payment of IHT and applying for the Grant of Representation. If you would like any further information or assistance administering an estate, then please do get in touch.