Step 2: Identify Liabilities
You need to establish all debt liabilities of the deceased had, including all debts such as loans, mortgages, utility bills and credit cards.
Step 3 Identify any Lifetime Gifts
These are gifts of property or possessions worth over £3,000 that the deceased made to family members or friends in the 7 years before they died. Any gifts made more than 7 years before the deceased died are exempt from Inheritance Tax.
Step 4 Calculate the Value
All assets that the deceased owned need to be valued at an open market price. This means understanding what each asset might sell for if it was sold on the open market at the time of death.
For lifetime gifts, these are calculated based on the value of the gift at the time it was given if the item offered no further benefit after this date. If the recipient benefitted from the item after receiving it, for example by living in the gifted property or renting it out, then the item should be valued at the time of death worth instead.
Once you have the total asset and lifetime gifts worth together with the amount of liabilities, you can calculate the net worth of the deceased’s estate.
In order to work out the value of the estate, you first need to write an inventory of the estate – a list of all the assets, debts and lifetime gifts the deceased made in the 7 years before they died.
This list can be tricky to put together, depending on the nature of the deceased’s assets and liabilities. If you struggle to make the list, you can instruct a probate solicitor to do this for you.
It’s important to get the valuation right because administrators and executors can be held personally liable for mistakes so if you are unsure, seek professional advice.
Start by going through the deceased’s paperwork to make sure no assets or debts are missed. Speak to family members and friends as well as the deceased’s accountant or solicitor if they had one.
You then need to write to the various organisations where the assets and liabilities are located, to confirm the value of each asset or debt at the time of death.
Organisations and individuals that often need to be contacted to value an estate for probate, include:
- Banks and building societies
- Pension firm
- Investment companies
- Firms where assets were held in a trust
- Life insurance companies
- Anyone who received a lifetime gift
When it comes to clarifying liabilities, you will likely need to contact organisations such as:
- Bank or mortgage provider
- Utility firms
- Local council
- Loan companies
- The funeral home
- Any care home that provided care for the deceased
Depending on the type of debt, you might be able to arrange a repayment amount for creditors up to the date of death, meaning the interest stops accumulating on the debt. However, this is not always possible and some liabilities will continue to incur interest.
In addition to contacting companies and people, you need to establish a value for the deceased’s personal possessions such as property, jewellery and art.
It’s best to ask a RICS qualified chartered surveyor to provide you with a valuation of the probate property as surveyors are experienced at providing estimations for Inheritance Tax reasons. As a result of this, HMRC is more likely to accept the valuation given and not make a request for further evidence to support the valuation.
When it comes to valuing the property contents and the deceased’s possessions, start by listing the items you think hold the most value. Often these include cars, art, furniture, jewellery, antiques and high-end gadgets.
Use a professional to value unusual or high-value items and the internet to establish the worth of the other items. Alternatively, you can use a company to value everything – they will charge a fee but this method is more likely to be approved by HMRC so it might be worth it if you’re unsure of the value of some possessions.
The Importance of an Accurate Valuation
For Inheritance Tax
The valuation of all assets must reflect the realistic selling price on the open market at the time of death. This is different to the worth of the asset when new as the item may no longer be popular or be in a worse condition after ageing.
Personal representatives are responsible for ensuring the valuations are correct. For high value items, it’s recommended you use an independent professional to provide the valuation rather than guessing or providing an inaccurate amount.
By taking care to accurately value an estate for probate, you minimise the risk of HMRC disputing any of the valuations you give them. This saves time and money as well as stress during what is already a lengthy process.
Whether or not Inheritance Tax is payable, it’s important to value all assets and liabilities accurately in order to submit a correct valuation to HMRC. An incorrect valuation can mean repercussions further down the line. If an inheritance tax under payment is made then it either needs to be paid before the estate is distribute to beneficiaries or administrators and executors will be held personally liable for any mistakes.
For Capital Gains Tax
Accurate valuations also matter for Capital Gains Tax owed when valuing an estate for probate. Any property or assets sold during probate whose value increased since the date of death, is liable to Capital Gains Tax. Beneficiaries inherit assets at the probate value – when they later sell the item, there will be Capital Gains Tax to pay on the increase in value from the date of death to the date of sale. This is particularly relevent for property which tends to be the highest value item. Take a look at Capital Gains Tax on Inherited Property for more information.
For the Tax-Free Allowance
Every estate has a tax-free allowance and anything under this threshold is not liable for Inheritance Tax. The current threshold is £325,000.
The tax-free allowance can be increased by a further £175,000 if the deceased passes their house to their children or grandchildren.
Submitting The Valuation To HMRC
You need to complete the relevant probate forms.
The correct forms depend on whether Inheritance Tax is payable or not.
There will be no Inheritance Tax to pay if the estate is either:
- Worth less than £325,000 or £500,000 if a property is given to children or grandchildren.
- Passing to the deceased’s spouse or civil partner
- Passing to a charity or a community amateur sports club
However, there are certain circumstances when full details need to be sent to HMRC even if no tax is owed, such as;
- the deceased gifted more than £250,000 in the 7 years before death or the estate includes trusts
- gave gifts for which they still received benefit e.g. they gifted a property to someone but continued to live in it.
- the estate value is over £3million
- the estate included foreign assets over £100,000
- the estate included trusts
Is Probate Required?
If probate isn’t needed, you don’t need to report the value of the estate to HMRC.
An Accurate Estate Valuation for Probate is Essential
When it comes to estate valuation, it’s vital to get it right – the valuation must be accurate and should ideally be based on the advice of professionals. When you submit the report on the value of the estate, HMRC is more likely to accept valuations from professionals and not ask for further evidence to support the estate’s value. As a result, there are minimal delays to the process, and it also ensures all debts are paid, including Inheritance Tax and Capital Gains Tax, allowing all assets to be distributed correctly.