How do I assess an estate for inheritance tax purposes?
Inheritance tax (IHT) is payable on the value of a deceased person’s estate together with certain gifts made by the deceased in their lifetime. It is the responsibility of the executor or personal representative to assess the estate, complete the appropriate IHT forms and pay any IHT due. We only cover the position for individuals who are domiciled in the UK.
Please note that this is only a brief guide and we would usually recommend seeking professional advice (see more help and information at the bottom of this page).
How do I assess an estate for IHT purposes?
There are a few key steps you must take in order to assess the deceased’s estate for IHT purposes.
- Value the deceased’s total assets and gifts. You must include all assets the deceased owned, or owned a share of, at their death. You should include all gifts (money, property, assets) the deceased made in the seven years prior to death that were not exempt – this will include potentially exempt transfers (PETs) made in that period. Add all the values together to get the total value of assets and gifts.
- Deduct any debts and liabilities. You can reduce the total value of the deceased’s assets and gifts by taking off any outstanding bills, debts or mortgages at the date of death.
- Note your valuation of the estate, that is, the value of all assets and gifts minus all debts and liabilities. Keep evidence of valuations and receipts.
- Decide whether or not IHT is due on the estate. Complete the correct IHT forms and pay any IHT due.
What does a deceased person’s estate include?
The ‘estate’ of a deceased person may include property, land, cash, stocks and shares and valuables, for example, jewellery, works of art and vintage cars. The estate also includes any debts outstanding at the date of the deceased’s death, such as credit card debts, a mortgage or equity release. These debts reduce the value of the estate for IHT purposes.
For example, if the deceased’s house is valued at £400,000, but there is an outstanding mortgage of £150,000, then its value for IHT purposes is only £250,000.
What lifetime gifts are chargeable to IHT on death?
There are some exemptions and reliefs available for lifetime gifts, meaning that often no IHT liability arises during the lifetime of the donor (maker of the gifts).
Some gifts, known as potentially exempt transfers (PETs), may become chargeable to IHT when the donor dies, if the donor dies within seven years of making the gift.
There is more information on PETs in the section ‘what is inheritance tax?’.
In addition, gifts known as chargeable lifetime transfers (CLTs), which can create an IHT liability during the lifetime of the donor, may also be chargeable to IHT when the donor dies. CLTs are normally gifts made into trusts, rather than gifts made outright to individuals.
How do you value assets in the estate?
When you value assets in a deceased person’s estate, you normally value them at the market value on the day after death. It is relatively easy to value cash and quoted shares, but you may need to obtain a professional valuation of other assets, such as property, land, jewellery or works of art. HMRC may challenge any valuations they disagree with. If you need to obtain a professional valuation, any costs involved will come out of the estate, not the pocket of the personal representative.
Ownership of property and assets
It is important to be aware of the ownership of property and assets, as this can affect the IHT treatment.
The deceased may have been the sole tenant or owner. This is self-explanatory, although rare among couples. Alternatively, the deceased may have owned property or assets jointly with one or more other individuals, either as joint tenants or as tenants in common. The valuation of property held jointly will depend on the size of the share held by the deceased and also who the other owner is.
Joint tenants own the property equally and undivided. On the death of one joint owner, the deceased’s share passes automatically to the other joint owner(s). In Scotland, joint tenants are called joint owners.
Tenants in common each own their own share of the property or asset and can dispose of their share as they wish whenever they want to. The deceased’s share does not pass automatically to the surviving tenants in common and can be bequeathed to anyone, for example, children of a previous marriage. In Scotland, a similar arrangement occurs when the survivorship destination has been removed from the title deeds of the property. In Northern Ireland, a tenant in common may also be known as a coparcener.
In Scotland, only if the survivorship destination has been removed from title deeds (been 'evacuated') can a joint owner pass on their share through a will. If the deceased dies intestate, the share of property will be passed on according to the rules of intestacy.
The deeds of the purchase of the house will make clear which form of ownership applies.
Debts and liabilities
You can deduct the value of any legally enforceable debts and liabilities that the deceased had when they died from the value of their estate for IHT purposes.
These might include household bills and bills for services and goods that the deceased had received but not yet paid for. Some debts and liabilities that you are likely to come across are mortgages, loans, credit card balances and uncashed cheques. You can also deduct funeral expenses.
You cannot deduct professional fees that you pay for when dealing with the estate, for example, if you pay a solicitor. You can claim these back from the estate, but you do not use them to reduce the value of the estate for IHT purposes.
Land and buildings
If the deceased owned any property or a share in any property, you must include it in their estate for IHT purposes. You must include the value of the property at the time of death. To ensure the valuation is accurate, it is a good idea to obtain a professional valuation. You could ask a property valuer or chartered surveyor, as these professionals often specialise in valuing property for IHT purposes.
Some types of property that you might come across are the deceased’s home, other houses or flats the deceased owned, farm land, business properties and garages.
There is more information on how to value land and buildings for IHT in the 'Guide to completing your Inheritance Tax account (IHT400 notes)' on the GOV.UK website.
Stocks and shares
If the deceased owned stocks and shares, you must include them in their estate for IHT purposes. You must include the value of the stocks and shares at the date of death.
If the shares are listed on a recognised stock exchange, such as the London Stock Exchange, you can work out the value of the stocks and shares yourself. You need the closing price on the day the deceased died. You will be able to find this in the financial pages of a newspaper, the newspaper’s website or a commercial website.
If the deceased had shares in various different companies, you may prefer to obtain a professional valuation. You could obtain a valuation from a stockbroker.
If the deceased had shares in a private company, the shares will not be listed on a recognised stock exchange. There is no open market for private company shares. You will need to contact the company secretary of the private company or the accountant to obtain a valuation for the shares.
There is more information on how to value stocks and shares for IHT in the 'Guide to completing your Inheritance Tax account (IHT400 notes)' on the GOV.UK website.
What IHT exemptions and reliefs are available?
There are certain exemptions from IHT. For example, there is normally no IHT to pay where property is transferred, either by lifetime gift or on death, between spouses, or given to charity. There is more information on exemptions and reliefs in the section ‘what is inheritance tax?’.
In addition, there is a nil rate of IHT on the first £325,000 of property transferred. This nil rate band applies to property passing on death together with any taxable gifts made within the seven years before death. Where the value exceeds £325,000, IHT is payable on the excess at a rate of 40%.
The nil rate band is transferable between spouses and civil partners so that when the surviving spouse or civil partner dies, they can add to their nil rate band any unused proportion of their late spouse’s or civil partner’s nil rate band.
There is more information on the nil rate band in the section ‘what is the nil rate band?’.
From 6 April 2017, there is also a ‘residence nil rate band’ available. Again, this is transferable between spouses and civil partners so that it can be used when the second of them dies if unused on the first death. This nil rate band can involve complicated calculations, especially if the deceased moved to a smaller house or sold their house and went into residential care before they died. Note also that it only applies where the property or proceeds from downsizing are passed on to direct descendants. There is a guide to the residence nil rate band on GOV.UK, but you might also need professional assistance – see below.
Where can I find more help and information?
You can find more information on these topics on the pages ‘what if I am an executor or personal representative?’ and ‘how is an estate taxed during administration?’. For information on how to work out the IHT due on a death estate, go to ‘how do I work out the inheritance tax due on an estate?’.
There is also information about valuing an estate for IHT purposes on the GOV.UK website.
In dealing with an estate, the personal representative may well find it advisable to seek professional help from a:
- solicitor – you can find a solicitor on the Law Society website;
- tax adviser – you can find an adviser on the Chartered Institute of Taxation website; or
- trust and estate practitioner – you can find a practitioner on the Society of Trust and Estate Practitioners website.
There are different sources of help if you need a solicitor in Scotland – you can find a solicitor on the Law Society of Scotland website, or a solicitor in Northern Ireland – you can use the Law Society of Northern Ireland website.