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.
You should note that valuation of the estate could be considered to be one the most important jobs that an executor or personal representative has. The proper calculation of an estate’s value will determine whether probate (or confirmation in Scotland) is required or whether there is any IHT to pay.
Please note that this is only a brief guide and we would usually recommend seeking professional advice (find where to get 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 to assess the deceased’s estate for IHT purposes.
- Value the deceased’s total assets. You must include all assets the deceased owned, or owned a share of, at their death. Care should be taken in identifying any assets located overseas as their value must also be included.
You should value all gifts (money, property, assets, etc.) 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. You are expected to make reasonable efforts to identify all gifts made by the deceased in the seven years before their death. Bank statements and personal documents should be examined for possible gifts and you should make reasonable enquiries of relatives.
Add all the values in step 1 and 2 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. You can also deduct funeral expenses. 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.
The situation might arise where the value of the debts and liabilities is higher than that of the assets, in which case the estate is ‘insolvent’. You can find some basic information on insolvent estates on the Bereavement Advice website.
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. Any debts outstanding at the date of the deceased’s death, such as credit card debts, a mortgage or equity release, 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 effective value for IHT purposes is only £250,000.
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 of 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.
Note that if the total value of the estate is likely to be well below the threshold for IHT, then HMRC will accept a reasonable estimate of values.
The following areas are worth noting:
Ownership of property and assets
It is important to be aware of the ownership of property and assets, as this can affect the valuation.
The deceased may have been the sole tenant or owner. 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 there is often a clause in the title deeds of the house meaning that the property automatically passes to the surviving joint owner(s), a survivorship clause. Unless this clause has been removed, in legal terms the survivorship clause has been evacuated, then the position is as for joint tenants in the rest of the UK.
Only the deceased’s share is included in the valuation. Very often this will amount to an equal share of the asset. If two people owned the asset then the starting point is usually 50%.
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 left to anyone, for example, children of a previous marriage. Again, the value of the deceased’s share must be included in the calculations. The share will be determined by the legal document that set up the tenancy in common. 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 the case of a house, the deeds of the purchase of the house will make clear which form of ownership applies. You can find these at the Land Registry for property in England and Wales, or for property in Scotland at the Scottish Land Registry or for property in Northern Ireland at Land and Property Services.
There is more information on how to value jointly owned assets and property on GOV.UK.
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 income tax bills, household bills and bills for services and goods that the deceased had received but not yet paid for. Some other debts and liabilities that you are likely to come across are mortgages, loans and credit card balances. 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 for a solicitor, tax adviser or a valuation. You can claim these back from the estate, but you do not use them to reduce the value of the estate for IHT purposes.
There is more information on how to value debts and liabilities on GOV.UK.
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 your valuation of any land and buildings is accurate, it is a good idea to obtain a professional valuation. You could ask an estate agent or chartered surveyor, as these professionals often specialise in valuing property for IHT purposes.
Valuations should represent the realistic open market value at the time of death. They must take into account anything which might make the property more attractive to buyers such as a large garden. However, they are also allowed to take detrimental factors into account, such as poor state of repair, which could reduce the value.
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 GOV.UK.
Please note that in recent years HMRC have increased the number of house valuations it challenges, as people often undervalue houses as a way to try and get out of paying IHT. If HMRC believe that due care was not taken in the valuation then penalties can apply on top of any extra IHT.
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 GOV.UK.
What IHT exemptions and reliefs are available?
After calculating the value of the estate, there are certain exemptions from IHT that can be applied. 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 on the page What is inheritance tax?.
In addition, there is a nil rate band of IHT on the first £325,000 of property transferred. This nil rate band applies to taxable, non-exempt property passing on death, together with any taxable gifts made within the seven years before death. Where the value exceeds £325,000, IHT is usually payable on the excess at a rate of 40%, but if the estate included the residence of the deceased there may also be a residence nil rate band.
There is more information on the nil rate band on the page What is the nil rate band?.
Where can I find more help and information?
There is information about valuing an estate for IHT purposes on GOV.UK.
More technical information on valuation can be found in HMRC's Inheritance Tax Manual.
You can contact HMRC’s probate and IHT helpline with questions – the contact details are on GOV.UK.
In valuing an estate, a 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.