One of the big issues many executors have to deal with is the calculation of inheritance tax. Unless an estate passes directly to a spouse inheritance tax is payable on an estate that exceeds £325,000, which means that anything above this is liable for 40% tax. The current rise in property values, particularly in the South East and London, means that many estates exceed the £325,000 limit – because the value is tied up in property it isn’t always easy to release funds to pay inheritance tax.
The first problem that many executors have to tackle is how to value the property accurately. HMRC can penalise executors with hefty fines if they believe a property has been undervalued – so it is essential to obtain more than one valuation, simply looking at what similar properties have sold for in the area is not enough. While it is a good idea to get two or even three estate agents to provide written valuations HMRC strongly recommend employing a professional valuer/chartered surveyor, who can look at a open market value and consider aspects that might decrease or increase a property value. If a property has a large garden with development potential, for example, HMRC would expect this to be taken into consideration in the valuation.
Under normal circumstances inheritance tax is payable within six months of death, so if a property hasn’t been sold within that time period and the estate doesn’t have sufficient funds to cover the cost of the inheritance tax bill, the executor may be forced to take out a loan to cover the cost of inheritance tax and avoid interest being charged to the estate. If the intention is to sell, or a beneficiary wants to live in the house, only 10% of the tax needs to be found by the six month deadline (the whole amount is payable after another year if the property is to be sold) but of course this bill could still run into thousands of pounds. For many people this was a real headache particularly where beneficiaries didn’t want to sell a property immediately – luckily HMRC offer an alternative in situations where the primary value of the estate is linked to property and the beneficiaries want to live in it. Inheritance Tax payments can now be spread out over a 10 year period with one instalment each year, interest is charged on each instalment, if money is subsequently released through the sale of the property the entire bill can be paid in one lump sum.
About the author
Guy has worked in the insurance profession for over thirty years, initially in the London Insurance market as a broker and subsequently as a Lloyd’s Members’ Agent. He set up private client insurance brokers Castleacre in 2005. Castleacre is the first company in the UK to offer indemnity insurance to lay executors – in direct response to clients who had become executors but could not find suitable cover on the market. If you have would like to know more about executor liability insurance or to contact Guy click here. If you wish to view the Executors Insurance blog click here.