Valuing the estate
Why is estate valuation important?
Valuation of the estate could be considered to be one the most important functions that a personal representative performs. The proper calculation of an estate’s value will determine whether probate is required or whether there is any Inheritance Tax or Capital Gains tax to pay. Application for a Grant of Probate cannot go ahead until valuation is complete.
Included within the Templates section is a suggested template to record the Assets and Liabilities of the deceased. The document is entitled Probate Summary and there are also accompanying Notes as a separate document. You may find this helpful to summarise the position if using a solicitor, and thereby keep the cost of obtaining probate to a minimum.
What is valued?
When valuing an estate you must include all the assets that the deceased owned or had an interest in:
- Money held in financial institutions
- Property and land
- Investments – stocks, shares, unit trusts etc.
- Personal items – e.g. jewelery, musical instruments, stamp collections, cars etc.
- House contents
- Money payable on death from a pension (excluding ongoing pension payments to a surviving partner)
- Life insurance payments paid on death, although tax will not be due on policies held in trust
- Loans made by the deceased to another person
- Foreign assets of any type
- Certain types of trust from which the deceased benefited. Consider getting professional advice
- An alternatively secured pension fund (ASP) from which the deceased benefited
In addition, gifts made by the deceased before their death must be carefully evaluated to see if they need to be included in the valuation.
Gifts made by the deceased during their lifetime must be included in the valuation of the estate unless they fall into one of the following categories:
- Gifts to a spouse or civil partner living in the UK
- Gifts to exempt organisations (including after death)
- Gifts within annual exemption limits
- Small gifts
- Regular gifts out of income
- Wedding or Civil Partnership gifts
- Maintenance payments to relatives
- Gifts made more than seven years before the death
See here for more detail about these exemptions.
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.
Gifts made where the deceased continues to benefit from the asset are called “gifts with reservation of benefit” and their value will always count in full as part of the estate and be potentially liable for Inheritance Tax. Most often this relates to private residences. It is surprisingly common for someone to give their house to their children in an attempt to avoid Inheritance Tax (without consulting a solicitor) and to continue to live in it.
The rules are clear and discussed in more detail here. Whilst it is perfectly possible to give away your home to avoid Inheritance Tax, there is no way of fooling the Inland Revenue with home-made dodges.
Jointly owned assets
Assets can be jointly owned in two ways – “Joint Tenants” and “Tenants in Common”. For the purposes of administering an estate the main difference is that in the case of Joint Tenants the assets pass automatically on death to the joint owner. Although they must be included in Inheritance Tax calculations they do not form part of the deceased’s estate for probate purposes. They are not part of the Personal Representative’s responsibilities although it would be normal for the Personal Representative to arrange transfer of title. If a will specifies what should happen to an asset that is owned as Joint Tenants this is ignored as the rules of joint tenancy override the will.
When an asset is owned as Tenants in Common the portion of the asset owned by the deceased is part of the estate and the Personal Representative will dispose of the asset according to the terms of the will or intestacy rules.
Joint accounts with financial institutions and jointly held shares are nearly always held as Joint Tenants. If you have reason to believe otherwise you should write to the institution.
Property is most often held as Joint Tenants but Tenancy in Common is not at all unusual. To be certain how a jointly owned property is held you must check the title register at the Land Registry. Searches cost as little as £3 each. The register will show the names of all the owners and if they own the property as Tenants in Common it will include the phrase “No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court.”
Valuation for Inheritance Tax
When assets are jointly owned only the deceased’s share is included in the valuation for Inheritance Tax purposes. Very often this will amount to an equal share of the asset. If two people owned the asset then the share is 50%, if three people owned it, 33.33% etc. If there is an unequal share this will be stated in the document that created the joint ownership – for instance a previous will if the property was inherited or the Trust Deed for property held as Tenants in Common.
If a property is jointly owned, either as Common Tenants or Tenants in Common, with someone who is not the deceased’s spouse or civil partner, then the value can be reduced by 10% to reflect the difficulty of selling the property and the reduced market value when another person has the right to live in it.
Sometimes a second name is added to a bank account, perhaps for a relative to assist an elderly person. In this case, where all the account is funded by one person, the share held by the funder is 100%. If the deceased did not contribute to the account then their share is nil and the account does not need to be mentioned in any probate or Inheritance Tax returns.
The value of all assets owned by the deceased needs to be reported. Assets jointly owned and passing to the surviving spouse or civil partner, either by virtue of being owned as Joint Tenants or by being passed in the will are reported separately as an exemption and Inheritance Tax will not be paid on them
Valuation for probate
Only those assets over which the Personal Representative acquires control are reported for probate purposes. Since assets owned as a Joint Tenant do not form part of the estate on death they are not included for probate purposes, although they will be included in any Inheritance Tax calculations. Assets owned as Tenants in Common, however, are the responsibility of the Personal Representative and must be reported.
If the total value of the estate is likely to be below £250,000 (i.e. well below the threshold for Inheritance Tax) then HM Revenue & Customs is happy to accept reasonable estimates of values. For estates above this value you need to be more accurate and obtain professional valuations where appropriate. Valuations should represent the realistic selling price at the time of death. Any professional valuer used should be asked for the “open market value” at the time of death. If you cannot get an accurate figure straight away, e.g. for a tax rebate, you can provide an estimate provided you note it as such and provide the correct figure later.
In recent years HM Revenue & Customs has increased the number of house valuations it challenges. If the estate you are administering is liable for Inheritance Tax (or close to it) then you have a very high chance of being challenged. Out of 16,000 estates that paid Inheritance Tax in 2010 over 9,000 were challenged. Over a third of these ended up with additional charges averaging more than £20,000. If HM Revenue & Customs believes that due care was not taken in the valuation then penalties can apply on top of the extra Inheritance Tax. HM Revenue & Customs strongly recommends that a professional valuer or chartered surveyor is used and that they are asked for an “open market value”. You must also ask for them to take into account anything which might make it more attractive to buyers such as a large garden. You are allowed to take detrimental factors into account, such as poor state of repair, which could reduce the value.