How To Value Assets And Liabilities For Inheritance Tax Purposes
For any professional handling probate matters, the task of calculating the correct amount of inheritance tax (IHT) to be paid to HMRC is one which demands a focus on the finest of details.
Changes brought about by annual budgets and ongoing reform mean that calculating IHT in full accordance with the Inheritance Tax Act (IHTA 1984) can be deeply complex. This is especially so where the estate includes property or businesses in other jurisdictions, where there are pre-owned assets, assets in trust, gifts with reservation of benefit, lifetime transfers, and related property. Mistakes at this early stage of probate may have later implications for the beneficiaries or personal representative (PR) of the estate. Indeed, so hot are HMRC on this matter, there were 5537 IHT investigations opened by HMRC in the 2018-19 tax year.
Considerations when listing the assets of the estate
When identifying each of the assets of the sale, it is best practice to categorise them according to the type of asset; these are as follows:
- Lifetime transfers – any transfers of value made by the deceased in the last seven years of their life may be subject to IHT – referred to as potentially exempt transfers (PET). Chargeable lifetime transfers into a company or trust may also attract IHT.
- Assets included in the Will or would be passed on under the rules of intestacy – this includes items which were in the sole ownership of the deceased, and items owned jointly under tenancy in common (meaning that their share can be passed on in their Will).
- Assets which will be passed on regardless of a Will or the rules of intestacy – including jointly owned items, which would pass to the surviving owner even if not stated in the Will. This is referred to as ‘survivorship’. Nominated assets, whereby an asset is intended to pass to another person following death, are also included in this category. An example of this type of asset would be a pension policy which states that proceeds will pass to a nominated person.
- Other statutory provisions – there are a series of statutory provisions which are designed to prevent individuals from reducing the value of their estate by gifting prior to death. These include assets held in a trust, and gifts from which the deceased continued to benefit (e.g. if the deceased passed their home to another person during their lifetime but continued to reside in the property).
Valuing assets in the estate
To ensure a fair return for the items within the estate, several methods can be adopted. Firstly, according to section 160 of the IHTA 1984, the value of each asset within the estate is the amount it may reasonably be expected to sell for on the open market. As such, when requesting a valuation of an asset, it is important to ask for an ‘open market’ value, rather than the ‘probate value’; the latter may be discounted.
Items should generally be valued separately, unless there is additional value in selling assets together (e.g. a set), are related property , or they are jointly owned.
Another factor to consider is that some assets within the estate may lose or increase in value as a result of the death of the estate owner. For example, the value of a business owned by the deceased may lose value as a result of their death.
When it comes to valuing stocks and shares, there are specific methods which must be applied. Shares can be valued by taking the last lower closing price on the stock market and increasing this by one-quarter relative to the highest price. It is also acceptable to calculate the ‘mid-bargain price’ which is ‘halfway between the highest and lowest bargains for the particular share recorded for the relevant day’.
Listing the liabilities of the estate
Before IHT can be calculated, it is important to deduct the liabilities of the estate from the value of the estate. Debts of the deceased individual can be deducted from the amount of IHT owing, subject to a number of criteria defined by the IHTA 1984. Funeral costs should be included, however not all funeral expenses will automatically reduce IHT and may be challenged if considered unreasonable by HMRC. For example, travel and accommodation costs may not be permitted. For more information on the handling of funeral expenses for the purposes of IHT calculation, see the UK Government website.
For debts beyond funeral costs to reduce IHT, they must be legally enforceable, have been incurred prior to death, and have been incurred in return for a promise to provide something in return (i.e. a service), or have been required by law (e.g. a fine or a Court order to make a payment).
The HMRC’s IHT manual is certainly not for the faint-hearted, and as we have shown, the process of valuing assets and liabilities for IHT is neither simple nor necessarily quick. Depending on your availability of time and the complexity of the estate, it may be prudent to seek the expertise of a specialist probate accountant. And if the estate contains foreign-based assets, the expertise of foreign legal professionals may prove invaluable.