25/02/2023 Can I cut an Inheritance Tax Bill once Probate is underway?
As featured in The Mail Online here.
It is well documented how to reduce or even avoid inheritance tax before a loved one passes, and people should be doing as much as possible to prepare for this says Nick Green, MD of The CoreProp Group.
However, sadly, there is not as much advice once your loved one has passed. During the confusing and often distressing probate process, there are huge savings to be made.
The amount of inheritance tax paid depends on the value of the deceased’s estate, which is worked out based on their assets (i.e sum of property, cash, shares, contents etc) minus any debts. The figure is then taxed at 40 per cent after any allowances.
You can, however, lower the declared value on the assets, especially on the property, which is typically the most valuable part of any estate.
At such an emotive time it is easy to overlook HMRC’s small print when assessing an estate’s value.
HMRC strongly advise executors or administrators to instruct a qualified independent valuer to assess the value of the property for probate.
The professional valuation report – known as an ‘RICS Red Book’ report – should incorporate answers to all the following critical questions, which could help lower the tax bill:
1) What date are you valuing the property at?
The valuation of the property for probate is fixed as at the date of passing, this is important to remember. Market fluctuations (such as the rising energy costs, Covid 19 lockdowns etc) severely affect the property market and often lead to dramatic movement and loss of confidence. For example, the property market was estimated to drop around 20 per cent in April 2020 during the most uncertain Covid periods. The value of the property at the date of death may be much lower than the current market value or any estate agent’s appraisal.
2) Is the property tenanted?
If the property is occupied by typical Assured Shorthold Tenants, typically on a term of one year or less, HMRC usually accepts a discount of 5 per cent on the full value of the property.
If the tenant is under a commercial lease or has a longer fixed term tenancy, the deductions can be greater than 5 per cent. Many estates miss out on this easy concession.
3) Any major defects or missing safety certificates?
If at the date of death, the property was suffering from defects such as subsidence or severe damp, even if these faults have now been fixed, these matters should be considered when assessing the value.
And properties in blocks of flats may not have their EWS1 (External Wall Safety) forms, which declares their cladding fire safe.
All these major issues can mean it is not possible to get a mortgage on the property and so the value to be declared should be much lower.
4) Was the property co-owned at the date of passing?
Section 18 of the IHT Manual permits a further 15 per cent deduction of the deceased’s share of the property, if at the valuation date, any co-owner remained in occupation of the property as their main residence.
If the co-owner(s) did not occupy the property as their main residence, the discount can still be up to 10 per cent.
5) Is the property owned by a company?
Again, a discount on the deceased’s share should be applied, up to a level of 20 per cent depending on whether the deceased owned minority shares or majority shares.
6) Are there any neighbourly issues?
For example, a neighbour’s planning application can have an adverse effect on the value of a property.
In addition, there may be some macro changes in the location, such as schools closing down, or high streets changing. All these factors could detract from the desirability of the property.
7) Is the property in a block of flats?
Often the Freeholder or managing agent will be in the process of preparing to do major works to the common areas of the block including the exterior fabric, and an additional large invoice will be sent to the leaseholders.
Often if such works are underway or about to be instructed, these potential added expenses should be considered when valuing the property for probate.
Inheritance tax: The Basics
Inheritance tax is charged at 40 per cent above the tax-free allowances everyone has on their estate, known as nil rate bands.
This is made up of the standard nil rate band of £325,000 per individual – of which any unused element can be passed on to a spouse or civil partner, effectively doubling their allowance to £650,000.
Under current rules, if you give away a main family home to direct descendants, a total of £500,000 each, or £1million combined, is the maximum value that a married couple or civil partners’ estate can reach before it starts being liable for the 40 per cent inheritance tax rate.
In total, this means property-owning spouses can benefit from a £1million buffer before their estate incurs inheritance tax.
But if the total value of an estate is worth £2million or more, the additional main residence nil rate band will be tapered at £1 for every £2 over the £2million threshold, meaning some higher value estates eventually lose the own home benefit altogether.
The other key inheritance tax basic to remember is the seven-year rule.
This applies to gifts that are above set limits – for example, making more than £3,000 in gifts per year – and are known as potentially exempt transfers.
Such a gift will only be free of inheritance tax if you survive more than seven years after making it.
If someone dies between years three and seven of making a gift, inheritance tax on it tapers down on a sliding scale.
CoreProbate https://www.coreprop.co.uk/coreprobate/(part of the CoreProp Group) are RICS Chartered Surveyors who provide specialist Probate services to Executors, Solicitors and Administrators, resulting in very best care and fairest pricing within this mostly unregulated industry.
Our aim is to raise the standards in specialist Probate services. CoreProbate will indicate a commitment to clients that they are working with firms who have high professional and ethical standards and whose pricing is competitive. Partners must be governed by their own regulatory bodies within their relevant sector.
CoreProbate offers the following professional services:
- RICS Red Book IHT property valuations
- IHT compliant contents (chattels) valuations
- Specialist unoccupied Probate Property Insurance
- International Probate Research, Genealogy & Heir Hunting
- Beneficiary / next of kin search
- National auction sales for property
- Specialist probate property sales advice
- National auction sales for contents (chattels)
- Property clearance solutions & recycling
- Property security and weekly insurance checks
- Will Writing and Estate Planning
- Probate support services including Estate Administration
- Notary Public services
- Asset search within an Estate
- Will search service
- Dormant and orphan funds search
- Estate distribution schedules
- Handling the whole Probate process
If you require assistance with any of our services email us at info@coreprop.co.uk or call us anytime on +44 20 3143 0451.
