Property Valuations for Probate – What do you need to know?
When someone passes away, the executor of their Will must value the deceased’s assets. The executor has a duty to collect in the assets, report their value to HM Revenue & Customs and transfer the assets in accordance with the deceased’s wishes.
The vital first six months
In the early stages of the administration of the estate, it is necessary to ensure that the value of the estate is reported correctly for inheritance tax (IHT) purposes. If there is any IHT to pay, it must be paid within six months of the end of the calendar month of death. Depending on the size of the estate, the estate’s representatives can complete either the longer inheritance tax form IHT400 which is sent direct to HM Revenue & Customs, or the shorter IHT205 form which is sent to the Probate Registry.
What is the value of the estate?
When valuing the estate for IHT purposes, the estate’s representatives need to include the value of any property, or shares in property owned by the deceased. It is also important to know the value at the date of death so that the estate’s representatives can correctly report the value to HM Revenue & Customs and determine whether any Capital Gains Tax (CGT) will be due if the property is later sold. The probate valuation for the property generally forms the base cost of the property for CGT purposes.
When it comes to valuing property for IHT purposes, the value that must be established is referred to as the ‘open market value’ which is the value that the property would reasonably be expected to achieve if sold on the open market at the date of death (Section 160 of the Inheritance Tax Act 1984).
For smaller, less complex estates, it is possible for the estate’s representatives to obtain an informal, market appraisal from estate agents. Most estate agents will carry out these market appraisals for free and others may charge a low fee then deduct this fee if instructed to sell the property at a later date. By obtaining several valuations, the estate’s representatives can use the average of those valuations for the purpose of IHT reporting. If the property is jointly owned, then the share owned by the person who died is reported and in some cases, a discount can be applied to the value of the deceased’s share in the property to reflect the fact that it is difficult to sell a share in a property.
For more complex estates
For larger, more complex estates, it is recommended that the estate’s representatives obtain a formal professional valuation using a qualified property surveyor. This formal open market valuation is provided on the basis of guidance issued by the Royal Institute of Chartered Surveyors (RICS) and is referred to as a ‘Red Book’ Valuation. There will be a charge for this formal valuation but the report will be comprehensive and will include comparable evidence and photographs. If the property is not a residential property (for example a farm, business property or land with development potential), the Red Book valuation will provide the information required by the estate’s representatives to ensure that the valuation is as accurate as possible.
A formal written valuation report undertaken by a qualified property surveyor often assists with any queries raised by HM Revenue & Customs and if HM Revenue & Customs instruct their own Valuer to value the land (called the District Valuer) then the qualified property surveyor who undertook the valuation can liaise and negotiate with the District Valuer.
The importance of accuracy
If a property is undervalued for IHT purposes, HM Revenue & Customs can impose penalties, together with an additional tax liability if not valued accurately. The property valuation should be as accurate as possible, as any discrepancies are likely to be investigated.
If a professional valuer has been instructed, the estate’s representatives will be protected from any liability to these penalties. HM Revenue & Customs have different levels for these penalties depending on the incorrect error of reporting, for example:
- If the error is due to lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due;
- If the error is deliberate, the penalty will be between 20% and 70% of the extra tax due;
- If the error is deliberate and concealed, the penalty will be between 30% and 100% of the extra tax due.
These penalties can be avoided and/or reduced by the estate’s representatives accurately reporting the values to HM Revenue & Customs and obtaining professional valuations and by informing HM Revenue & Customs to correct the error.
How can we help?
Freeths LLP has extensive experience in the administration of estates. Freeths’ dedicated Probate, Trusts & Administration of Estates team will support you in organising, managing and safeguarding you and your family’s interests. We can advise you on Gift Applications and Inheritance Tax Planning, Personal Tax, Probate, Trusts and Wills. You can rely on us to be honest, sensitive and to explain everything clearly.
By bringing together lawyers with legal, accountancy and tax backgrounds, we offer a full spectrum of services to organise your finances. From preparing trust assets to implementing the terms of a will, we can assist you every step of the way. Our specialist Private Client Dispute Resolution team can also assist with disputes relating to Wills, Trusts and Probate. Whatever your needs, we have a confident grasp of the processes and issues involved.
Please contact Louise Lewis to discuss any queries you may have.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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