When someone dies, their estate may be due to pay inheritance tax. In fact, most people do not have to pay the tax since only estates with a value of more than £325,000 are due to pay it, and estates with a value below that threshold will not be liable for inheritance tax. When inheritance tax is due, it is payable at the rate of 40% on everything over the £325,000 threshold.
This rate can be reduced to 36% if at least 10% of the value of an estate is to be bequeathed to charity. Inheritance tax is not payable on jointly owned assets when the joint owner of the assets is the surviving spouse or civil partner.
Unless an estate is worth less than £5,000 a declaration of the worth of the estate must be made to HMRC, even if no inheritance tax will be due. The responsibility for doing this lies with the executor of the estate who will have been named in the will. Many executors, especially in the case of large or complex estates, choose to engage the services of a solicitor or accountant to handle the tax affairs.
When no executor has been named, or the named executor declines to take on the role which they have the right to do, an administrator, usually a close relative must be appointed. The administrator will have the same duties and responsibilities as an executor in relation to HMRC.
On order to fulfil their obligations to HMRC, the executor or administrator must calculate the value of the deceased person’s estate. This is done by first identifying all the assets of the estate which may include property, vehicles and other possessions such as jewellery, antiques and artworks. Property should be professionally valued by an estate agent or surveyor. Other possessions should also be valued by a competent professional. HMRC advise that all items with a value of £500 or more should be professionally valued.
After the worth of the assets has been calculated the total sum of the liabilities should be worked out. Liabilities may include mortgages, bank loans, credit card balances, utility bills and money owed to tradesmen. To get the net value of the estate, you then need to subtract the liabilities from the assets and this will then be the figure reported to HMRC.
It is very important that this figure is accurate. If HMRC believe that assets have been undervalued then they can and do mount a challenge. This can result in lengthy delays before any beneficiaries of the will can access their inheritances. If the valuation is too high, the estate may end up paying too much inheritance tax.