This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website:
Introduction – Is Inheritance Tax due?
Calculating Inheritance Tax
Valuing assets
Responsibilities of personal representatives
Business relief and businesses
Discretionary trusts
Deceased left no will
Pensions
Agricultural relief
Deceased's liabilities
Foreign aspects
Joint property
Penalties
Settled property
Woodlands
Probate
Alter Inheritance tax
Gifts
Excepted estates
Paying IHT
Thresholds and Interest
Introduction
This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
It also gives advice about lifetime gifts and the taxation of discretionary trusts.
The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
- gifts into certain kinds of trusts
- the tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits
- the ending of an interest in possession during a beneficiary's lifetime
- the treatment of funds in alternatively secured pensions on death.
This article will be updated as necessary when the Finance Bill is enacted.
What value should I use?
For inheritance tax purposes, you have to use the open market value of the assets on the date the person died. This represents the realistic selling price of an asset, not an insurance value or replacement value.
You should be able to value some of the estate assets quite easily, for example, money in bank accounts or stocks and shares. In other instances, you may need the help of a professional valuer. If you do decide to employ a valuer, make sure you ask them to give you the 'open market value' of the asset.
If I do not know the exact value, can I estimate the value?
If you do not know the exact amount or value of any item, such as an income tax refund or household bill, do not put off applying for the grant just because you do not know the exact figures. You may use an estimated figure.
You should not guess at a value, but try to work out an estimate based on the information available to you.
If you are completing a form IHT 205 for an excepted estate and are including an estimate, tick the box alongside the figure concerned.
If you are completing a form IHT 200 and you are including an estimate, you must complete box L3 on page 8 of that form.
Do I have to get accurate values when the estate is very small?
No, you do not. If it is an excepted estate and the gross value of the estate is likely to be below £200,000, you can estimate the value of the assets. You should not guess at a value, but try to work out an estimate based on the information available to you. There is no need to tick the boxes on the IHT 205 in those circumstances.
How do I value stocks and shares?
You do not have to get a professional valuation for quoted stocks and shares. You can value shares quoted on the London Stock Exchange by finding the price of the shares in a newspaper. The Financial Times has the most comprehensive listings and may be available in your local library. Alternatively, you can use the London Stock Exchange Historic Price Service. There is a charge for this service.
First of all, make a list of all the shares, including the name, nominal value and type of shares - for example, 'A N Other Plc 10p ordinary shares'. Then, if you are using a newspaper, find the shareholding and write down the price given for each shareholding. To find out the value of the shares, multiply the number of shares by the price given.
So, if the deceased held 1,250 shares and the price was 1093½p, the value for the holding is £13,668.75.
Sometimes, for unit trusts, the newspaper may show two prices, take the lower one.
You should take the value of the shares on the day the person died - remember that a newspaper printed on the day the deceased died will have share prices for the day before.
What is the 'quarter-up' price?
If you use the Stock Exchange historic prices service, the Stock Exchange will tell you what the end of day quotation was for each of shares. The price will appear as a range such as 1091 - 1101p. To work out the value of the shares, you need to work out the 'quarter-up' price. This is the lower price, plus one quarter of the difference between the two prices. So, in this example, the price would be 1091p plus one quarter of 10p or 2½p. The price for the shares would be 1093½p.
What does 'xd' mean?
If a dividend was due when the deceased died, the shares will be marked 'xd'. Such a marking indicates that the dividend will be paid to the deceased's estate and you will need to include a value in the estate. Usually, the dividend will be paid to the estate before you need to apply for a grant, in which case you should add the net value of the dividend to the value of the shares and put the total value on the form.
To work out the value of the dividend, multiply the number of shares by the dividend per share. Sometimes the dividend may be given as a percentage, say 2.6%. Where this is the case, you can work out the dividend by finding out the percentage of the nominal value of the stock. So if the deceased had owned £400 of loan stock, the dividend would be 2.6% of £400 or £10.40.
What if the deceased died on a day the stock exchange was closed?
If the deceased died on a day when the Stock Exchange was closed take the price for either the next or last day when the Stock Exchange was open, whichever is the lower. For example, if the person died on a Sunday you can take the price for either the Monday after or the Friday before.
What about shares in a private company which are not quoted on the stock exchange?
For private company shares, you should give the open market value of the shares. You may need to contact the company's secretary or accountant to get this value. You should not include just the nominal value of such shares - for example the nominal value for 1,000 £1 ordinary shares is £1,000 – unless that genuinely reflects the open market value of the shares.
How do I value household and personal goods?
The term 'household and personal goods' means things such as furniture, pictures, paintings, china, TV, audio and video equipment, cameras, jewellery, cars, caravans, boats, antiques, stamp collections and so on. You do not have to get a professional valuation, although it might worth doing so if you think any items may be worth more than £500, or for items specifically mentioned in the will.
If you estimate the value, remember to use the open market value not an insurance or replacement value. A valuation 'for insurance', although a good place to start, may be the cost to replace the items and not necessarily a realistic price for which the items might be sold. The insurance value is often higher than the price you might reasonably expect to get for an item if you sold it on the open market.
A realistic price is likely to be the value the item might fetch if sold at auction, or through the local paper, or even at a car boot sale.
What value should I use?
You should use the open market value for the deceased’s home and any other land and buildings the deceased owned.
Do I have to get a professional valuation?
You do not have to get the property professionally valued, but you must take all reasonable steps to put a value on the property. Advertisements in the local estate agents and newspapers for properties that are very similar to the deceased's property may help you to make a realistic estimate of the value.
What about the condition of the property?
You should take account of the state of repair of the property (which may decrease its value). But you must also take account of any features that might make it attractive to a builder or developer, such as large gardens, or access to other land that is suitable for development (which may increase its value).
What if I find there is a range of values for the property?
If you come to a range of values for the property, it is probably best to adopt a value that is somewhere in between the highest and lowest values that you have got.
What if I find out later that the property is worth more than my initial estimate?
If, having arrived at your figure and before you apply for a grant, you find out about other information that casts doubt on your estimate, you must reconsider it. For example, if you have estimated that the property was worth £150,000, but when you try to sell the property you market it at £170,000 and receive some offers in that figure or more, it suggests that the open market value for the property may be more like £170,000. We recommend that you do reconsider your figure, taking into account such things as the length of time since the death and movements in the property market and, if necessary, change your figure.
What about other land and building besides the deceased’s home?
You should include the open market value for any other land and buildings that was owned by the deceased. This will include:
· farms
· business property, for example a hotel, shop, factory etc,
· timber and woodlands,
· other land and buildings such as lock-up garages, redundant or derelict land, quarries, airfields etc, and
· other rights that attach to land such as fishing or shooting rights.
· You should value the property as we explained above, although it is more likely you may need professional advice if the estate contains this sort of land. Write the address or location of the property in the space provided.
How do you value the right to live in a house?
It is very common for a married couple or civil partners to own their house jointly. Usually, they own their house as joint tenants and on the death of the first to die; their share passes automatically to the survivor, so that when the survivor dies, the whole property is part of their estate.
If, however, a married couple or civil partners own their house as tenants-in-common, the first to die can say what is happen to their share of the property in their Will. The Will might say something along the lines that "….while my husband/wife/civil partner remains alive and desires to reside in the property and keeps the same in good repair and insured to its full value with insurers approved by my trustees and pays all rates, outgoings etc my trustees shall not make any objection to such residence and shall not disturb or restrict it in any way and shall not take any steps to enforce the trust for sale or to realise (sell) any share therein or to obtain any rent or profit from the property…".
On the survivor's death, the property passes on to someone else: usually a child.
So the surviving spouse or civil partner continues to live in the house, owning half of it in their own name and occupying the other half under the protection of the Will. Although the Will does not talk in terms of leaving the property in trust for the husband/wife/civil partner for life, the wording is such that, for inheritance tax, it has the same effect.
If you are dealing with the survivor's estate and they occupied their matrimonial or civil partnership home (or a property that replaced it) under such terms, you will need to treat the survivor's estate as if they were entitled to benefit from a trust.
The same rules about trusts apply. So an interest in the house is a 'trust' asset and the open market value of the house (or a share of the house) should be included as trust property.
If, within 7 years of their death, the survivor ceases to occupy the property, or the property is sold and not all the proceeds are reinvested in a replacement property, The survivor will be treated as making a transfer of the trust capital in which they ceased to benefit. You should include that value as a gift.
What value do I use?
You should include in the estate the net open market value of all the deceased's business interests.
Ideally, accounts for the business should be prepared at death and it will be total of the deceased's capital and current accounts that will be the starting point.
Remember, though, that the value for capital assets in accounts is usually the 'book' value, and this is often different from the open market value that is required for inheritance tax.
Where necessary, you should increase (or decrease) the value of the business interests that is shown in the accounts to reflect any adjustments that are necessary through replacing the 'book' value with the open market value.
What if the deceased was a Lloyds Underwriter?
If the deceased was an Underwriter at Lloyds, you should include their business portfolio of shares as an interest in a business.
How do I value money owed to the deceased?
What kind of things should I include?
You should include as assets of the deceased’s estate all kinds of money and debts owed to the deceased at the date of death.
Examples are:
· money which the deceased had lent to someone else and which had not been repaid at the date of death,
· money which the deceased had lent to trustees linked to a life insurance policy held in trust,
· money for which the deceased held a promissory note or 'IOU',
· money which the deceased had lent to someone and which is secured by a mortgage over property,
· money owing to the deceased from a director's loan account or current account with a company
What value should I use?
You should include the face value of the loan, after taking off any repayments that had been made.
How do I value a share in joint property?
How do I value a share in land and buildings
Bank and building society accounts, stocks and shares and freehold and leasehold property are the assets most usually owned in joint names. If the deceased owned any assets jointly as with another person or people, you will need to include a value for the deceased's share of the assets in the estate.
Valuing a share in land and buildings
If the deceased owned land or buildings with other people, you should start by working out the value of the deceased's share.
If the other joint owner is not the deceased’s spouse or civil partner, you can reduce the value of the deceased’s share by 10%. But if the land or buildings is wholly owned by husband and wife or civil partners, this is known as related property and special rules apply. In that situation you should not reduce the deceased's share by 10%.
Valuing joint insurance policies
If the deceased owned an insurance policy jointly with someone else, you should include the deceased's share of the policy as a joint asset. If the policy is known as "joint life and survivor" policy, you should still include the deceased's share of the policy. The insurance company should be able to give you an estimate for the value of the whole policy at the date of death, so you can work out the value of the deceased's share.
Valuing joint bank accounts
You should include the deceased share of a joint bank account by reference to the amount of money the deceased provided. If the bank account is in joint names for convenience only and the deceased provided all the money in it, you should include the whole of the balance in the account at the date of death.
If the deceased did not provide all the money, you should only include the share of the account that the deceased did provide.
How do I value National Savings Investments?
You can find out the value of all National Savings investments by sending off form NSA 904 which you can get from the Post Office.
How do I value bank and building society accounts?
The bank or building society will be able to tell you how much was in each account when the deceased died and how much interest was due, but not paid, up to the date of death.
How do I value travellers' cheques?
Sterling travellers' cheques should be included as capital at face value. If the travellers' cheques are in one of the major foreign currencies, you should convert them to sterling using the closing mid-price at the date of death from the ‘Pound Spot Forward against the Pound' table in the Financial Times. Otherwise convert them at the rate shown in the 'FT guide to World Currencies' which is published every week in the Financial Times on Monday.
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