HMRC Valuation for Inheritance Tax: What You Need to Know?
Do you know how HMRC values assets for Inheritance Tax? HMRC (Her Majesty’s Revenue and Customs) values Inheritance Tax by assessing the worth of a deceased person’s assets. This includes everything they owned, like property, investments, and possessions. The tax is then calculated based on this total value. Understanding how HMRC determines these values is crucial for effective inheritance planning.
Let’s discuss the steps involved and how to manage the valuation for Inheritance Tax effectively.
HMRC collected a record £6.1bn in inheritance tax in 2021–22, a 14% increase from the previous year 1. The average inheritance tax bill has increased by £7,000 per estate to £216,000.
When someone in the UK dies, the money, property, and possessions they leave behind make up their “estate.” The government may tax this estate, known as “inheritance tax.” The responsibility to pay this tax falls on the estate itself. The executor or administrator, handling the deceased person’s properties, calculates the amount of tax owed and ensures its payment to the government.
The amount of tax depends on the estate’s total value, with certain allowances and exemptions considered. HM Revenue & Customs (HMRC) assesses the value and ensures the correct amount of tax.
Who has to Pay Inheritance Tax?
In reality, there is an inheritance tax threshold, and the properties that fall below the limit need not pay the inheritance tax. The individual is exempted from paying tax if:
- The value of the estate is below £325,000.
OR
2. Any amount above £325,000 goes to a spouse, civil partner, charity, or community amateur sports club.
If neither applies, the estate is taxable at 40% on anything above the £325,000 threshold (or 36% if you leave at least 10% of the value after any deductions to a charity in your will). Remember that the threshold limit of £325,000 can vary based on unique situations.
How do you apply HMRC Valuation for Inheritance Tax?
If the deceased person’s estate does not fall under the threshold limit, below are the steps to follow to apply for HMRC valuation for Inheritance Tax.
Step 1: Identify the executor (Usually mentioned in the deceased person’s will). If there is no will, an administrator, often a close family member, must be appointed.
Step 2: Before applying for inheritance tax, you need to register the death. The local register office usually handles this.
Step 3: Collect information about the deceased’s assets, liabilities, and estate. This may include property, investments, bank accounts, debts, and other relevant details.
Step 4: Determine the value of the deceased’s estate. This involves getting valuations for all the assets, including property, investments, and personal belongings.
Step 5: Inheritance tax forms must be completed and submitted to HMRC. The forms required will depend on the complexity of the estate. The main form is typically the IHT400, but simpler estates may use the IHT205.
Step 6: For certain assets, it might be necessary to get professional valuations. For example, you may need a property valuation or valuations for specific items of significant value. (Example: Arts & Collectibles, Company shares, Intellectual Property, etc,)
Step 7: Send the completed inheritance tax forms, along with any supporting documents and valuations, to HMRC. You may need to include a check for the amount of tax owed or a statement explaining how and when to pay.
Step 8: Pay any inheritance tax owed to HMRC. This is typically due within six months of the person’s death. If the estate includes property, paying the tax in installments over ten years may be possible.
Once HMRC is satisfied with the information provided, they will issue a probate, allowing the executor to distribute the assets according to the will.
Step 9: After receiving probate, the executor can distribute the assets to the beneficiaries according to the terms of the will.
It’s important to note that dealing with inheritance tax can be complex. It’s advisable to seek professional advice, such as from a tax advisor or legal expert, to ensure meeting all legal requirements and paying the correct amount of tax.
What are the exemptions from the inheritance tax value?
There are exception scenarios where Inheritance Tax value can be reduced or avoided. Below are some of the exceptions an individual can make to get leverage on IHT.
Giving Away Gifts:
Money or gifts given away during the deceased person’s lifetime can impact how much inheritance tax to pay. In simple terms, gifts given more than seven years before the death are not liable for Inheritance Tax. If the gift is given in the seven years before a person’s death, this will count towards the Inheritance Tax allowance.
Even if the gifts given seven years before the death amount to less than £325,000, they can still impact how much inheritance tax to pay on the rest of the estate.If the gift amount exceeds £325,000, the individual should pay inheritance tax on the amount above the threshold, up to a maximum of 40%.
Tax-Free Gifts:
There are a few other Gifting exemptions apart from those falling under the seven-year rule:
Each year, you can give gifts up to £3,000 to as many people as you want without paying tax. This is called your ‘annual exemption.’ You can also make unlimited gifts of up to £250 to different people, even if you haven’t already used the £3,000 allowance on the same person.
If you don’t use up your £3,000 allowance in a year, you can carry it forward to the next year, but only for that year.
Put Assets in a trust:
If you place assets within a trust, they will not form part of an inheritance tax. Place the asset in a trust for the benefit of your children, which could be useful when they are 18.
If you place assets in an “Interest in possession trust,” you can still take income from the assets. Though it is liable for Income Tax, it can avoid becoming a part of Inheritance Tax.
Make use of Property Allowance:
If you leave your home to your children or grandchildren in your will, a special allowance will apply that increases your tax-free limit by £175,000 in the current tax year (2022–23), making it a total of £500,000 that you can pass on without paying Inheritance Tax.
For a married couple leaving their home to their children or grandchildren, combining both their allowance values will apply, which means they can pass on a total estate of up to £1,000,000 without any Inheritance Tax.
Take out Life Insurance:
Taking out a life insurance policy can help reduce or avoid inheritance tax. When you have a life insurance policy and name beneficiaries, the money from the policy is usually exempt from inheritance tax if it’s written in trust. This means the payout isn’t part of your estate for tax purposes.
Your beneficiaries can then use the insurance money to cover any inheritance tax that might apply to the rest of your estate. It’s a way to provide financial support to your loved ones without them having to worry about a big tax bill. Working with a financial advisor is a good idea to ensure you set things up correctly based on the current rules.
Get your HMRC Valuation Guidance from Eqvista!
HMRC Valuation is important to know the accuracy of tax to pay as under or lower payment will have unnecessary penalties. Hiring an Expert valuation firm will greatly reduce your risk exposure.
At Eqvista, we provide HMRC valuation services for businesses and individuals. We offer accurate, rules-compliant, and cost-effective. Contact us to know more.
