Valuing an Estate and Paying Inheritance Tax

Valuing an estate and paying inheritance tax can be a complex and time-consuming process, especially for those who are unfamiliar with the steps involved.

There are several important tasks that need to be completed in order to properly value an estate and ensure that any required inheritance tax payments are made on time.

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By this point you should have a comprehensive list of all the assets and debts included in the estate. Our Finding and Valuing a Deceased Person’s Assets article for more information.

Estimate the Estate’s Value

After you have compiled a list of the assets you need to create an estimate of the value of the estate so that you know if you need to pay inheritance tax.

If you determine that you do need to pay inheritance tax, or that you are close to the threshold over which you would pay inheritance tax, then you will need to compile a detailed valuation of the estate and pay any inheritance tax due within the first 6 months following the death. If you miss this deadline, you will be charged interest on any tax due, therefore it’s very important to get a good estimate of the estate’s value as soon as possible.

Once you know if you need to pay inheritance tax, apply for an inheritance tax code, even if you don’t know how much will be owed, as the application process can take more than 3 weeks to process and could delay your ability to pay the tax within the timeframe.

The government have an estimation tool to help you figure out if you need to pay inheritance tax: https://www.tax.service.gov.uk/guidance/check-inheritance-tax-due/

For assets which change value, you need to know the market value on the date they died. If you sell parts of the estate and they sell for more than your estimate, then the government may believe that you’ve underpaid inheritance tax, which might mean the government contacts you asking for justification as to why you’ve valued it ‘incorrectly’ in your estimate.

You will therefore need to keep records and evidence, including valuations by estate agents, up to 20 years after the Inheritance Tax is paid, as HM Revenue and Customs (HMRC) can ask to see your records during this timeframe.

The deceased has left a spouse or civil partner. What does that mean for the estate’s value and inheritance tax?

Where assets are jointly owned by the deceased and someone who is still alive, you will need to determine the value that was owned by the deceased.

So if Dave and Anne jointly owned £10,000 in savings and Dave died, you would need to document the £5,000 which would be Dave’s share of the account.

The exception to this is if the owners of the account have filed Income Tax Form 17, which allows them to declare a different proportion of ownership, so in the above example, Dave might have used this form to declare ownership of 75% of the account, £7,500, so that he could pay more income tax than Anne.

There is no inheritance tax to pay on anything the deceased left to their spouse or civil partner, so if the deceased left everything to them, then there will be no inheritance tax to pay. You may still need to value the estate if you need to apply for probate in order to ask 3rd parties to transfer assets to the surviving spouse or civil partner, or if the estate is worth more than £1 million.

Gifts: do I have to pay inheritance tax?

The rules around gifts given can be very complicated, which is why we advise that you find out about and log all information surrounding every gift the deceased gave in the 7 years before their death, even if they are likely to be exempt.

That way you have evidence of their exemption status if HMRC challenged you on this in the future.

The main gift exemption is for gifts that were given 7 or more years before the date of death.

However, there are other exemptions for gifts given within the 7 year timeframe.

For gifts given within 7 years preceding the death:

• Gifts to spouses or civil partners who live in the UK permanently
• Annual Exemption: £3000 per annum threshold across all gifts over £250. You can carry any unused annual exemption forward to the next tax year - but only for one tax year.
• Small Gift Allowance: You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
• Birthday or Christmas gifts you give from your regular income (i.e. not from your savings)
• Gifts for weddings:
  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to any other person
• If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance
• Regular payments to support someone’s living costs as long as you can afford them from your regular income
• Gifts to heritage bodies and charities, as long as they are regulated and ‘managed by fit and proper persons’
• Gifts to political parties as long as they had at least 2 members elected to the House of Commons or one elected member and received at least 150,000 votes

Gifts that are not exempt:

• Gifts that were given within the 7 years before the date of death which breached the above thresholds
• Gifts that were given but were still used for free by the deceased in the 7 years before they died, e.g. if they gave away a caravan and then occasionally borrowed it for a holiday. This is called a ‘gift with reservation of benefit,’ as they could use the gift for free. If they had paid to use the caravan, this would be an outright gift.
  • The exception to this is if the deceased had an unforeseen change of circumstances owing to old age or infirmity, which caused them to move into a property that they had given away and not intended to use.
• Assets which the deceased has given away but still received income from (e.g. stocks and shares) and had elected to pay inheritance tax on their income from these instead of the normal income tax.

Any gifts that are not exempt will be subject to inheritance tax, but the amount of tax varies depending on how long ago the gift was given.

If you are unsure if you owe inheritance tax on gifts

Please enter your number below to use our Free Probate Advice Service. Our team is available to assist you working out what tax you owe.

Paying Inheritance Tax

When do I need to pay Inheritance Tax?

In order to avoid paying any interest on inheritance tax, you will need to pay before the end of the 6th month following the date of death. For example, if the person died at any point in January, you must pay Inheritance Tax by 31 July. N.B: it can take 3 weeks or more to apply for an Inheritance Tax reference number, which you need before you can pay inheritance tax.

Probate will generally not be granted until the full amount of inheritance tax is paid, so you will need to pay it before you can distribute the estate according to the deceased’s wishes.

An exception to this may be if an annual payment plan is set up with HMRC, as you can then sell large items such as property in order to release the funds to pay back the IHT, however it is important to pay back as much as you can within the first 6 months in order to reduce any interest it would accrue with the government.

Tax Thresholds

The current threshold for paying inheritance tax is £325,000, however there are some other exemptions:

• If you pass a home on to a spouse or civil partner it will not be taxable.
• If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if you leave it to your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million
• If the deceased had a spouse or civil partner who predeceased them less than 2 years previously, and none of the predeceased’s £325,000 threshold was breached, then the threshold rises to £650,000 (£325,000 for each person).

How much is Inheritance Tax?

Inheritance Tax is 40% of anything which exceeds the inheritance tax threshold. For instance, if they left an estate that was worth £400,000 and the normal £325,000 threshold was applicable, then £75,000 would be taxable at 40%, leaving you with an inheritance tax bill of £30,000.

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if the deceased leaves 10% or more of the ‘net value’ to charity in their will (the net value is the estate’s total value minus any debts).

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill, and you may be able to claim Agricultural Relief if the estate includes farm or woodland, which may not be taxable.

For personalised info on your inheritance tax situation

Please enter your number below to use our Free Probate Advice Service. Our team is available to assist you and answer any questions you may have.

What happens if I miss the 6 month inheritance tax deadline?

HMRC will charge interest on any outstanding tax balance. The interest rates change erratically and sometimes frequently. In the tax year 2022-2023, the rate changed 8 times as the cost of living crisis caused inflation to shoot up, however between September 2009 and August 2016 it stayed the same. In the past 10 years, it has been as low as 2.6% and as high as 7% (at time of writing). This link will give you details of current and past interest rates.

It’s a good idea to make a payment as soon as you know that you will need to pay inheritance tax, even if you’re not sure what the exact tax amount is. This is known as a ‘payment on account’, and it will reduce the amount of interest you will have to pay if you don’t pay the rest of it off within the first 6 months following the date of death. If you overpay, then you will accrue interest on the amount you have paid, and this will be handed back to you after grant of probate is issued.

How to find the funds from the estate

In most cases, the funds can be taken from the estate. If the deceased had enough cash in a bank account, you can ask the bank to pay HMRC directly by sending them form IHT423 which will instruct them to pay HMRC. HMRC do not provide receipts of payment, but they will tell you when the full amount has been paid. Some banks may not release funds however, so here are some other ways you can find the funds.

With certain assets, HMRC will allow you to pay IHT in annual instalments, however you will still accrue interest on any tax not paid, even with an instalment plan agreed. The assets which allow for annual instalments are:

• Houses
• Shares and securities
• Unlisted shares and securities
• Business run for profit
• Gifts of the above asset types

Check the government’s website for a full list of which assets you can use for annual instalments and their rules. You will need to declare this on the IHT400 as part of reporting the estate’s value.

Other ways of paying inheritance tax

An executor can pay IHT to HMRC directly and claim it back from the estate once probate is granted.

Life insurance policies can sometimes be used to pay IHT, however this will depend on the terms of the policy and the length of time it takes for the policy provider to pay out. Check with the policy provider to see if this is an option.

Inheritance tax loans are available for those struggling to pay. The interest rates can be very high however, so if there are other ways to find the funds they may be preferable, even if you pay interest on the IHT with the government, as the government’s interest rate will probably be lower. It is important to weigh up your options carefully based on your situation.

I need help!

We understand that this can be a difficult and overwhelming process, and we want to ensure that you have the support and guidance you need.

Our team of experts can provide you with advice and assistance on finding and interpreting wills, as well as guidance on the distribution of assets and property.

To take advantage of our free probate advice service, simply enter your phone number below. Our team is available to assist you and answer any questions you may have. Don’t hesitate to reach out for help – we are here to support you every step of the way.