My family was forward-thinking and took all the steps necessary to decrease my inheritance tax bill prior to my parents’ passing.
Now we are faced with confusing probate procedures and would like to find out if there’s anything that can be done to reduce our tax burden.
After the probate process is over, there are many ways you can reduce your inheritance tax bill.
MailOnline Property expert Myra Butterworth replies: Although you may not have taken any steps to minimize your inheritance tax bill while your parents still lived, like passing wealth on so it becomes exempt under the seven year rule, there are still many ways that tax bills can be shaved during probate.
This approach uses accepted discounts provided by HMRC. A tax expert spoke with us and suggested seven methods to lower your tax bills once probate has started.
This article will show you how to decrease the asset’s declared value, especially property.
Nick Green from The CoreProp Group responds:There are many ways to lower or avoid inheritance taxes before the death of a family member. People should do everything they can to make this happen.
Unfortunately, the advice you receive after the death of a loved one will not be as helpful. There are many ways to save money during the often confusing probate process.
The amount of inheritance tax paid depends on the value of the deceased’s estate, which is worked out based on their assets (i.e sum of property, cash, shares, contents etc) minus any debts. This figure then gets taxed at 40% after allowances.
However, you can lower the value of the assets. This is especially true for the property which is usually the most valuable asset in an estate.
At such an emotive time it is easy to overlook HMRC’s small print when assessing an estate’s value.
HMRC advises executors and administrators to hire an independent qualified valuer for the valuation of any property that is being probated.
The professional valuation report – known as an ‘RICS Red Book’ report – should incorporate answers to all the following critical questions, which could help lower the tax bill:
1) When are you going to value your property?
It is crucial to note that probate valuations are based on the date of death. Market movements (such rising energy costs and Covid 19 locksdowns) have an adverse effect on the property markets and can often cause dramatic changes and loss of faith. In April 2020, during Covid’s most unpredictable periods, the market for property was predicted to fall by 20 percent. The value of the property at the date of death may be much lower than the current market value or any estate agent’s appraisal.
2) Does the property have a tenant?
HMRC will usually give a 5 percent discount if the property is occupied for a typical term of Assured Shorthold Tenants. This typically applies to properties whose terms are less than one year.
The deductions may be higher if the tenant has a long-term fixed-term tenancy or is on a commercial lease. This concession is often overlooked by estates.
(3) Any safety certificates missing or with major defects?
These matters must be taken into consideration when valuing the property if it was in poor condition at the time of the death.
Properties in flat blocks may not be required to have EWS1 forms (External Wall Safety), which indicates that their cladding is fire-safe.
All of these issues could make it difficult to get a loan on your property.
4) Did the property have co-ownership at the time the death occurred?
Section 18 of the IHT Manual permits a further 15 per cent deduction of the deceased’s share of the property, if at the valuation date, any co-owner remained in occupation of the property as their main residence.
Even if the owner(s) of the property was not their primary residence, they can get a discount up to 10%
5) Does the company own the property?
Again, a discount on the deceased’s share should be applied, up to a level of 20 per cent depending on whether the deceased owned minority shares or majority shares.
6) Is there any problem with neighbours?
For example, a neighbour’s planning application can have an adverse effect on the value of a property.
There may also be macro changes, like schools closing or streets being changed. This could affect the value of your property.
7) Are the flats in which the property is located?
Often, the managing agent and the freeholder are in the process or preparing for major repairs to block common areas. An additional large invoice is sent to leaseholders.
These additional expenses can often be overlooked when the property is valued for probate.