My family was forward thinking and took as many steps as they could to reduce the inheritance tax bill before my parents passed away.
We are now facing a confusing probate process and want to know if there is anything else we can do to limit our tax burden?
There are several ways to lower your estate tax bill once the probate process has begun
Myra Butterworth, MailOnline property expert, replies: Although steps may have been taken while your parents were still alive to minimize their estate tax bill, such as passing on wealth so that it eventually becomes exempt using the seven-year rule, there are yet ways to potentially cut thousands of dollars off a tax bill during the probate process.
These approaches use accepted discounts offered by HMRC. We spoke to an expert, who highlighted seven ways to lower your tax bill once the probate process begins.
We consider how it is possible to reduce the declared value of assets, especially property
Nick Green, of the CoreProp group, replies: It is well documented how to reduce or even avoid inheritance tax before the death of a loved one, and people should do everything possible to prepare for it.
However, unfortunately, there isn’t as much advice once your loved one has passed away. During the confusing and often tedious probate process, there are huge savings to be made.
The amount of inheritance tax paid depends on the value of the deceased’s estate, which is calculated based on their assets (i.e. the sum of property, money, shares, contents, etc. .) minus debts. The figure is then taxed at 40 per cent after any deductions.
You can, however, reduce the declared value of assets, especially property, which is usually the most valuable part of any estate.
At such an emotional time, it’s easy to overlook the fine print of HMRC when assessing the value of an estate.
HMRC strongly advises executors or administrators to appoint a qualified independent appraiser to assess the value of the property for probate.
The professional valuation report – known as the “RICS Red Book” report – should incorporate answers to all of the following critical questions, which could help reduce the tax bill:
1) On what date do you value the property?
The valuation of the property for probate is set at the date of death, it is important to remember this. Market fluctuations (such as rising energy costs, Covid 19 shutdowns, etc.) severely affect the real estate market and often lead to dramatic moves and loss of confidence. For example, the real estate market was estimated to have fallen by around 20% in April 2020 during the most uncertain Covid times. The value of the property on the date of death may be well below the current market value or any realtor’s appraisal.
2) Is the property rented?
If the property is occupied by typical Assured Shorthold tenants, usually for a period of one year or less, HMRC will usually accept a 5% discount on the total value of the property.
If the tenant is on a commercial lease or has a longer fixed-term lease, the deductions can be higher than 5%. Many areas miss this easy concession.
3) Major defects or missing safety certificates?
If at the date of death the property suffered from defects such as subsidence or high humidity, even if these defects have now been repaired, these elements must be taken into account when assessing the value.
And condominiums may not have their EWS1 (External Wall Safety) forms that declare their siding fire safe.
All of these major issues can mean that it is not possible to get a mortgage on the property and therefore the declared value should be much lower.
Inheritance tax: the basics
Inheritance tax is charged at 40% on top of the tax deductions that everyone benefits from on their estate, called zero-rate brackets.
This is made up of the standard zero rate bracket of £325,000 per person – any unused element of which can be passed on to a spouse or civil partner, doubling their allowance to £650,000.
Under current rules, if you give a primary family home to direct descendants, a total of £500,000 each, or £1million combined, is the maximum value a married couple or civil partner’s estate can reach before he begins to be liable for the 40% estate tax rate.
In total, this means spouse owners can benefit from a £1million buffer before their estate incurs inheritance tax.
But if the total value of an estate is worth £2m or more, the additional principal residence’s zero rate band will be reduced to £1 for every £2m above the £2m threshold. pounds, which means that some higher value areas will eventually lose the house edge altogether. .
The other key estate tax thing to remember is the seven-year rule.
This applies to gifts that exceed set limits – for example giving more than £3,000 in gifts a year – and are known as potentially exempt transfers.
Such a gift will only be exempt from inheritance tax if you survive more than seven years after making it.
If someone dies between the third and seventh year of a gift, inheritance tax decreases on a sliding scale.
4) Was the property jointly owned on the date of death?
Section 18 of the IHT Handbook allows an additional deduction of 15% of the deceased’s share of the property if, at the valuation date, a co-owner still occupied the property as their principal residence.
If the co-owner(s) did not occupy the property as their principal residence, the discount can still reach 10%.
5) Is the property owned by a company?
Again, a discount on the deceased’s share must be applied, up to a level of 20 percent depending on whether the deceased owned minority or majority shares.
6) Are there neighborhood problems?
For example, a neighbor’s planning request can have a negative effect on the value of a property.
Additionally, there may be macro changes to the location, such as schools closing or major streets changing. All of these factors could affect the attractiveness of the property.
7) Is the property in a block of flats?
Often the landlord or managing agent will be preparing major works to the common areas of the block, including exterior fabric, and a large additional bill will be sent to tenants.
Often, if such work is in progress or about to be completed, these potential additional expenses must be taken into account when evaluating the property for probate.