Protecting Your wealth

by admin on July 7th, 2010

Valuing an estate for inheritance tax

Helping you protect your wealth is an important part of what we do, and one thing is certain, you need to plan to protect your wealth from a potential Inheritance Tax (IHT) liability. Benjamin Franklin once said that ‘nothing is certain but death and taxes’, and thanks to IHT, they’re not only certain, they’re intrinsically linked. Once only the domain of the very wealthy, the wide-scale increase in home ownership and rising property values over the past decade have pushed many estates over the IHT threshold. However, in recent years we have also seen property price reductions.

IHT applies to your entire worldwide estate, including your property, savings, car, furniture and personal effects. You should also consider all of your investments, pensions and life insurance policies and ensure that life polices are held in an appropriate trust so they do not add to the value of your estate.

When valuing a deceased person’s estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.

Valuing the deceased person’s estate is one of the first things you need to do as the personal representative. You won’t normally be able to take over management of their estate (called ‘applying for probate’ or sometimes ‘applying for a grant of representation/confirmation’) until all or some of any IHT that is due has been paid.

Valuation process

This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

– their share of any assets that they owned jointly with someone else – for example, a house that they owned with their partner
– any assets that are held in a trust, from which they had the right to benefit
– any assets that they had given away, but in which they kept an interest – for instance, if they gave a house to their children but still lived in it rent-free
– certain assets that they gave away within the last seven years

Next, from the total value above, deduct everything that the deceased person owed, for example:

– any outstanding mortgages or other loans
– unpaid bills
– funeral expenses

If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.
The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of the estate is taxed at 40 per cent is £325,000 for the 2010/11 tax year.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

From → Financial News

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