Probate is a legal process that has to be carried out at what can be a very distressing time. It can be tempting to simply “get it done” as quickly as possible. This offer the best chance to close the chapter and carry on with life. But it is important to take the time to get it right. Short cuts that seem to be a good idea at the time can come back to bite you later. Often in an unpleasant way.
The difference between Probate Value and Market Value is:
- A Probate Value has been obtained in a way acceptable to HMRC for establishing what inheritance tax is due.
- Market value is often a broader estimate gained by reference to other sales of similar property or possessions.
Often the market value is fine and is a true indication of what that item is worth. The key, however, is proving that to the tax man. Get this wrong and you could have the headache of a battle with HMRC long after you hoped the matter was settled.
A good starting place is to get the terminology right and speak the tax man’s language. We refer usually to “probate valuations”, but the actual phrasing is “a Valuation for Inheritance Tax purposes to gain probate”. Anything else on the documents you submit could lead to the numbers being challenged from the outset.
Property is usually the most valuable asset a person will leave. Unfortuanately it can also be the trickiest to get an accurate valuation for. Many estate agents advertise their service as carrying out “probate valuations”. However, you really do need to check that they are actually meeting the standards required by HMRC.
Establishing an accurate market value should be done based on the idea that:
- The sale is carried out on specific date, and:
- The ‘seller’ and ‘buyer’ are prudent and willing parties to the transaction.
- The property is offered for sale on the open market by whatever method of sale would achieve the best price.
- There are adequate publicity and advertisements for the sale to take place.
- The valuation should take account of the fact that there could be a “special purchaser”, i.e. someone that is willing to pay more than the market value because they have a special interest in the sale.
Taking this approach can result in a valuation quite different from an estate agent looking around for ten minutes and coming up with their best guess.
The Property Valuation Report
The report should contain enough information for HMRC to see that the valuation has been carried out properly and do some cross checking if they wanted to. This would include:
- Age of the property
- Type and style of construction
- State of repair
- Special features
- Local restrictions
- Ongoing disputes
The state of repair can actually be stated in quite general terms as this is for valuation and is not a full survey.
The reason to be careful here is that if the valuation is too low, and that comes to light later, HMRC will re-assess the estate and work out if any/more Inheritance Tax is due. If they consider the valuation was deliberately kept low to avoid paying the right amount of tax, it can become difficult for the executor, however innocent they may have been of the mistake.
The key point is to get the property valuation done by a qualified professional who will spend the time and effort to apply the approach above and had the expertise to know what that property would fetch if sold.
It Pays to be Careful
If HMRC suspect the valuation is a “guesstimate”, they will investigate. The tax man has the power to impose a fine of up to 100% of any additional tax found to be owed. Recent figures show that additional payments are normally in excess of £20,000 for estates that have been valued incorrectly. Executors can even be held personally liable if the estate is hit with additional penalties, as it is their job to take steps to ensure that the correct information is supplied to HMRC.
Compared to this, the cost of a professionally carried out property valuation (normally £200 to £300 or so) is more than reasonable. The fact that the valuation will be on paperwork from a qualified professional is also usually enough to satisfy the tax office.
The key point here is that a valuation for probate is:
– what you could sell an item for on the open market, quickly, and without travelling too far.
This may vary wildly from the value that a person placed on an item and specified in their will or on insurance documents. Depending on when the will/insurance was written, the market value for any particular item could have changed significantly.
For a majority of items, the market value will be less than it could be replaced for with a new item. Replacement value is often the insurance value but will not reflect its actual market value. The cost price of an item is also a poor guide unless it really is brand new. Depending on what the item is, it could be worth a lot less. Sometimes it can go the other way and be a lot more than the price it was purchased for.
Often the only way to get anything like a true probate valuation is to engage a professional specialist. This is especially true for antique or collectible items. You could engage an auctioneer, but their expertise is often limited to antiques. House clearance companies and probate valuers are often best placed to do the work. They have the expertise to value a wide range of personal possessions. They also have the contacts to bring in other specialists as needed for things like art and antique collections.
When Estimates Are OK for Probate Value
That said, HMRC will accept estimates as to the second-hand value of lower value items. This would include things like:
- Kitchen utensils, pots and pans,
- Small electronics
It’s for items considered worth more than £1500 that they do expect a professional valuation.
The problem comes when looking at something like a set of medals for an old war hero. Most of us would have no idea what they would be worth on the open market. It’s probably not worth risking a “guesstimate” and possibly being caught out later. It is still worth including anything you’re unsure about in a professional valuation.
A Reasonable Approach
There is an occasion when a little leeway is avialable. If executors are getting a probate valuation to apply for probate before they have physical access to the items. In that case best estimates of value can be made as the guiding principle here is the maxim of:
” a layman’s opinion of – is this worth enough to be worth taking to someone who knows what it is?”
An example would be a box of jewellery with no information about any of the items in the box. If there were no diamonds, pearls or large gemstones it would not be unreasonable to assume there were no particularly valuable items in the box and value accordingly. It may later came to light one of the rings was in fact a rare piece by top maker. In this case a revised valuation would have to be submitted. HMRC would be unlikely to view this particular occurrence in a bad light.
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