How to Report the Value of an Estate to HMRC

When someone dies, you need to report the value of their estate to HMRC to determine whether Inheritance Tax is due. The process involves calculating the estate's total value, deducting eligible reliefs and exemptions, and comparing what remains against the available tax-free threshold. This article walks you through each step of valuing an estate and understanding which parts are liable for tax.

Working Out the Estate Value

Calculating the value of an estate follows a specific sequence of steps. Start by determining the market value of all assets the deceased owned, then work through the following stages:

Step 1: Calculate the gross value

Add up the market value of everything the deceased owned—property, savings, investments, possessions, and any other assets.

Step 2: Work out the net value

Subtract any debts from the gross value. This includes mortgages, loans, and other money owed. The result is the net value of the estate.

Step 3: Deduct applicable reliefs

Certain types of property qualify for Inheritance Tax relief, which can reduce their taxable value—often by 100%. The main reliefs apply to agricultural assets and businesses or business assets. Apply these reliefs and use the reduced values in your calculations.

Step 4: Remove exempt assets

Take off the value of any assets left to a spouse or civil partner, as these are exempt from Inheritance Tax. Assets left to certain charities are also exempt. What remains after this step is the taxable value of the estate (known as the 'chargeable estate').

Step 5: Calculate the available tax-free threshold

Start with the basic Inheritance Tax threshold of £325,000. Add any unused basic threshold transferred from a late spouse or civil partner's estate. Then subtract the value of any gifts the deceased made within the 7 years before death—if these gifts exceed £325,000, there will be Inheritance Tax to pay on them separately.

Next, add the residence nil rate band (RNRB) of £175,000 if the estate qualifies. You can also add any unused RNRB transferred from a late spouse or civil partner. Use the RNRB calculator on GOV.UK to work out the exact amount you can claim.

Step 6: Compare and calculate tax

Compare the chargeable estate (from step 4) with the available threshold (from step 5). If the chargeable estate is less than the threshold, no Inheritance Tax is due. If it exceeds the threshold, you pay Inheritance Tax at 40% on the amount above the threshold (or 36% if more than 10% of the estate goes to charity).

Once you've completed these calculations, check whether you need to send full details to HMRC based on the type of estate.

Understanding Reliefs and Exemptions

Agricultural and business reliefs

Agricultural property and business assets can qualify for relief that reduces their value for Inheritance Tax purposes, frequently by 100%. When reporting to HMRC, include only the reduced value after applying the relief.

However, if an asset that qualifies for relief is left to an exempt beneficiary (such as a charity), the benefit of the relief may be lost because the charity exemption applies instead. HMRC may need to apply "interaction rules" to ensure a fair calculation in these situations.

Interaction rules

These rules become relevant when an estate qualifies for Agricultural or Business Relief and the will includes at least one specific gift of property, plus property subject to tax relief that isn't specifically gifted, and some exempt assets. Because these calculations can become very complex, you may want to consult a professional tax specialist.

Gifts Left 'Free of Tax'

Some wills specify that a beneficiary should receive a certain amount "free of tax," meaning the estate pays any Inheritance Tax due rather than the beneficiary. This creates certainty about the amount the beneficiary receives.

When gifts are left tax-free and only part of the remaining estate (the 'residue') is exempt from Inheritance Tax, HMRC applies a calculation called "grossing up" to work out the taxable value. The calculation differs depending on whether the estate pays tax at 40% or the reduced 36% rate (which applies when more than 10% of the estate goes to charity).

If the estate also includes lifetime gifts made within seven years of death, the grossing up calculation becomes more complex. HMRC provides Inheritance Tax grossing up calculators to help with these situations.

What Happens Next

After completing your calculations and confirming you've applied all relevant reliefs, exemptions, and thresholds, you need to determine what information HMRC requires. The forms you complete and the level of detail you must provide depend on the type and value of the estate.

Make sure you've double-checked that all reliefs and exemptions have been correctly calculated and applied to the net value of the estate before submitting your report to HMRC.

Sources

• Work out what part of your estate pays Inheritance Tax
• Agricultural Relief on Inheritance Tax
• Business Relief for Inheritance Tax
• Transferring unused basic threshold for Inheritance Tax
• Work out Inheritance Tax due on gifts
• Check if you can get an additional Inheritance Tax threshold
• Inheritance Tax: transfer of threshold
• Inheritance Tax: gifts and exemptions
• Calculate additional Inheritance Tax threshold
• Inheritance Tax grossing up calculators
• Valuing the estate of someone who died
• Get help from HMRC with tax

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.