Learning Outcomes
After studying this article, you will be able to explain the legal requirements for valuing assets and liabilities in the context of grants of representation. You will understand how to determine the net estate for probate, apply the correct valuation principles to different asset types, identify deductible liabilities, and recognise the impact of these valuations on inheritance tax and estate administration. You will also be able to apply these rules to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the valuation of assets and liabilities when applying for a grant of representation. This includes the legal rules for determining the value of estate assets and debts, the order of payment of liabilities, and the consequences for inheritance tax and distribution to beneficiaries.
As you work through this article, focus your revision on:
- the legal definition and types of grants of representation (probate, administration)
- the rules for valuing assets in the estate (market value, date of death, special rules for certain assets)
- the identification and deduction of liabilities from the gross estate
- the impact of asset and liability valuation on inheritance tax calculations
- the order of payment of debts and liabilities in estate administration
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the general rule for valuing assets in a deceased’s estate for probate and inheritance tax purposes?
- Which liabilities can be deducted from the value of the estate when calculating inheritance tax?
- How are jointly owned assets treated for valuation in the estate?
- In what order must debts and liabilities be paid out of the estate?
Introduction
When a person dies, their estate must be administered by personal representatives (PRs) who are authorised by a grant of representation. Before assets can be collected and distributed, the PRs must value all assets and liabilities in the estate. Accurate valuation is essential for inheritance tax, payment of debts, and ensuring beneficiaries receive their correct entitlement. This article explains the legal rules for valuing assets and liabilities in the context of grants of representation, as required for SQE1.
Types of Grant of Representation
A grant of representation is the legal authority issued by the probate registry to administer a deceased person’s estate.
Key Term: grant of representation The legal document authorising personal representatives to collect, manage, and distribute a deceased person’s estate.
There are two main types:
- Grant of probate: Issued when there is a valid will and executors are appointed.
- Grant of letters of administration: Issued when there is no valid will or no executor able or willing to act.
The type of grant determines who is entitled to administer the estate but does not affect the valuation rules.
Valuation of Assets
All assets in the estate must be valued as at the date of death. The value of the estate is used to determine inheritance tax liability, the probate fee, and the amount available for distribution to beneficiaries.
Key Term: market value The price an asset might reasonably be expected to fetch if sold on the open market at the date of death.
General Rule
Assets are valued at their open market value at the date of death. This applies to all types of property unless a specific statutory rule applies.
Special Rules for Certain Assets
- Real property (land and buildings): Value is based on the price a willing buyer would pay at the date of death, ignoring any forced sale or special purchaser.
- Jointly owned property: The deceased’s share is valued as a proportion of the whole, but a discount may apply for minority interests in land (typically 10–15%) unless the co-owner is a spouse or civil partner.
- Quoted shares: Valued using the Stock Exchange price at the date of death, following HMRC’s published method.
- Unquoted shares and business interests: Require specialist valuation, considering factors such as earnings, assets, and control.
- Personal chattels: Items such as jewellery, art, and vehicles are valued at their second-hand sale price, not insurance or replacement value.
- Foreign assets: Valued in local currency and converted to sterling at the date of death.
Worked Example 1.1
A deceased owned a house (sole name), a joint bank account with her spouse, and a collection of paintings. How should these be valued for probate?
Answer: The house is valued at its open market value at the date of death. The deceased’s share of the joint bank account is included (usually 50% if two account holders, unless evidence shows otherwise). The paintings are valued at their likely sale price at auction or by private sale.
Valuation of Liabilities
Liabilities reduce the value of the estate for inheritance tax and probate purposes. Only certain debts can be deducted.
Key Term: deductible liability A debt or obligation that may be subtracted from the gross value of the estate when calculating inheritance tax and the net estate.
Deductible Liabilities
The following may generally be deducted:
- Funeral expenses (reasonable costs only)
- Debts incurred for full consideration (e.g., loans, credit cards, utility bills)
- Mortgages and secured loans (deducted from the value of the charged asset)
- Unpaid taxes and rates
- Legal and professional fees incurred before death
Non-Deductible Liabilities
Some debts cannot be deducted, including:
- Debts forgiven by the creditor
- Debts not legally enforceable
- Debts incurred to acquire excluded property (e.g., certain foreign assets by non-domiciled persons)
- Debts for which the estate is not liable
Worked Example 1.2
The deceased owed £10,000 on a credit card, had an outstanding mortgage of £50,000 on her house, and had made a gift to her son with a reservation of benefit. Which liabilities are deductible?
Answer: The credit card debt and the mortgage are deductible. Any liability relating to the gift with reservation of benefit is not deductible for inheritance tax purposes.
Net Estate and Inheritance Tax
The net estate is the value of all assets less deductible liabilities. This figure is used to calculate inheritance tax (IHT).
Key Term: net estate The value of the estate after deducting all allowable liabilities from the gross value of assets.
Inheritance tax is charged on the net estate, subject to exemptions and reliefs. The PRs must submit a full account of the estate to HMRC, including details of all valuations and debts.
Worked Example 1.3
A deceased’s estate consists of a house (£400,000), bank accounts (£50,000), and personal chattels (£10,000). Debts include a mortgage (£100,000), funeral expenses (£5,000), and a personal loan (£15,000). What is the net estate for IHT?
Answer: Total assets: £400,000 + £50,000 + £10,000 = £460,000. Deduct liabilities: £100,000 + £5,000 + £15,000 = £120,000. Net estate: £460,000 – £120,000 = £340,000.
Order of Payment of Debts
The Administration of Estates Act 1925 sets out the order in which debts must be paid:
- Funeral, testamentary, and administration expenses
- Secured debts (e.g., mortgages)
- Preferential debts (e.g., certain employee wages)
- Unsecured debts (e.g., credit cards, personal loans)
- Beneficiaries’ entitlements
PRs must ensure all debts are paid before distributing the estate. Failure to do so can result in personal liability.
Exam Warning
If PRs distribute the estate before all debts are paid, they may be personally liable to unpaid creditors. Always check for outstanding liabilities before making distributions.
Impact on Beneficiaries and Estate Accounts
The valuation of assets and liabilities affects the amount available for beneficiaries. PRs must prepare estate accounts showing:
- Gross value of assets
- Liabilities paid
- Net estate available for distribution
Beneficiaries are entitled to see these accounts and may challenge valuations or deductions if they believe them to be incorrect.
Revision Tip
Always use the date of death for asset valuations, and ensure all liabilities are supported by documentary evidence.
Key Point Checklist
This article has covered the following key knowledge points:
- The grant of representation authorises PRs to administer the estate.
- All assets are valued at open market value at the date of death.
- Only legally enforceable and deductible liabilities may be subtracted from the gross estate.
- The net estate is used to calculate inheritance tax and for distribution to beneficiaries.
- Debts must be paid in the statutory order before beneficiaries receive their share.
- Accurate valuation and deduction of liabilities are essential for proper estate administration and SQE1 exam success.
Key Terms and Concepts
- grant of representation
- market value
- deductible liability
- net estate
