Grieving families could be handing over thousands of pounds too much in inheritance tax, by overestimating what deceased loved ones’ personal possessions are worth.
More than four in five people thought the value of everyday items was too high in a test by Swift Values, a probate and chattel valuer.
If this pattern is followed by those valuing their loved ones’ possessions during probate, as is likely, it means they are likely giving away a bigger chunk of the estate to the taxman than required.
With inheritance tax charged at 40 per cent above the tax-free thresholds, overestimating the value of someone’s possessions by £5,000 would lead to an extra £2,000 charge. The figure could be reached by guessing that items such as a car, paintings, jewellery or furniture are worth too much money.
The valuer put 1,000 people to the test and found 81 per cent said items such as sofas, rings and a washing machine were worth more than they actually are.
Even those who had been an executor previously were no better at valuing items then those who have no experience with probate, Swift Values said.
What’s a diamond ring worth? Not as much as most people think, a test showed
Inheritance tax is charged on estates above the £325,000 tax-free individual allowance, known as the nil-rate band. Those who leave their home to direct descendants can get an £175,000 tax-free allowance on top of this.
Spouses can pool their allowances, which means a couple could leave a maximum of £1million free of IHT.
Families can also give away money and valuables during their lifetime to slim down their estate, which means a lower death duty bill for grieving loved ones, but you must survive for seven years after the gift for it to become fully IHT-free.
To work out any inheritance tax bill, an executor needs to value an estate and fill in a complicated set of forms. This includes listing assets such as property, but also furniture, cars and personal items too.
The value of items must be based on the open-market value on the date of death – what the item would sell for, not the value it was bought for.
But swathes of people think they should use an insurance value, or even the purchase price in a bid to be more ‘accurate’ for the taxman.
With such a punitive 40 per cent tax rate, even modest overestimates on valuables can quickly rack up.
For example, if the IHT-free allowance is used up and remaining belongings are overvalued by just £10,000, families would be handing an extra £4,000 to the taxman.
Mark Littler, founder of Swift Values, says: ‘Far too many families are unknowingly giving money away to the taxman. We see this time and time again – families doing their best to be honest, only to end up overpaying because they’ve used replacement or insurance figures instead of probate values.
‘It’s completely understandable – no one teaches you how to do this – but it means thousands of pounds that could have gone to loved ones ends up going to HMRC instead.’
As part of the test, participants were asked to value a two-seater sofa from John Lewis. While it was bought new for £976.65, it sold second hand for just £100 at auction, which is its market value. Just 7.6 per cent of people valued it correctly, stating its probate value was between £0 and £150. The most common answer was between £251 and £500.
In another example, people were asked to value a 0.7 carat solitaire diamond ring. It was bought for £6,250 but its probate value was £1,250. Only 9.6 per cent of people correctly valued it. The most common answer was between £5,501 and £6,500.
A bereaved family would need to pay £2,600 in tax on that £6,500 if it fell into the inheritance tax net. Whereas, at the correct probate value, just £500 would be handed over.
In the most extreme example, those tested wildly overvalued a Georgian long-clock . Its probate value is £320, which only 5.2 per cent correctly guessed.
However, some 41.8 per cent believed its value to be more than £3,000. This would mean a family could be liable to pay £1,200 in tax. However, at it’s true value just £128 would be owed.
Other items proved easier to guess. A Bosch washing machine bought in 2012 had a probate value of just £40, which some 43.4 per cent of peoplegot right.