20.2 Valuation, Excepted Estates and the Burden of IHT

Valuation of assets and liabilities

Inheritance Tax Act 1984 s.160 values property at the price it might reasonably fetch on the open market at the moment of death. For SQE purposes you must separate three different "estates":

Quoted shares are valued on the recognised quarter-up basis: take the lower closing price plus one quarter of the difference between the lower and higher markings for that day. Land is valued as at the date of death; a later sale is evidence, not an automatic substitute. A tenancy-in-common share of land is often discounted for lack of control; a joint-tenancy share is still in the IHT estate at its related-property or co-owned value even though it will never be in the grant. Related property (IHTA s.161) stops spouses and civil partners from manufacturing an artificial minority discount by splitting ownership.

Deductible liabilities are those that are legally enforceable and incurred for consideration. Finance Act 2013 restricts deductions where the borrowed money was used to acquire excluded property or was not in fact repaid. Reasonable funeral expenses are deductible. Lifetime Inheritance Tax on failed PETs is a liability of the estate only to the limited extent the legislation places it there; do not casually deduct every tax the family hopes to recover.

Excepted estates

HMRC's Inheritance Tax Manual (IHTM06011, updated April 2026) still groups excepted estates into three categories for deaths on or after 6 April 2004: low value, exempt, and estates of people who are not long-term UK residents (for deaths on or after 6 April 2025) or, for earlier deaths, foreign domiciliaries. For deaths on or after 1 January 2022 the short IHT205-style account is no longer sent to HMRC for a qualifying excepted estate. The personal representatives declare the estate as excepted on the probate application itself.

Low-value excepted estates (IHTM06012) require, among other conditions, that the deceased was a long-term UK resident immediately before death (deaths on or after 6 April 2025) or UK-domiciled (earlier deaths), and that the gross value of the estate, including the deceased's share of jointly owned assets, specified transfers and specified exempt transfers, does not exceed the available nil-rate band. HMRC's published nil-rate band from 6 April 2009 to 5 April 2031 is £325,000; for excepted-estate purposes that figure can include a transferable nil-rate band where the IHTM06011 conditions are met. Further caps apply: a single trust holding not exceeding £250,000, foreign assets not exceeding £100,000, specified transfers not exceeding £250,000, and — critically — the deceased must not have made a gift with reservation of benefit.

Exempt excepted estates (IHTM06013) allow a higher gross figure (for deaths on or after 1 January 2022, £3 million) provided that, after deducting only spouse or civil partner exemption and/or charity exemption and allowable liabilities, the net chargeable value does not exceed the nil-rate band. No other relief (business relief, agricultural relief, residence nil-rate band) may be used to squeeze an estate into the excepted regime. Spouse exemption is available for this test only where both spouses or civil partners have always been long-term UK residents (from 6 April 2025) or UK-domiciled (before that date). A gift with reservation still destroys excepted-estate status.

If the estate is not excepted, form IHT400 must be delivered. GOV.UK probate guidance states that where Inheritance Tax is due you must report the estate's value within one year using IHT400, and you cannot apply for probate until you have done so. You will normally have to start paying the tax before the grant issues.

Funding the initial Inheritance Tax payment

GOV.UK ("Pay your Inheritance Tax bill") requires payment by the end of the sixth month after the month of death. A death in January means tax is due by 31 July. Interest runs from the day after that date. The practical problem for FLK2 is the chicken-and-egg: institutions will not release sole-name funds without a grant, but the registry will not issue a grant until non-excepted tax that is not on instalments has been paid.

Methods you must be able to advise on:

• Direct use of the deceased's own accounts. GOV.UK allows payment from the deceased's bank, savings or investment accounts and from government stock, using HMRC's payment reference. This is the Direct Payment route in practice: the bank remits to HMRC without first putting the money through the personal representatives' account.
• Payment from the applicant's own funds, or from a joint account held with the deceased, with a right to reclaim from the estate once the grant issues.
• Payments on account where the exact figure is not yet known.
• Instalments for qualifying property. GOV.UK ("In yearly instalments") allows ten equal annual instalments on land and buildings, controlling holdings, certain unlisted shares, a business run for profit, and assets that qualify for agricultural or business relief. The first instalment is still due on the ordinary six-month date. From 6 April 2026, GOV.UK states that instalments on new assets that qualify for agricultural relief or business relief are interest-free if paid on time; that concession does not apply to instalment debts that were already running before that date. Selling the asset crystallises the outstanding tax.
• Borrowing, including a short-term bank loan secured on the expected grant, or an advance from a residuary beneficiary.
• Life policies and other non-estate funds that are already available to the personal representatives in another capacity, provided you do not mix client money in breach of the Accounts Rules.

Personalty that does not qualify for instalments must still be funded up front. Do not tell a client they can put the entire bill on instalments merely because the estate includes a house; only the tax attributable to instalment property can be deferred.

Burden, liability and incidence of Inheritance Tax

FLK2 now examines three different words, and they are not synonyms.

Liability is who HMRC may sue. On a transfer on death, IHTA 1984 s.200(1) makes liable:

• the deceased's personal representatives, so far as the tax is attributable to property that was not comprised in a settlement (or was settled UK land that devolves on or vests in the personal representatives);
• the trustees, so far as the tax is attributable to settled property;
• any person in whom the property is vested after the death, or who is beneficially entitled to an interest in possession in it;
• any person for whose benefit settled property or its income is applied after the death.

Section 204 then limits a personal representative's liability to assets actually received, or that would have been received but for that personal representative's own neglect or default. Lifetime failed PETs have their own liability code in s.199: the transferor is primarily liable; the personal representatives of the transferor are only in the frame to a limited extent if the tax remains unpaid.

Burden / incidence is who, as between the family, actually bears the tax. IHTA 1984 s.211 is the engine:

• Tax on UK property that vests in the personal representatives and was not immediately before death comprised in a settlement is treated as a general testamentary and administration expense — so it falls on residue unless the will shows a contrary intention.
• Tax on property that does not vest in the personal representatives is not a testamentary expense. The "vestee" must reimburse the personal representatives if they have had to pay it (s.211(3)).

Apply that machinery to the four FLK2 persons:

Worked incidence example: a house held as beneficial joint tenants by the deceased and her brother, plus a solely owned investment portfolio. Tax on the deceased's half share of the house is collected by HMRC from whoever s.200 names (often the personal representatives in practice, and the surviving co-owner as vestee), but as between brother and residue it is the brother's problem unless the will clearly directs the estate to discharge it. Tax on the portfolio vests in the personal representatives and is a testamentary expense falling on residue.

A poorly drafted "free of tax" legacy is a direction about incidence, not a magic exemption from HMRC. It moves the burden onto residue; it does not shrink the IHT estate.