Probate - variations in valuations between death and distribution

As an executor, you bear significant responsibility for administering the estate of the deceased person. A key challenge during this process is managing any variations in asset valuations that can occur between the date of death and the eventual distribution to beneficiaries. These fluctuations can arise due to changes in market conditions, the nature of the assets themselves, or simply the passage of time.

If not handled carefully, variations in valuations during the probate process can impact the entire distribution process, tax liabilities, and your duty to treat beneficiaries fairly and according to the law. Proactively managing asset valuations and seeking expert advice early on can significantly reduce the risk of a dispute and financial loss for beneficiaries.

In this blog, we delve into the key challenges when managing asset valuations during probate.

Timing issues: death, HMRC payment dates, and distributions

When an individual dies, the estate must be valued as of the date of death. This valuation is then used for calculating inheritance tax (IHT) liabilities, which must be paid to HMRC within six months of the end of the month in which the death occurred. If inheritance tax is not paid on time, penalties and interest can accrue.

However, the final distribution to beneficiaries may not occur until months, or sometimes even years, after the date of death.  During this period, assets such as property, shares, or business interests may fluctuate in value.  This can affect not only the value of the estate but also the fairness of distributions to beneficiaries.

Revaluing assets

Throughout the probate process, it is often necessary to obtain an up-to-date valuation of certain assets. For example, if you are managing a portfolio of shares, their market value may rise or fall significantly between the date of death and the final distribution. Similarly, property values can fluctuate based on market conditions.

To ensure equitable treatment of all beneficiaries, you may need to revalue key assets before distributing the estate. These fresh valuations help determine whether beneficiaries are receiving a fair share of the estate, in accordance with the will or the rules of intestacy, while also providing clarity for any tax calculations.

Tax implications – when assets increase in value

Fluctuations in asset valuations directly affect the estate's tax liabilities.  If an estate asset is sold which has increased in value since the date of death, Capital Gains Tax (CGT) may be payable by the estate.  As executor, you are responsible for settling any taxes payable.

CGT is due on the difference between the date of death value (sometimes called probate value) and the sale price, less any expenses and less the estate's annual tax-free allowance.

A deed of appropriation can sometimes reduce the CGT liability by allocating the asset to the beneficiaries before it is sold, so that the asset is held on their behalf instead of in the estate.  The beneficiary should agree to the appropriation and sign the deed before the asset is sold.  The asset would then be sold on their behalf and not through the estate.

This means that the beneficiaries' personal tax allowances and their individual tax rate (which can be lower than the estate’s) can be applied when the asset is sold, as shown in the example below.  This can be advantageous where there is more than one beneficiary entitled to the residuary estate, as there would be more than one annual tax-free allowance to apply against the gain (as long as the beneficiaries had not made any other chargeable gains in that tax year).

By way of example:

John, Patrick, William, Lily and Stephen and are the residuary beneficiaries of their mother’s estate.  At their mother’s date of death, her property was valued at £250,000.  During estate administration the property increased in value and the executor has accepted an offer on the property of £265,000. The £15,000 difference is liable for CGT.

As the beneficiaries have not made any chargeable gains during the current tax year, they want the property to be appropriated to them before it is sold. A deed of appropriation is signed by all five before exchange of contracts on the sale.

Each beneficiary can therefore apply their annual tax-free allowance (£3,000 in 2024-5 tax year) against their one-fifth share of the gain of £15,000 on the property.  The CGT liability will then be nil.

Had the property instead been sold through the estate, there would only have been one tax-free allowance of £3,000 to set against the gain. This would have resulted in a CGT liability on the remaining amount of £12,000. This would have been charged at 24% (if sold in the tax year 2024/2025, which would have been paid out of the estate and reduced the size of the estate for distribution.

It is highly advisable to seek legal advice before proceeding with a deed of appropriation.

Tax implications – when assets decrease in value

On the other hand, if assets decrease in value, you may be able to claim inheritance tax loss relief. This relief applies to assets like shares or property that are sold for less than their value at the date of death.

• Loss relief for shares - If you sell qualifying shares or securities within 12 months of the date of death for a price lower than their original valuation, you may claim IHT loss relief. This allows the estate to substitute the sale price for the date of death value when calculating IHT.  This relief can reduce the overall IHT liability.
• Loss relief for property - Similarly, for land or property, if the sale occurs within four years of the date of death and the sale price is lower than the initial valuation, you can apply for IHT loss relief. This adjustment can be particularly valuable in a fluctuating property market, helping to align the IHT due with the actual proceeds from the sale.

Both types of relief require careful consideration of the timing of asset sales and the procedural requirements for claiming the relief. It is essential to obtain advice to ensure that the estate benefits from these provisions and that all relevant paperwork is submitted to HMRC.

Communication with beneficiaries

One of the most important aspects of your role as executor is maintaining transparent and regular communication with beneficiaries. Variations in asset values can cause confusion or a dispute, especially if one beneficiary perceives they have been disadvantaged due to fluctuations in value.

By keeping beneficiaries informed at each stage of the estate administration, particularly when a revaluation is obtained or when appropriations are considered, you can help manage their expectations and avoid potential conflicts.

Regular updates will also ensure that beneficiaries understand the complexities of probate and the decisions you must make to protect the estate’s value.

Making informed decisions with financial advice

As an executor, one of the key decisions you may face is whether to retain certain assets, such as shares, as part of the estate rather than selling them immediately. Retaining assets can be beneficial in some cases, especially if their value is expected to appreciate, but it can also expose the estate to the risk of market fluctuations. To avoid any potential loss during the administration of the estate, it is highly advisable to seek independent financial advice and to obtain the views of beneficiaries on the treatment of estate assets.   

How we can help

We have extensive experience in probate administration and can provide you with the legal and tax advice needed to fulfil your duties effectively. Our team can assist you with advice on valuations, revaluations, appropriations and ensuring that all beneficiaries are treated fairly. Contact us today to discuss how we can help make the probate process smoother and more efficient for you.

For further information, please contact a legal advisor in our Private Client team at any of our offices – York, Selby, Malton or Pickering.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.