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A Princely sum: the cost of getting probate valuations wrong

Prince’s estate has generated controversy since his death with reports of long-running family disputes.

In the latest development it appears that the estate has fallen foul of the IRS as according to the US revenue authorities the executors have allegedly undervalued the estate by 50%. As a result the IRS allege that the estate owes another $32.4 million in unpaid tax and penalties due to undervaluation of Prince’s music publishing and recordings.

The figures involved may be very high but, that aside, all UK taxable estates run the risk of a similar run in with HMRC should assets not be declared or if they are incorrectly valued. Long gone are the days when probate valuations could be submitted which do not directly reflect the open market value of an asset. Properties, for example, should be valued according to the “Red Book”, a manual containing rules and best practice guidance for chartered surveyors carrying out asset valuations.

Some assets can be tricky to value: private company shares fall into this category as indeed does the value of a world famous singer’s back catalogue. If the estate has such assets it is essential that the executors instruct a specialist valuer who can negotiate with HMRC in due course should the Share Valuation Division challenge a valuation.

Every asset should be valued and declared down to arrears of State Pension and income tax repayments that might be due to the estate.

Getting the tax right

It is not only the assets in an estate that affect the amount of inheritance tax that is payable. If the deceased person gave away assets in the seven years before their death such gifts fail to reduce the tax payable on death and full details must be given to HMRC. Executors must take reasonable steps to find out whether gifts have been made, checking seven years of bank statements, for example, and making enquiries of the family and beneficiaries as to whether they are aware of gifts.

Tax calculations can also be affected by claiming reliefs and exemptions from inheritance tax so it is essential to ensure that none of these claims have been over-inflated. For example if the deceased was widowed steps should be taken to check the terms of their late spouse’s Will. This is to ascertain whether any of their inheritance tax nil rate band had been used on gifts under their Will to non-exempt beneficiaries (such as their children), as this will affect the amount of transferable nil rate claimable by the deceased and the tax due on their estate.

The forms submitted to HMRC detailing the estate’s assets, liabilities and tax due will be carefully examined and HMRC will make enquiries if they are concerned about any aspect. Executors should remember that they are personally liable up to the extent of the estate’s assets for any underpaid tax. The IRS are imposing a $6.4 million penalty on Prince’s estate for the alleged inaccuracies and HMRC have the same power to impose penalties here, which can be as much as 100% of the extra tax due.

The role of an executor can be an onerous one, but it can also be expensive, if great care is not taken to ensure that all is as correct as it can be.

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Your key contacts

Samantha Neagle

Partner

Bristol
Samantha specialises in the administration of deceased estates with a particular focus on the complex estates of high net worth individuals often involving intellectual property, business and foreign assets.
View profile for Samantha Neagle >

Rebecca Clarke

Senior Associate

Manchester
Rebecca is an experienced solicitor dealing with all aspects of private client work from capital taxes planning and Court of Protection work, to advising private family charitable trusts to dealing with contested probate cases.
View profile for Rebecca Clarke >

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