Mark McLaughlin looks at valuing gifts of land and property for inheritance tax purposes.
Valuations of assets for inheritance tax (IHT) purposes is a specialised area. It is generally not an area for inexperienced taxpayers or tax professionals to dabble in. Even HM Revenue and Customs (HMRC) does not normally engage in tax valuations of assets; instead, it uses specialists in other government departments (e.g., Shares and Assets Valuation for unquoted shares, and Valuation Office Agency (VOA) for land and buildings).
Tricky IHT valuation issues potentially include ‘related property’ (e.g., involving spouses), and valuation discounts for jointly owned property. However, this article focuses on land and buildings owned by a single individual (e.g., where a property was wholly owned by a widow on their death).
Leave it to the professionals!
Unfortunately, the IHT legislation offers little guidance on how to determine the market value of transfers. The general rule bases market value around the price that property might reasonably be expected to fetch if sold in the open market at that time. HMRC regards valuations as a ‘high risk’ area in terms of the potential loss of IHT where valuations are too low. Obtaining professional valuations of land and buildings is not compulsory. However, simply guessing market values is not recommended; aside from additional IHT and interest, material undervaluations of property may result in penalties being charged.
HMRC has published an ‘IHT toolkit’ for tax agents or advisers (www.gov.uk/government/publications/hmrc-inheritance-tax-toolkit). HMRC states that for assets with a material value, taxpayers are ‘strongly advised to instruct a qualified independent valuer, to make sure the valuation is made for the purposes of the relevant legislation, and for houses, land and buildings, it meets Royal Institution of Chartered Surveyors (RICS) or equivalent standards.’
HMRC expects the person seeking the professional valuation to explain the context and draw attention to the definition of market value (in IHTA 1984, s 160), and to provide the valuer with any relevant information and documentation concerning the property.
Latest ‘developments’
A particular difficulty in property valuations can be ascertaining a property’s ‘development value’ (i.e., broadly any increase in value attributable to the prospect of development). When valuing a property, HMRC expects the valuer to consider whether there is any potential for development and, if so, to ensure it is taken into account and reflected in the valuation. HMRC states (in its Inheritance Tax Manual at IHTM36275) that it considers ‘hope’ value to be ‘a component part of the open market value in appropriate cases, whether or not planning permission has been sought or granted’.
The difficulty in establishing development value has resulted in several cases coming before the land tribunal. For example, in Prosser v IRC (DET/1/2000 [2001] RVR 170, the garden of a house was large enough to potentially constitute a building plot. The district valuer suggested a figure as at the date of death assuming planning permission, and deducted an allowance of 20% to reflect that no planning permission had been given at the valuation date. However, the land tribunal held that there was a 50% chance of obtaining planning permission, and that a speculator purchaser in the absence of the planning permission would not offer 80% of the development value, but would only offer 25%. Other notable valuation cases include Palliser v Revenue and Customs [2018] UKUT 71 (LC), and Foster v Revenue and Customs [2019] UKUT 251 (LC).
Practical tip
Useful information on the VOA’s approach to its valuation work for IHT purposes is in its own Inheritance Tax Manual (www.gov.uk/guidance/inheritance-tax-manual).
