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Housing boom: valuing property for IHT

How to get the best deal for clients when valuing property for inheritance tax purposes, by Geoffrey Milnes

15 August 2012

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Administering and managing the estate of a deceased person can be a challenging and intricate business. First, you are dealing with the bereaved who may find it difficult to make the rational and objective decisions required. Second, sorting out the affairs of the remaining estate can often be complex and involved.

Money matters

The death of a family member or close friend is not just a difficult emotional issue; it also has significant financial implications for the estate’s beneficiaries and so it is important to ensure that affairs are correctly and fairly administered for those left behind.

However, even qualified and experienced professionals can struggle with inheritance valuations. The current fluctuating and unpredictable property market makes valuing residential and commercial property for the purposes of the estate a tricky business. Furthermore, solicitors, executors and advisers need to ensure that they achieve the best deal for their client while keeping payments made to HM Revenue & Customs (HMRC) to a minimum - but still within the law.

This task is made more difficult by the fact that HMRC is alert to the issue of property valuation and inheritance tax - and in the current economic climate is eager to claw back taxes wherever it is able. In fact, the organisation carried out over 9,000 investigations into the property valuations of deceased estates in 2010, raising around £70m for the public purse.

So, unless you want to burden clients with an unexpected tax bill, it is important to ensure that the whole process is correctly carried out.

While to the layman it may seem that estates take an excessive amount of time to administer, it does take time to value an estate fully. Property often forms a significant, if not major share and so it is crucial to get expert advice to ensure an accurate valuation and correct apportionment of any taxes due.

Acting in the best interest of your clients, you may strive to keep professional costs to a minimum, thereby ensuring the maximum amount remains for distribution to the beneficiaries. In the interests of simplicity and reducing costs, well-meaning advice will often be to ‘get a couple of estate agents round for a valuation’. The figures from these valuations will then be used as a basis for filling in the probate forms.

However, there are often many variables to consider which an estate agent may not be fully qualified to appreciate. Estate agents are best placed to know the current market value of a property, but they will usually provide marketing appraisals not valuations. Their primary role is to acquire a house rather than to satisfy the legal requirements of the probate courts and the taxman.

This means that the figures used for probate may not always be satisfactory for taxation purposes.

Reasonable care

Furthermore, if the valuation is considered to be incorrect, the excuse of ignorance will hold no sway. It is the responsibility of the estate and its beneficiaries to ensure that ‘reasonable care’ has been taken. If this is judged to not be the case, the estate and its beneficiaries could be fined up to 100 per cent of the additional tax liability, as well as having to pay the tax itself. This could also leave the executors open to challenge by the beneficiaries.

HMRC defines taking reasonable care as seeking professional advice from a qualified independent valuer, making the valuer aware of any particular features of the property which could affect the final figure (development potential, existing tenancies, third-party possessory rights, etc) and questioning anything unusual about the valuation.

In order to prevent any nasty surprises, HMRC ‘strongly recommends’ using a professional valuer to ensure a greater degree of accuracy; it’s also possible that the cost of this may be claimed back from the estate at a later date. Moreover, many valuers allied to estate agencies will discount the cost of the inheritance tax valuation from any eventual sales commission if you use their estate agency services.

There are also pitfalls associated with property ownership, which isn’t always a straightforward issue. It’s important to get this right as the question of who owns how much of the house will affect the amount of tax payable.

There are two main ways of ?owning a house – tenants in common and joint tenants.

1. A joint tenancy, as the name suggests, is when all parties own the entire house. For example, a married couple who own their home as joint tenants will both own the property. On the death of one, the remaining spouse becomes the sole owner, with the deceased’s share passing directly to them with no inheritance tax liability. However, the estate may suffer inheritance tax based on the full ?value of the property when the remaining spouse dies. The same applies to civil partnerships.

2. Tenants in common own the house in separate shares, which may not be equal. They are not interlinked, and the owner of each share can determine its fate through his or her will - it does not pass automatically to the surviving shareholders.

This makes the valuation process more complex as it is necessary to determine the value of the part share based on its market value. It has been held that this value is not the same as dividing the full value of the property into the proportions held by the various parties.

However, an allowance can be made to account for the difficulty in selling a part share, agreed with HMRC at a minimum of ten per cent. Higher percentages may occur depending on the valuer’s opinion of the precise share concerned, and its saleability.

Straitened times

With people living longer and care in old age issues raised by the government’s recent social care bill, many people are planning more carefully for their long-term retirement and death. A strategy favoured by some is leaving the family home to children or other relations, thereby avoiding inheritance tax if the donor survives for seven years after the donation, when the gift becomes free of tax. Nor will the property form part of the giver’s ?estate if death occurs before seven years have elapsed.

However, the question then arises of where the surviving parent will live: does she/he move out, or will they be allowed to stay until they either die or move house?

While this might sound like a sensible solution, there are pitfalls which can result in payment of the very tax it was implemented to avoid. If the surviving spouse lives in the house rent free, HMRC deems this a ‘gift with reservation’: it then forms part of the spouse’s estate. This is because it is gift, but of no value to the recipients because they can do nothing with it when inhabited by the surviving parent. The whole house will become liable for inheritance tax on their death.

The survivor could pay rent at market value, judged by the valuer, which means it is no longer a ‘gift with reservation’. However, the rent will be treated as income and therefore liable ?to income tax.

If parents are reluctant to pay rent, the children could make an annual gift to the parent of an amount equal to the rental value. However, this needs to be very carefully set up by a legal representative.

Ultimately, it usually pays to take professional advice, particularly in matters of property valuation. Ideally, valuers should work in partnership with legal advisers and the client to minimise any inheritance tax. This will also ensure that correct procedures are followed, avoiding unwelcome comebacks from HMRC, often on the lookout in these straitened times for reasons to legitimately acquire more tax.

So, tempting as it may be to cut corners, save costs and obtain a favourable valuation, as with most things in life, it is advisable in the long term to follow the rules and choose the right person for the job.

Geoffrey Milnes is a residential surveyor and valuer in the professional services team at independent estate agency and chartered surveyors Andrew Ganger & Co