December 2022 Inheritance Tax Planning
What a ride this last few years have been. If you’ve had a valuation on a property and you feel that something has changed or altered, you should take action to raise this with the revenue. Of course, valuations are based on the date of death, however, this should not stop you considering a revaluation. Link below to my December 2022 comment
The Inland Revenue are making themselves very busy over property valuations on death (note not on sale). With more and more probate cases being tested. Some are blatant under valuations in order to reduce the amount of tax – if any is paid.
It’s a dangerous game to play – the Revenue Inspectors don’t have to pay to take a case to court so it’s not their money that’s at risk – it really is a case of Executor beware.
Post Covid -19 a lot of people were questioning valuations as the crisis hit, but the evidence is that house prices have continued to increase substantially so I’m not so sure that low valuations will be accepted without a wriggle from the revenue and without evidence.
So what are the options?
Get three Independent Estate Agents to value, formally the property. See if there is a consensus and make sure they justify the valuation. Remember it’s not the expected sale price we are trying to get – it’s the value of the property. As an Executor you have a formal obligation to value the estate – no matter if it sells for less – the valuation is important.
Other expenses like ‘reasonable funeral expenses’ can, of course, be deducted. But Estate Agent, legal costs and probate charges are not deductible – quite a lot of unfairness built into the system already.
Where the deceased offers specific gifts, like items of jewellery these need to be valued formally and included in the estate valuation.
Key is what needs to be offered up to the Inland Revenue on death and these are.
An account of assets and liabilities.
Formal valuations for things like motor vehicles and chattels along with details of any liabilities and loans of the deceased. There is some flexibility in this. You can of course try and use ‘trade sale prices’ for things like motor vehicles. We have used the likes of ‘we buy any car’ as a starting guide. However if the vehicle is then purchased by a connected party expect the valuations office to make contact with you. Fair is fair after all.
Then the big one, the value of the property.
Three Estate Agents valuations as a starting point and possibly a valuation survey by a RICS Member outlining the valuation at date of death – these are normally accepted without question by the Revenue. If further work is required or there is more specialised questions to be asked then the Inland Revenue District Valuer will want to get involved – best avoided if possible.
From Rumball Sedgwick The valuation should be carried out by experienced RICS property surveyors with an in depth knowledge of the local property market. The report also needs to be compliant with current HMRC inheritance tax law to reduce the risk of the District Valuer becoming involved, which invariably delays the whole process further. https://rumballsedgwick.co.uk/valuations-for-probate/
Any costs of this are born by the beneficiaries. and not on the estate, which seems harsh but the Inland Revenue have rules for a reason – they don’t always make sense. Of course they could argue that you don’t need to appoint an Estate Agent to sell the house or ask someone to take on probate for you – and you can inherit all of the available proceeds. As the Revenue say – that’s your choice.
Often with normal household goods valuing them is hard to do. The Revenue seem to think an auction is the best place to sell – it will obtain ‘market value’. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm21041
Figures issued today show that HM Revenue & Customs (HMRC) has increased by 26% the amount of extra IHT it receives by successfully challenging property valuations. When someone dies, any land and buildings they own are part of their estate when it comes to working out IHT. Most estates don’t have to pay because they are valued at less than the threshold: £325,000 in 2012-13. Above this, tax is paid at 40%. However, recent figures from the Land Registry show the average house price in the UK is now £246,000, and £410,000 in London.
Mark McLaughlin warns that inaccurate valuations of land and buildings for inheritance tax purposes can result in HMRC enquiries, additional tax and possibly penalties.
Some areas of tax compliance are much more difficult to get right (and therefore more of a risk in terms of making errors) than others. Valuing assets such as land and property for inheritance tax (IHT) purposes (e.g. on death) is one such area.
Land valuationsOne of the difficulties with land (and many other valuations) for IHT purposes is a lack of clear guidance on what constitutes ‘market value’. This term is simply defined in the legislation as ‘…the price the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time’ (IHTA 1984, s 160).
According to HM Revenue and Customs (HMRC), inadequate valuation of land (and buildings) is one of the biggest risks in IHT compliance. HMRC enquiries into land valuations produce large amounts of additional IHT and interest. What can be done to reduce the possibility of problems with HMRC?
Importantly items of value will need separate, formal valuations and a formal valuation of other goods remaining. My view would be that an initial position of the estate should be obtained as soon as possible in order to calculate the rough situation and then a decision made from there as to what the next stage will be.
2022 House Prices
As we move into 2023 there is some movement downwards on house prices. If you lost a family member in 2022 and used a valuation from then, there is a good chance you won’t achieve that sale price. For obvious reasons (who wants to pay more tax than you need) keeping an eye on your options is helpful.
You don’t have to accept the tax due on the valuation price, you can negotiate. From the Telegraph (December 2022) House Prices and Inheritance Tax
If you are finding this article helpful, you can buy me a coffee.
There is a some more information here https://www.litrg.org.uk/tax-guides/bereavement/how-do-i-assess-estate-inheritance-tax-purposes
Household Items – Goods and Chattels
All the stuff that is left. You know the valueless items that no one wants – but were of course precious to the deceased. The Inland Revenue are interested and are watching carefully. For these reasons you need to be a little careful.
From the Revenue Practice Notes
Household goods and personal goods: valuation and technical issues: how we value household goods
IHTA84/S160 stipulates that the value to be included in the IHT400 (IHTM10021) is ‘the price which the property might reasonably be expected to fetch if sold in the open market at that time’. You may want to ask Shares and Assets Valuation (SAV) for advice when very valuable items are included but, otherwise, if the taxpayer has provided a professional valuation of household goods, which states that it has been prepared on the basis of the open market value and/or in in the terms of S160, you will usually be able to accept it. This is subject to the comments about sales below.
A valuation prepared on any other basis may not satisfy the terms of S160, as the value could be more, or less, than the open market value. For example, a valuation ‘for insurance purposes’ using replacement values may include too high a value.
Where a valuation is described as being made ‘for probate purposes’ or for ‘IHT purposes’ you may want to confirm with the taxpayer or agent that the open market value has been used.
If you are concerned that the value returned does not reflect the open market value ask SAV for advice, if the amounts involved are worthwhile.
Generally, sales after the death, particularly those at auction, provide the best evidence of the open market value at the date of sale. The taxpayer or agent may be happy to substitute the sale prices for the original valuations or may argue for an adjustment due to market movement between the dates of death and of sale. You should consult SAV (Chattels) if appropriate.
You will occasionally find that the taxpayer or agent will deduct either the cost of obtaining the valuation or the costs incurred in sales from the gross value. You must remember that any costs incurred after the date of death are administration expenses and therefore not deductible. The auction sale price is the gross proceeds of sale (or hammer price) before deduction of commission and insurance and without addition of any buyer’s premium.
You have been warned.
As always, please let me know if you need any help on the matter of probate.