HM Revenue and Customs (HMRC) have recently been hosting conferences for the professions on Inheritance Tax (IHT) and one of the issues that has been at the forefront of concern for practitioners is the problem of IHT liabilities on properties, the values of which have fallen significantly since the owner died.
There is a procedure for obtaining a refund of IHT overpaid when a property is sold for less than the probate value, but HMRC’s view is that a mere fall in the value of a property is not enough to warrant an adjustment to the IHT return. They advise that ‘Where the value of real or leasehold property has been accepted as returned, or agreed through negotiations, and tax has been paid and accepted based on that value, then that valuation is final. The valuation can only be re-opened if it can be shown that:
information affecting the value of the property, that was available at the time of the valuation, was not taken into account; or
new information affecting the value of the property has come to light, and that information would reasonably have been available at the time of the original valuation.’
Where an uplift in a property valuation is required, then penalties can be levied if the original IHT valuation is too low. In this case, HMRC comment that “Whilst each case is dependent upon its own facts, if instructions for the valuation of a property are given on the correct basis, i.e. as a hypothetical sale in the open market under normal market conditions, and marketed properly with no discounts for a quick sale or the time of year etc., then any uplift in value that is agreed is unlikely to attract a penalty.”
The feeling amongst many participants at the conference was that to demonstrate compliance with this approach can be demonstrated, three valuations from different estate agents are preferable, or a valuation to RICS (Royal Institution of Chartered Surveyors) standards if a definitive figure is required. Whilst this will go a long way to demonstrate that the liable persons exercised reasonable care, the most important questions for HMRC are on the actual steps that were taken:
Was professional advice sought?
Were instructions given on the correct basis?
Was the valuer’s attention drawn to particular features of the property (such as development potential)?
Was anything unusual about the valuation questioned?
The answers to these questions will help demonstrate whether reasonable care was taken or not.
Says Cathy Owen, “HMRC’s approach will cause concern to executors who, whilst wishing to be diligent in the performance of their role as executor, may find it difficult to find the funds or time necessary to obtain three valuations.”