RegulationJun 24 2013

Inheritance tax: valuations and variations

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      The latest issue of HMRC’s toolkit on how to complete Form IHT 400 - the form reporting assets in an estate liable to inheritance tax (IHT) – acknowledges that “valuations are the biggest single area of risk accounting for a large part of compliance checks”. A compliance check will take time and increase costs and delay for personal representatives (PRs). Equally, in its quest to ensure that the IHT take is maximised, HMRC does not always consider valuation issues in favour of the taxpayer – unless such issues are drawn to its attention.

      The starting point for valuations for IHT purposes is section 160 of the IHT Act 1984 (the Act) as set out in Box 1. At the broad level, that rule was clarified to mean that “price” is the gross figure, rather than the net price after the deduction of selling costs by the case of Duke of Buccleuch v CIR (1967). This point is occasionally overlooked by valuers, but hardly ever by HMRC.

      At more specific levels, account of notional valuation discounts and additional costs can be allowed as a valid deduction, for example the valuation discount given to most part shares in property and the deduction of up to 5 per cent of value of a foreign asset as represented by additional administration costs incurred (in addition to any double taxation relief).

      The valuation

      The onus is on the taxpayer to get the valuation right, with the prospect of additional tax in the form of penalties and interest to pay if mistakes are made, careless or otherwise. In 2011 there was some publicity on the penalties/interest HMRC had made by targeting property valuations in estates – some £70 million extra IHT. This followed warnings in HMRC’s IHT newsletters to intermediaries. The current guidance to PRs states that “HMRC strongly recommend that you use a professional valuer as they will make sure the valuation is as accurate as possible. You’ll have to pay their fees, but you may be able to claim these back from the estate later.”

      Valuation fees are a proper administration liability and are not eligible as a deduction for IHT, but would be a deduction for CGT purposes on any disposal by the PRs. Even when a valuer is instructed, the PRs are not clear of liability. HMRC expects them to submit a realistic valuation, giving full instructions to the valuer, especially about any occupiers and development potential. This can be signalled by phrases such as “an unusually large garden” or “access to other development land.”

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