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A fair share of inheritance tax?

are indications that the squeezed middle is being squeezed further after death. The chartered accountants, UHY Hacker Young, recently announced that last year, HM Revenue & Customs (HMRC)increased the amount of extra tax it took through investigations into property valuations for inheritance tax (IHT) far faster than house prices rose.

UHY Hacker Young’s analysis shows that when HMRC receives an IHT return, it checks HM Land Registry records of the sales of other properties in the area and whether there have been refurbishments or extensions not taken into account. The accountants suggested two tips to those who want to maximise the chances of their valuations being accepted. The first is to carefully document the state of the property - via photos - immediately after death, and certainly before any work is done to get the property ready for sale or to improve it in any way. The second is to obtain a valuation - again, while the property is in its original state - from a professionally qualified valuer who has experience of dealing with HMRC.

A third tip is to ensure family members who know the property are persuaded to disclose the warts peculiar to that property for the valuer to include in the report. For example, if a garden or adjoining road regularly floods or has water lying on it, the heating system breaks down or traffic noise is high at certain times, they are all factors that a valuer could miss and are likely to be picked up by any subsequent purchaser.

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Further squeezing

There is a second valuation area where HMRC is also actively increasing IHT. Most professional advisers would consider that if an interest in property or land is sold by personal representatives at a loss to the probate valuation within four years of the late owner’s death, then the IHT legislation allows that lower gross sale proceeds figure to be substituted for the higher probate valuation. A repayment of IHT can then be claimed, calculated on the difference between the original probate valuation and the lower gross sale proceeds. This is not correct.

HMRC is operating an unpublished procedure whereby, in cases of its choosing, the relief is restricted and the personal representatives effectively will pay IHT on sale proceeds they have not received. The relevant legislation is contained in section 191 of the Inheritance Tax Act 1984 (the Act). HMRC is using the definition of “sale price” in this section (as set out in Box 1) to support its interpretation of the legislation.

HMRC has a “tolerance” level of 25 per cent ie, if an interest in land is sold for a loss of 25 per cent or greater from the original probate valuation, then it will ask HMRC’s district valuer to advise on “what would have been the best price obtained at the date of sale.” This approach is not mentioned in the IHT manual, the guide to HMRC’s staff on how to administer IHT, made publicly available on the internet.

The legislative intention