Journal

Probate valuation

William East, July 2012

This STEP briefing note discusses recent correspondence between STEP and HMRC concerning the valuation of UK residential property for IHT purposes, particularly where the sale follows a grant of probate. This has caused uncertainty among STEP members, particularly over the extent to which a formal RICS valuation is needed.

Background

Under s160 of the Inheritance Tax Act 1984 (IHTA 1984), the value of property at any time is the price ‘the property might reasonably be expected to fetch if sold in the open market at that time’. As the charge to IHT on death assumes the transfer of value occurred immediately before death, the property valuation submitted to HMRC must be the valuation of the property at that time.

In the past, when selling residential property after a grant of probate, personal representatives (PRs) submitting Forms IHT 400 and 405 have often asked the agent selling the property for a letter of advice about a realistic selling price. The PRs would use this as a ‘provisional estimate’ for the IHT 400 and report the gross sale proceeds following the sale.

If the sale took place soon after death, HMRC usually accepted the sale proceeds as representing the value at the death, subject to market adjustments between the date of death and the sale. Penalties where the sale price exceeded the agent’s valuation were not imposed, meaning professional valuations were not needed, thus saving costs.

STEP members are concerned that HMRC has now resiled from this approach. HMRC’s ‘How to value land and buildings for Inheritance Tax’ states:

‘Professionals like property valuers and chartered surveyors specialise in valuing land and buildings for people’s estates. HM Revenue & Customs (HMRC) strongly recommend that you use a professional valuer because they’ll 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.’1

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A similar amendment was made to the notes to Form IHT 400. These now also state that if PRs gain information casting doubt on a valuation it must be reconsidered2 and referred back to the valuer.3

It was unclear whether this applies when the residential property concerned was to be sold immediately after a grant of probate was obtained. STEP members became concerned that, if so, HMRC might now penalise undervaluations if the method described above of asking the selling agent to nominate the price was used. STEP therefore took the decision to raise the matter in formal correspondence with HMRC.

HMRC’s response

Following this correspondence (which, unfortunately, STEP is not at liberty to publish), it is clear that HMRC now takes the following view:

  1. There can be no assurance that a quick-fix valuation from the selling estate agent will be sufficient. If there is an undervaluation, there is no guarantee that the PRs will not incur a penalty.
  2. However, penalties will not be charged where the method of valuation is reasonable and proportionate in the circumstances. It is for the PRs and their advisors to decide, on the facts of the case, what is appropriate.
  3. Professional valuations are favoured by HMRC but must be ‘properly executed and based on the full circumstances relating to the property in question’. Multiple valuations may sometimes be appropriate, with the median valuation figure being used to determine what is finally submitted.
  4. Where PRs have information that a sale value might be above the IHT 400 valuation after submission, this must be disclosed as soon as possible, together with a reasonable explanation for having adopted the IHT 400 valuation, to avoid a penalty.

Comment on HMRC’s position

HMRC’s position still provides no certainty that the valuations approach outlined above will not result in penalties if the valuation later proves to be inaccurate. The safest course is to obtain a professional valuation.

Furthermore, HMRC has given no guidance as to when instructing an estate agent is reasonable and proportionate. However, HMRC has suggested that it is particularly concerned about the risk of inaccurate valuations where the land has development value and was subject to tenancies at the date of death. Where there are other complicating factors, such as property in an estate that could be valued together with other property in order to generate a higher market value, as in Gray v IRC [1994] STC 360 and under s161 IHTA 1984, or those listed in HMRC’s Inheritance Tax Manualat IHTM23017,4 a professional valuation should be considered. This is also more likely to be justified where the value of the property or estate is large.

‘The safest course is to obtain a professional valuation’

PRs and their advisors should place a premium on:
  1. ensuring that the valuation is as accurate as possible
  2. recording in detail the steps taken to satisfy themselves of this; and
  3. disclosing to HMRC all material information in their hands as to the value of the property.

To demonstrate (a) and (b), professional advisors should seek to discover whether there are any special factors likely to boost the property’s value (e.g. development potential). Any such features of the property that are relevant to the valuation, and that are not obvious to the valuer, should be included in a letter of instruction. To satisfy (c), it would seem sensible to disclose to HMRC the letter of instruction and the valuation received along with the IHT forms.

Conclusion

There is no guarantee of avoiding penalties if PRs choose a valuation from the selling estate agent that proves to be inaccurate. The letter and other HMRC guidance also raise questions about the extent to which PRs can rely on valuation advice even when from a professional valuer such as a surveyor. Given the potential for penalties, PRs and their professional advisors must anxiously scrutinise all aspects of the valuation process in line with the points made above to minimise the potential for inaccuracy.

Comment

Kelly Greig

About the author: Kelly Greig TEP is Head of Court of Protection Services at Moore Blatch LLP in Lymington, Hampshire. She is a member of the STEP UK Practice Committee

Valuation: points for practitioners

The adjacent briefing note summarises the recent history and viewpoints of HMRC that should be considered by practitioners. Below are five key points that should help practitioners minimise the scope for liability if an incorrect valuation is submitted.

1. RICS Valuer Registration Scheme
  • Practitioners are guided to engage the services of a chartered surveyor or valuer, especially where inheritance tax is likely to be payable.
  • As of the end of April 2011 it is mandatory for chartered surveyors who provide ‘Red Book Valuations’ to sign up to a registration scheme administrated by the RICS. IHT valuations fall within the scope of application of RICS Valuation – Professional Standards (The Red Book).
  • You might alternatively engage the services of a member of the Institute of Rating, Revenues and Valuation (IRRV). They will also need to provide valuation advice that complies with the minimum requirements of The Red Book, but they are not encompassed in the RICS Valuer Registration Scheme.
  • In any event, practitioners should ensure that any valuation they receive is prepared both in accordance with The Red Book and by an appropriately qualified and, in applicable cases, registered valuer.
2. Beware of the potential conflict of interest for firms instructed to market the property to also value for IHT purposes
  • Through prior enquiries of a surveyor/valuer about a possible instruction, they should declare whether they are appropriately independent to provide impartial advice. If the valuer, or their firm, already has instructions to sell the property, upon which they would attract a fee or commission, there might be pressure applied to the valuer to ensure that the more lucrative instruction is not compromised.
3. Provide clear instructions to the valuer
  • As the briefing note recommends, a practitioner should instruct the valuer fully and correctly to ensure that the ultimate valuation advice received is as accurate as possible. Clear instructions should be provided at the outset to include the basis of the valuation and any particular points to note regarding the property. It is good practice to send a copy of the title to the valuer and to highlight any restrictions, ties, etc. If the valuation might thereafter be questioned by HMRC you will collectively be able to demonstrate the scope of enquiries made and how any specific issues relating to the property have been addressed in the valuation report and reflected in the property value. The valuation will need to address increases to value, such as ‘hope value’ and development potential, but also things that may restrict value, such as highways and other offsite planning or environmental legacies.
4. Check all assumptions made by the valuer in their report
  • If the value provided might be based on assumptions you may need to undertake subsequent enquiries to quantify or dismiss the grounds surrounding those assumptions, and thereafter work with the surveyor/valuer to try to mitigate the potential for a distorted valuation.
5. No quick fix estimate is likely to be sufficient even if property is to be sold immediately after grant is obtained
  • While the traditional practice of submitting on the IHT forms the average of three market appraisals prepared by local estate agents used to be acceptable, expectations and standards have progressed. Continued application of the traditional approach will leave practitioners exposed to the wrath of HMRC and liable to penalties.

 

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