HMRC challenges land valuations in estates

Since 2019 more than 13,000 individuals have been subject to HMRC inheritance tax investigations and the figures have increased in the most recent year. The most valuable asset in many clients’ estates is property and so it is vital to submit an accurate valuation when applying for a Grant of Probate. Submitting incorrect values is likely to lead to an investigation and possible penalties if HMRC take the view that the figures submitted are inaccurate, whether that inaccuracy is deliberate or careless.

How are property valuations determined?

Executors are required within one year of a deceased’s death to submit to HMRC valuations of all the assets in the deceased’s estate. S160 of the Inheritance Tax Act 1984 provides that all property should be valued on an “open market” basis. Long gone are the days when the valuer would provide one value for marketing the property and another, sometimes much different value, for its probate valuation.

S160 states,

“Except as otherwise provided by this Act, the value at any time of any property for the purposes of this Act shall be the price which the property might reasonably be expected to fetch if sold in the open market at that time, but the price shall not be assumed to be reduced on the grounds that the whole property is to be placed on the market at the same time.”

In order that the executors can be seen to be acting reasonably it is essential in tax paying estates that a professional property valuation is obtained and that this is carried out by either a member of the Royal Institute of Chartered Surveyors or by a member of the Institute of Revenues Rating and Valuation. In addition, the valuer must be correctly instructed on the basis on which the property should be valued. An appropriate basis of valuation is a “Red Book” valuation carried out by a RICS member in accordance with the standards laid down by the RICS and including comparable evidence of three properties sold within the six months preceding the valuation date in the same or a similar area.

The value of some properties will include “hope value” (ie potential but unrealised development value) and it is important that this is carefully assessed as the property or land concerned will be more difficult to value as it will involve judgments on matters such as to the likelihood of obtaining planning permission for development.

Submitted property values will usually be referred to the District Valuer’s Office for consideration on behalf of HMRC and occasionally the probate valuation and the District Valuer’s valuation can differ markedly.

Challenging valuations

This potential valuation divergence was illustrated in a case concerning 6.39 acres of pasture land in Shifnal, Shropshire in the estate of the late Susan Foster who died in August 2013. Mrs Foster’s executor contended that the land was worth £191,700 while in HMRC’s view it was worth £850,000, a considerable discrepancy. The difference in valuation hinged on the possible development value of the site with the executor arguing that a planning application for development would have been refused at the valuation date as, among other reasons, the site was ecologically sensitive due to the presence of Great Crested Newts (a protected species), there was no means of access to the site from a highway and there had been a glut of recent residential property planning applications in the area which was likely to lead to local opposition to a further application.

The Tribunal held that in their view a hypothetical purchaser would have viewed the land as a development opportunity in the short term but there were a number of issues that were bound to be reflected in the price that would be paid by the purchaser. Those problems included the lack of access, and uncertainties over whether planning could be obtained. In arriving at the date of death valuation, those risks would lead to a discount of 80% on the price that the site was likely to obtain with planning permission. This meant that in the Tribunal’s view the land was worth £590,000 at the date of death, considerably more than the executor’s valuation, but also much less than the valuation put forward by HMRC.

A valuation which is successfully challenged by HMRC could have expensive consequences; HMRC will charge interest on any unpaid tax, and may also impose a penalty if they feel that the executors did not take sufficient care in ensuring the valuation submitted was a reasonable one.

The importance of probate valuations for CGT purposes

It should be remembered that the agreed probate value of the property will form its base acquisition cost for Capital Gains Tax (CGT) purposes on its disposal. Property gains in estates are currently taxed at 28% so CGT is preferable to an inheritance tax charge. It may be possible to appropriate the property to the beneficiaries before sale which could be beneficial if there are a number of beneficiaries with unused CGT annual exemptions, losses to set against the gain, or if the beneficiaries will be liable to CGT on the gain at a lower rate than the estate.