Published: 28th March 2019
As the executor or personal representative for an Estate, there is always the challenge of valuing the assets as part of the Estate Administration process. It is easy to think that where an Estate has property as assets, it is okay to rely on an Estate Agents valuation, but that is not in the best interest of the Estate or compliant with the Section 160 of the Inheritance Tax Act 1984 (IHTA).
To protect the beneficiaries of the estate and your own professional indemnity insurance as an Executor, it’s important to find experienced surveyors who are able to provide valuation advice for Capital Gains Tax purposes and to negotiate with the Valuation Office Agency in respect of Capital Gains and Inheritance Tax issues.
Recent cases have shown that HM Revenue & Customs (HMRC) are proactive at ensuring the IHTA is complied with and that the appropriate tax is paid on an Estate.
In the Land Chambers case, Palliser v HMRC  UKUT 0071 (LC) the Upper Tribunal found that a maisonette, in need of modernisation but with great potential, should have been valued for IHT purposes with hope value of £184,000 included. A reminder that any valuation used must be able to stand up to scrutiny by the District Valuer.
Section 160 of the Inheritance Tax Act 1984 - Market value
Except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.
In this case a Notice of Determination was served by HMRC under section 221 of the Inheritance Tax Act which resulted in the beneficiary receiving an asset of a higher value, resulting in the Estate owing more inheritance tax.
DETERMINATION FROM Palliser v HMRC  UKUT 0071 (LC)
A statutory valuation, made in accordance with section 160 of the 1984 Inheritance Tax Act (160 IHTA), requires the determination of the price which the Property might reasonably be expected to fetch if sold in the open market.
As the property was being marketed with the potential for improvement, then if the market is prepared to pay a price which includes the prospect of an enlarged floor space, that must be taken into account in the valuation.
To the extent that the potential has not been crystallised by a planning permission, its value will be hope value rather than development value, but either way it is not an element of value that falls to be ignored under section 160 IHTA.
CASE KEY POINTS
19 June 2012 (Date of Death Valuation) Beneficiary inherited an 88.4% share in a property
12B Wedderburn Road, London, NW3 5QG (The Property) was a dated and unmodernised maisonette, requiring major refurbishment
August 2012. The date of valuation, a RICS Chartered Surveyor valued the asset at £1.4m
Beneficiary entitlement £1.237m
RICS red book did not mention Hope Value so it was not included. However the Valuation did list issues which negatively impacted the value
July 2013. The Property was marketed by Knight Frank
The beneficiary pushed the agents
for the highest possible asking price & to market the property at £2.75m
to promote the largest living space possible in the marketing materials
March 2014. The property was sold for £2.525m
13 December 2016. HMRC issued a Notice of Determination under section 221 of the Inheritance Tax Act 1984 under which the deceased’s freehold interest was valued at £1,829,880
31 March 2017. The Valuation was upheld after a review by HMRC
28 April 2017. The beneficiary appealed the decision to the First-tier Tribunal proposing a correct valuation of £1,113,840
26 May 2017. The appeal was referred to the Upper Tribunal (UT) to determine the valuation dispute
The Upper tribunal dismissed the appeal and criticising the surveyors negative approach to the valuation
The following case is referred to in this decision:
Inland Revenue Commissioners v Gray  STC 360 - The court considered the ‘statutory hypothetical sale’ when valuing property for Inheritance Tax purposes: ‘The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale.
Inland Revenue Commissioners v Crossman HL ( AC 26) - For a valuation for estate taxes, the value is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date.
Duke of Buccleuch v Inland Revenue CommissionersHL ( 1 AC 506) - When a valuation was to be attributed to a property the test must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market.
SECTION 221 OF THE INHERITANCE TAX ACT
NOTICES OF DETERMINATION
(1) Where it appears to the Board that a transfer of value has been made or where a claim under this Act is made to the Board in connection with a transfer of value, the Board may give notice in writing to any person who appears to the Board to be the transferor or the claimant or to be liable for any of the tax chargeable on the value transferred, stating that they have determined the matters specified in the notice.
(2) The matters that may be specified in a notice under this section in relation to any transfer of value are all or any of the following—
(a)the date of the transfer;
(b)the value transferred and the value of any property to which the value transferred is wholly or partly attributable;
(d)the tax chargeable (if any) and the persons who are liable for the whole or part of it;
(e)the amount of any payment made in excess of the tax for which a person is liable and the date from which and the rate at which tax or any repayment of tax overpaid carries interest; and
(f)any other matter that appears to the Board to be relevant for the purposes of this Act.
(3) A determination for the purposes of a notice under this section of any fact relating to a transfer of value—
(a)shall, if that fact has been stated in an account or return under this Part of this Act and the Board are satisfied that the account or return is correct, be made by the Board in accordance with that account or return, but
(b)may, in any other case, be made by the Board to the best of their judgment.