Valuing assets such as land and buildings is potentially tricky for various tax purposes, including inheritance tax (IHT) on making a chargeable lifetime transfer, or on death. One area of potential difficulty is valuing joint interests in land and buildings.
For example, a property in London may be jointly owned, such as by spouses or other family members. The question arises whether the value of a joint owner’s interest in the property should be discounted for IHT purposes on (say) their death.
Joint interests (or ‘undivided shares’, as they are sometimes known) in a property can be held either as ‘joint tenants’ or ‘tenants-in-common’ (different rules apply in Scotland). The interest of a joint tenant passes on death by survivorship to the remaining owner. By contrast, disposals of tenants-in-common interests in the property are possible during lifetime or by will.
When valuing an individual’s joint interest in a property (particularly as a tenant-in-common) for IHT purposes, a discount from the pro-rata value of the whole property is often considered, to reflect the rights and interest of the co-owner.
For example, a tenant-in-common of an interest in the family home would generally entitle that co-owner to occupy the whole property. On a transfer of that interest (e.g. on death), Valuation Office Agency (VOA) guidance indicates that the person’s share could be eligible for a potential discount from the freehold vacant possession value of 10–15%, although the actual level of discount will depend on the particular facts and circumstances (see ‘Inheritance tax: undivided shares’ at: tinyurl.com/IHT-VOA-s18; also tinyurl.com/VOA-IHT-Manual-PN2 at paragraph 9.7).
A discount in the value of a joint interest in the property could therefore result in a useful IHT saving in some cases.
Beware: ‘related property’!
However, there are special valuation rules for ‘related property’ (IHTA 1984, s 161). Those rules apply broadly where valuing a property interest together with the related property results in a higher value than a normal valuation. Property is ‘related’ for these purposes in circumstances including where it is in the estate of a spouse (or civil partner).
Consequently, if property is jointly held by spouses or civil partners (whether as joint tenants or tenants-in-common, albeit that joint property passing by survivorship may be subject to the IHT spouse exemption in any event), HMRC could seek to challenge any discount claimed using the related property rules.
HMRC states (in its Inheritance Tax manual at IHTM09739):
“The related property rules apply because the interests of the spouses/civil partners are together worth more than the sum of their separate interests – the separate interests would normally be subject to a discount for joint ownership. The interests of the husband and wife, or civil partners, will normally be identical and will extend to the whole of the land and property so the value of the deceased/transferor’s interest will be the appropriate proportion of the entirety value.”
If the related property rule applies to jointly-owned property, the value to be included in the estate is the ‘appropriate portion’ of the value of the combined property. There are two methods of calculating the appropriate portion, commonly known as the ‘general rule’ (in s 161(3)) and ‘special rule’ (in s 161(4)).
The ‘general rule’ was used in Price v Revenue and Customs  UKFTT 474 (TC). In that case, a matrimonial home was owned by husband and wife in equal half shares as tenants-in-common. The entire property was valued at £1.5 million, but the value of the half shares of the property were valued at £637,500 each. Following the wife’s death, her husband (as executor of the estate) argued that in applying the related property provisions to his wife’s share in the property (which was left by will to her children), it was necessary to take the two property interests valued separately and add them together, rather than (as HMRC argued) treating the totality of interests as a single item of property. Unfortunately for the husband, his argument before the First-tier Tribunal was unsuccessful.
HMRC considers that the ‘special rule’, which is generally used to value units of assets with identical attributes (e.g. company shares of the same class), also applies to undivided shares of property, although HMRC acknowledges that there is some question whether it can apply to shares of land (see IHTM09737). HMRC’s approach is despite the case Arkwright (personal representatives of Williams v IRC  EWHC 1720 (Ch), in which the Special Commissioner held that the special rule did not apply to undivided shares of land.
Whichever rule applies, the related property provisions can result in higher IHT valuations than expected.
However, if property in the death estate is valued under the related property rules and is subsequently sold for a lower amount within three years of death, ‘related property relief’ may be claimed if certain conditions are satisfied (see IHTA 1984, s 176, and IHTM09751 onwards).
The above article was first published in Property Tax Insider (January 2019) (www.taxinsider.co.uk).