How much are your assets worth? Some asset valuations (e.g., quoted shares) are relatively straightforward; others might cause disagreements with HM Revenue and Customs (HMRC).
What is ‘market value’?
For example, when valuing a chargeable lifetime gift of a property for inheritance tax (IHT) purposes, or a property on an individual’s death, its market value must be ascertained.
Unfortunately, it is unclear exactly what constitutes ‘market value’. The definition in the IHT legislation is only brief: “…the price 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” (IHTA 1984, s 160).
HMRC regards inadequate valuations of land and buildings as ‘high risk’ of IHT loss. HMRC enquiries into such valuations produce large amounts of additional IHT, interest and penalties.
Do it properly!
What can be done to reduce potential problems with HMRC? In its ‘Inheritance Tax Toolkit’ HMRC states that for assets with a material value, taxpayers “are strongly advised to instruct a qualified independent valuer, to make sure the valuation is made for the purposes of the relevant legislation, and for houses, land and buildings, it meets Royal Institution of Chartered Surveyors (RICS) or equivalent standards.”
However, in HMRC’s view it is not enough simply to seek a professional valuation: “In the absence of proper instructions the valuer will not understand the context nor have all the necessary details on which to make a proper valuation.”
HMRC expects the person seeking the professional valuation to explain the context and draw attention to the definition of market value for IHT purposes (see above) and provide the valuer with all the relevant details concerning the property, including copies of any agreements (e.g., leases).
Still not enough?
If HMRC enquires into (say) a professional property valuation and it transpires the property was undervalued, HMRC may seek to establish whether the valuer was negligent for penalty purposes (IHTA 1984, s 247(3)), or whether the taxpayer failed to instruct the valuer properly.
In the latter case, the taxpayer may be liable to a penalty. HMRC might ask the following (see HMRC’s Inheritance Tax manual at IHTM36153):
- what steps were taken to arrive at the figure(s)?
- what instructions were given to the valuer and what were the terms of the advice received (for professional valuations)?
- was the valuer provided with all relevant information about the property?
- was advice sought from more than one valuer?
- if the property is being (or has been) sold, when was the decision taken to sell?
- what was the offer price and how was it arrived at?
HMRC puts the onus on taxpayers to “question any valuation advice which obviously ignored relevant information or which did clearly not represent an open market valuation” and check any “significant assumptions made by the valuer about the property which affected its open market value” (IHTM36154).
An undervaluation might arise despite the taxpayer’s (and valuer’s) best efforts. To mitigate against possible late payment interest charges following protracted negotiations, consider making a payment on account of the eventual IHT liability.
The above article was first published by Property Tax Insider (February 2021) (www.taxinsider.co.uk).