Mark McLaughlin warns that inaccurate valuations of land and buildings for inheritance tax purposes can result in HMRC enquiries, additional tax and possibly penalties.
Some areas of tax compliance are much more difficult to get right (and therefore more of a risk in terms of making errors) than others. Valuing assets such as land and property for inheritance tax (IHT) purposes (e.g. on death) is one such area.
Land valuations
One of the difficulties with land (and many other valuations) for IHT purposes is a lack of clear guidance on what constitutes ‘market value’. This term is simply defined in the legislation as ‘…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).
According to HM Revenue and Customs (HMRC), inadequate valuation of land (and buildings) is one of the biggest risks in IHT compliance. HMRC enquiries into land valuations produce large amounts of additional IHT and interest. What can be done to reduce the possibility of problems with HMRC?
Call the professionals!
HMRC guidance in its ‘Inheritance Tax Toolkit’ 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. HMRC also state: ‘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 in IHTA 1984, s 160 (see above), and provide the valuer with all the relevant details concerning the land and property, including copies of any agreements (e.g. leases), or full details where only an oral agreement exists.
The ‘high risk’ nature of a land valuation increases the possibility of challenge, particularly where HMRC suspects that the valuation may be too low (see Hatton v HMRC [2010] UKUT 195 (LC)). However, this will not necessarily result in an increased value being attributed (see Chadwick and another v HMRC [2010] UKUT 82 (LC)).
Penalties? Not necessarily…
HMRC review undervaluations to look for cases where penalties should be charged. However, in Cairns v Revenue & Customs [2009] UKFTT 00008 (TC), a professional executor who submitted an IHT account on a deceased individual’s death containing a property valuation that later turned out to be too low successfully appealed against penalties sought by HMRC.
In that case, HMRC argued that Mr Cairns should have obtained another professional valuation or revisited the valuation already obtained, and that there had been a wilful default. However, the tribunal held that ‘…the mere failure to obtain another valuation when it has not been established that a second valuation would have led to a different figure being inserted in the statutory form does not constitute negligent delivery of an incorrect account.’
Practical Tip:
HMRC’s Inheritance Tax & Trusts Newsletter (August 2009) featured a report on its Annual Probate Section Conference, which indicated that if instructions for the valuation of a property were given on the correct basis, any uplift in value subsequently agreed was ‘unlikely’ to attract a penalty. The ‘correct basis’ was defined as: ‘… a hypothetical sale in the open market under normal market conditions and marketed properly with no discounts for a quick sale or for the time of year etc.’
The suggestion was made that in order to be confident that ‘reasonable care’ had been demonstrated, three valuations from different estate agents would be preferable, or a professional (i.e. Royal Institute of Chartered Surveyors) valuation if a definitive valuation was necessary. However, whether a person has exercised reasonable care will depend on what actual steps were taken in each case.
