It is often necessary to value assets such as a property for inheritance tax (IHT) purposes. For example, if an individual makes a lifetime gift of an investment property in the UK to a discretionary trust, it will normally be necessary to ascertain the market value of the property transferred, as there will be an immediately chargeable transfer on which IHT may be payable. Another example is when someone dies; IHT is chargeable based on the value of the individual’s estate immediately before death.
What’s it worth?
The general IHT definition of ‘market value’ is ‘the price which the property might reasonably be expected to fetch if sold in the open market at that time.’ The price is not reduced on the basis that selling the whole property on the hypothetical open market at the same time would flood the market (IHTA 1984, s 160).
This market value rule looks straightforward enough. However, in practice establishing the market value of a property can be difficult because valuations are subjective in nature. For example, it is quite possible that three professional valuers may arrive at different market valuations for the same property.
For IHT purposes, taxpayers and personal representatives will generally prefer a lower valuation of the property to a higher one, to reduce exposure to IHT liabilities. HM Revenue and Customs (HMRC) regards valuations as a ‘high risk’ area in terms of the possible loss of IHT if valuations are too low.
‘Development’ or ‘hope’ value
When valuing a property, HMRC expects the valuer ‘to consider whether there is any potential for development and, if so, to ensure that it is taken into account and reflected in the valuation. HMRC considers that ‘hope’ value is ‘a component part of the open market value in appropriate cases, whether or not planning permission has been sought or granted’ (see HMRC’s Inheritance Tax manual at IHTM36275).
In Palliser v Revenue and Customs [2018] UKUT 71 (LC), an individual (AP) owned an 88.4% share in a residential property. He died in June 2012. AP’s son (the appellant) instructed a valuer to value the property for probate purposes. In August 2012, the valuer valued the property at £1.4 million. AP’s interest (at 88.4%) was £1,237,600. The property was eventually sold for £2.525 million in March 2014. However, HMRC considered AP’s property interest to be worth £1,829,880. The appellant appealed, on the basis that the correct valuation was £1,113,840 (i.e. £1,237,600 less a discount of 10% to reflect the undivided share in the property).
The appellant’s valuation did not reflect any hope value for future development or change of use of the property. However, the Upper Tribunal (Lands Chamber) considered that the appellant’s valuer was wrong to say that hope value could not be taken into account. The tribunal considered that insofar as the property’s potential for improvement had not been crystallised by planning permission, its value would be ‘hope’ rather than ‘development’ value, but either way it could not be ignored. In the tribunal’s opinion, the property was ripe for a major reconfiguration and improvement of a type that the purchasers subsequently pursued. The tribunal also stated that the potential for some expansion of the floor space of the property should be reflected in the value of the property at the valuation date.
The tribunal determined that the net valuation of the property with extension was £2.2 million, and without extension was £1.832 million. It took 50% of the difference (i.e. £368,000) as representing the hope value of extending the floor area of the property, giving £184,000. Therefore the market value of the property including hope value was £2.016 million. The appellant’s share (88.4%) was £1,782,444. This was reduced by 10% to reflect the undivided share, giving a value of £1,603,930. The appellant’s appeal was therefore allowed in part.
Planning permission
In Palliser, planning permission had been granted subsequent to the sale of the property in March 2014. However, the property was valued at the date of the deceased’s death in June 2012 (although previous planning permissions had been given for the property in the 1960s). The tribunal therefore took 50% (not 100%) of the development value as representing hope value.
By contrast, in Prosser v IRC [2000] EWLands DET_1_2000, the Valuation Office Agency suggested a figure as at the date of death assuming planning permission and deducting an allowance of 20% to reflect the ‘risk’ that no planning permission had been given at the relevant date. However, the Lands Tribunal held that there was a 50% chance of obtaining planning permission, and that a speculator purchaser would have paid only 25% of the full development value, to reflect the 50% chance of obtaining planning permission.
Practical point
HMRC’s ‘Inheritance Tax Toolkit’ strongly advises that professional valuations are obtained, and that valuers are given ‘proper instructions’ (see tinyurl.com/IHT-Toolkit).
The above article was first published in Property Tax Insider in August 2018 (www.taxinsider.co.uk).
