The Covid-19 crisis has created a volatile environment in which markets continue to see-saw wildly, asset values are dropping and interest rates remain extremely low. This will have a bearing on valuing assets for inheritance tax (IHT) purposes.
Any professional handling the administration of estates has the task of calculating the correct amount of IHT payable to HMRC.
Recently there has been a plethora of changes brought in annual budgets in continuous reform. This has meant that calculating IHT in line with the Inheritance Tax Act (IHTA 1984) can be deeply complex, especially where the estate includes property or businesses in other jurisdictions, gifts with reservation of benefit, or lifetime transfers, for example.
Mistakes earlier on in a probate administration may have later implications for the beneficiaries or personal representatives (PRs) who are responsible for administering the estate.
Do not be mistaken, HMRC is watching closely. There were 5537 IHT investigations opened by HMRC in the 2018-19 tax year.
The technical bit
When valuing assets in an estate to ensure a fair return you will need to bear several things in mind.
- Some assets may lose or increase in value as a result of the death. For example, the value of a business owned by the deceased may lose value as a result of their death.
- When it comes to valuing stocks and shares, there are specific methods which must be applied. Shares can be valued by taking the last lower closing price on the stock market and increasing this by one-quarter relative to the highest price. It is also acceptable to calculate the 'mid-bargain price' which is "halfway between the highest and lowest bargains for the particular share recorded for the relevant day."
- According to section 160 of the IHTA 1984, the value of each asset within the estate is the amount it may reasonably be expected to sell for on the 'open market'.
What about property values?
Many clients seek counsel as to how to value a property in the current climate. Quite often the family home will be the main and most valuable asset in the estate. Recent figures analysing the housing market show that:
- some 373,000 property sales are on hold owing to the current lockdown
- £82 billion of house sales have come to a screeching halt
- agreed sales are at a tenth of the normal level for the time of year, similar to the level of activity seen in late December
- Zoopla said the rate of sales falling through peaked on 23 March - the day the UK lockdown began
Traditionally, spring is seen as a 'boom' time for the housing and mortgage markets. Those in the trade call it the "spring bounce". However, the Government’s 'stay at home' message has meant that:
- people can only move homes in exceptional circumstances, such as entering a vacant property
- guidance to sellers and buyers are that they should amicably agree on a delayed moving date
The result, unfortunately, is that the housing market has come to a grinding halt and will take some time to recover.
People have been browsing for homes less on the internet, but this had recovered slightly in the last couple of weeks. However, this could simply be down to people finding themselves feeling increasingly claustrophobic living and working from home and wanting more space. Realistically, whether the property market will recover will hang on how much the economy is affected over the rest of the year and unfortunately, the subsequent effect on employment.
From an IHT point, however, this could be advantageous for the purposes of valuing as this will centre around what a buyer would willingly pay on the open market. In the current climate this is proving challenging since no visitors are allowed into properties, including estate agents, surveyors and potential buyers. This clearly will have a bearing on the valuation submitted, which is likely to be lower.
The practical bit
It would be wise to obtain a professional valuation as at the date of death. Note that it may be unwise to rely simply on an estate agent’s valuation for sale, and ideally valuations should be 'Red Book' valuations. In other words, they should adhere to the principles of the Royal Institution of Chartered Surveyors which are accepted by professional valuers and HMRC’s valuers.
If HMRC questions the market valuation provided by personal representatives, it may arrange for a valuation to be made by the District Valuer and discussions may be entered to agree upon the appropriate valuation on which IHT will be calculated upon.
If as at the date of death the property valuation has declined due to the pandemic and fall in the property market, then IHT will be paid on the depressed property valuation at a rate of 40%, after the deceased’s nil rate band exemption of £325,000 is taken into account and any other exemptions that may apply.
If the property valuation as at the date of death is agreed with the District Valuer and it is subsequently sold at a higher price when the market has recovered, then the estate could take advantage and pay capital gains tax on the gain at the lower rate of 28%.
The moral of the story
HMRC’s IHT manual really is not for the faint-hearted!
The process of valuing assets for IHT is not simple, nor quick. It may be prudent and worthwhile to seek the expertise of a professional to guide you through the process. If the estate contains foreign-based assets the expertise of foreign legal professionals may prove invaluable.
The priority is for everyone to stay safe and well and to follow Government guidance. As is the nature of the pandemic things are changing fast, and we are doing everything in our power to stay on top of the latest updates. In the meantime, we can guide you through the process of obtaining an appropriate valuation during these unprecedented times and advise you how to maximise upon tax efficiencies.
Our team at Russell-Cooke would be more than happy to support you by Facetime, Skype or some means of video call.
Lastly and most importantly we hope everyone, both clients and contacts, stay well and safe.