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Hot Topic Highlight - Inheritance Tax

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What is today's blog about?

Benjamin Franklin famously said, 'in this world nothing can be said to the certain, except death and taxes'. Inheritance tax (IHT) is, therefore, an inevitability and something that you may face both personally and professionally. 

In this article, we discuss inheritance tax and property valuation. Essential reading for RICS APC and AssocRICS candidates.

You can also listen to our CPD podcast on Anchor for more free AssocRICS and RICS APC training and support.

Why is this relevant?

Changes to IHT were made in April 2017, with phased arrangements being brought in over the period to 2020.

This means that whether you are a RICS APC candidate, professional member or student - having an understanding of how IHT works is important, together with the implications on IHT valuations.

What is IHT?

Inheritance tax has been around for centuries in various guises; Death Duties, Estate Duty, Capital Transfer Tax and mostly recently in the form of IHT.

Originally considered a tax on the rich, IHT now affects more estates than ever.  A proportion of personal estates, including the family home, investments, life assurance plans and chattels may form part of a taxable estate on death.

What is an estate?

The total value of the assets left behind upon death.

What was the position before April 2017?

Previously, no IHT was payable on the first £325,000 of the deceased person's estate. This meant that a couple could pass on a home worth £650,000 (or £325,000 for a single person) at the nil rate band. Above this, 40% IHT was payable on the value of the property (assuming there were no charitable bequests).

What changes were made in April 2017?

From 6 April 2017, each person receives an additional £100,000 (rising to £175,000 by 2020 by way of the phased arrangements) tax free allowance to use against the value of their home if passed to a direct descendant. However, this allowance is reduced for estates in excess of £2m.

Does this only apply in the UK?

All individuals domiciled in the UK are subject to IHT on transfers of value of all of their worldwide assets with the exception of excluded property. 

Those who are not UK-domiciled are only subject to IHT in respect of their UK assets.  

What is excluded property?

This includes some interests in a trust and assets not situated in the UK.

What is a transfer of value?

Any action or omission (usually a gift) which reduces the value of an estate.  It is calculated by reference to the loss to the estate, rather than the value of the transfer.

Exempt Transfers include if IHT was never payable, Potentially Exempt Transfers (PETs) (if the donor survives 7 years from the date of the gift) and Chargeable Lifetime Transfers (CLTs).

Are there any exemptions?

  • Transfers between husband and wife or civil partners

  • Annual and Small Gift exemptions - gifts of up to £3000 per annum are exempt

  • Normal expenditure out of income

  • Gifts for maintenance of a dependent

  • Gifts in consideration of marriage or registration of civil partnership - £5000 from parents to child or £2500 from grandparents

  • Gifts to recognised UK charities or other bodies

Are there any reliefs?

  • Business Relief - at either 100% and 50%

  • Agricultural Relief - at either 100% or 50%

  • Woodlands Relief - defers IHT until timber is sold

  • Taper Relief - if donor dies before 7 years expires after a non exempt transfer

  • Quick Succession Relief - where deceased received assets on which IHT was paid within previous 5 years

How are land and property valued for IHT purposes?

HMRC generally require an IHT valuation where an estate includes land and/or property.

This needs to comply with Section 160 of the Inheritance Tax Act 1984 and UK VPGA 15 - Valuations for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax and the Annual Tax on Enveloped Dwellings (2019 UK Red Book Supplement).

The valuation will be instructed by the personal representatives of the deceased and then submitted to a district valuer acting on behalf of HMRC. 

What does UK VPGA 15 say?

UK VPGA 15 states that IHT valuations are based on a statutory definition of Market Value, which may not be exactly the same as the definition in VPS 4 of the Red Book. This is because it is subject to interpretation by the Upper Tribunal (Lands Chamber).

What is the statutory definition of Market Value?

Broadly speaking, it is defined as 'the price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time'.

However, case law has established the following assumptions when arriving at Market Value on the above statutory basis:

  • The sale is a hypothetical sale

  • The vendor is a hypothetical, prudent and willing party to the transaction

  • The purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser)

  • For the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price

  • All preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date

  • The property is offered for sale on the open market by whichever method of sale will achieve the best price

  • There is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers 

  • The valuation should reflect the bid of any special purchaser in the market (provided that purchaser is willing and able to purchase)

How can we help?

  • Head to our blog archive to access even more free CPD and AssocRICS and RICS APC training and support.

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Stay tuned for our next blog post to help build a better you

N.b. Nothing in this article constitutes legal or financial advice.


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