Tax on property value increase

[mymsman]

I hope someone will be able to clarify how tax is calculated on a change in property value.

My father died in October 2010 and we obtained probate valuations of his house from three estate agents of £300K, £330K and £350K. We used the middle figure (£330K) for the IHT calculations. Total estate is £650K.

The house has now been sold for £375K, HMRC are querying the probate valuation with the District Valuer.

The entire estate is split equally between myself and my son (who currently lives in America).

Should tax on the increased value be paid at IHT rates (40%) or CGT rates (28%) and if CGT can both my son and I apply annual exemptions to reduce the amount or just the executor.

Sorry for asking a basic question but I can't find a clear explanation on the HMRC web site.

Bob

[maths]

Any increase in value will affect the IHT due on the estate; in effect an extra 40% on the increase.

Whatever value is agreed for IHT will form the base cost of the asset for CGT purposes.

The sale of the property is either by the will's executors or by you and your son if the property was first assented to you both (only in the latter case can you each use your own annual exempt amount).

[mymsman]

Thanks for quick reply.

Sale was by executor.

So if I am understanding correctly it will depend on the value returned by the district valuer.

I will need to pay extra IHT on the amount between probate value and the district valuers figure and CGT on the difference between that and the sale price minus executors exemption.

[maths]

Broadly correct.

The increased IHT charge and any CGT charge are the liabilities of the executor and thus payable out of the deceased's estate before the beneficiaries inherit.

[tax_schmax]

You're not alone.

Last year HM Revenue & Customs challenged nearly ten thousand probate valuations of land, raising an extra GBP70 million of inheritance tax charges.
The exact number of disputed valuations was 9,368, according to official figures. Where a challenge was brought, the resulting re-valuation raised the house's estimated value by GBP24,600, say tax advisers UHY Hacker Young.

HMRC's new enforcement powers are also encouraging it to crack down on alleged under-valuations for probate. The agency is now asking personal representatives how much care they took when getting an independent valuation.The implication, says UHY, is that penalties may follow where "reasonable care" was not taken with the valuation. If HMRC decide it was not, the estate and its beneficiaries could end up having to pay penalties of 30 to 100 per cent of the additional tax liability, on top of the additional tax due. This could be a considerable sum for some estates with a relatively small cash component, says UHY tax partner Mark Giddens.

[peter@2711.co.uk]

Certainly not alone - there are a lot of us.

I am still dealing with a case going back to January 2002 , now back with the PHSO. District Valuer refused to see the Deceased's Property, but rejected 35 Valuations (17 Professional) and the validity of the Sale Contract.

You will see in the middle of page 16 of this IHT Forum on 29 December 2009 I asked "Anyone reached the "end" of the IRev Complaints System?" - 538 views - but apparantly no one has yet lived long enough, as Revenue can delay matters indefinitely.

[peter@2711.co.uk]

Further Thoughts

mymsman - District Valuer is a "Tax Enhancer" - neeedn't see any property, or his own "comparables", and can reject all Independent Professional Valuations without giving a reason. DV is interested in the Theoretical Gross Sale Value, Open Market, as at Date of Death.
Suggest check your figures on say the Nationwide House Property Calculator, but for most Regions there has been a reduction in property valuers between your DoD & DoS, (Date of Sale i.e Completion) , which determined the value of the property at that time. Therefore, unless there were improvements to the property or other changes, such as enhanced planning permissions, I think you will have great difficulty in arguing that the Property was NOT worth £375K in October 2010.

tax-schmax- I struggle with all HMRC released figures and these are no exception. I have also read that HMRC manage to raise the "value" of a Deceased's Property by an average of c£24.000. With IHT @ 40% & the CGT adjustment, this apparantly raises c£8,000 per "case" and with 9,000 successs, produces £70m extra tax pa. Very few PPV Disputes get to the Lands Tribunal (say 1 per year) because of the cost. Unfortunately it always seems cheaper to pay the extra tax demanded than Dispute a DV's PPV Rejection.

Peter

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