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Julie Butler FCA considers a recent Land Tribunal case and the importance of obtaining accurate and up-to-date valuations for Inheritance Tax purposes. 

Background

A recent Land Tribunal case, Tapp v HMRC 2008 EW Lands TMA/284/2008 has highlighted the importance of market value of property at date of death and interaction with the state of repair.

In the Tapp case the District Valuer (DV) only visited the property two years after the date of death.

Market Value

The basis of valuation for inheritance tax (IHT) is market value (IHTA 1984 s 160), i.e., the price that would be paid by a willing buyer to a willing seller.

Clearly the valuation should be undertaken as soon after the date of death as possible.  If a professional valuation is not undertaken, photographic evidence of the property and the state of repair should be obtained.  It is of course a good idea for beneficiaries and/or executors who do arrange to have repair work carried out,  to keep records of work done ready for the valuation.

The valuation is obviously important for IHT planning and establishing any IHT liability.  The tax relief on the expenditure must also be considered – is this a capital gains tax (CGT) improvement expense or is it a cost to offset against income?

Repairs to Farms

The fact that repairs to farms may attract 100% Agricultural Property Relief (APR) and/or Business Property Relief (BPR), whilst non-business property does not benefit from these reliefs could be the subject of some death bed or later year's planning.  For example:

1) Farmer “J” owns a farm worth £2 million including a farmhouse worth £500,000.  It is anticipated HMRC could accept agricultural value of 60% so £200,000 may not qualify for APR or BPR.  Farmer “J” has recently sold development land, and has £400,000 cash due to savings and this sale.  The obvious tax planning is to rollover the gain into more land.  Entrepreneurs’ Relief would not be available as a material disposal of business assets has not been made.  The cash is clearly “IHT vulnerable”, i.e., will not be covered by the “nil rate band”. Rollover can save CGT and ensure the replacement of IHT-vulnerable property with IHT-efficient property, for IHT purposes.  The rollover could be into mprovements to the farm.

2) Farmer “O” owns a farm worth £3 million including a farmhouse which could similarly be subject to restriction.  Farmer “O” has savings and investments of £600,000 and the farm is in a bad state of repair due to the deteriorating health of Farmer “O”.  If cash is used on repairs and improvements then the value of the farm should increase and potentially be subject to APR and BPR as appropriate at 100%.

Conclusion

The recent Tapp case shows an example of late DV visits and questions over repairs indicating the need for photographic evidence at various stages.  There are tax planning opportunities for the use (and timing thereof) of “inheritance tax vulnerable” cash.  There is also the question of the complexity of what exactly is “market value” at the time of writing.

There are those who argue that market values may be uncertain (under the ‘willing buyer, willing seller’ principle) in today’s economic climate.

There is no doubt that “repair" and "market uncertainty” can be used as tax planning tools.