Enter Your E-mail

Julie Butler comments on the lack of certainty in determining the market value of land and buildings for Inheritance Tax purposes.

The Difficulty of Estimating the Hope Value of Development Land

In order to understand the Inheritance Tax (IHT) on development land values, perhaps the starting point is how is ‘hope value’ calculated at the date of death? The consideration is how is ‘hope value’ defined? Hope value is the difference between market value and agricultural value.

What is the Market Value of Development Land?

IHTA 1984 s 160 dictates that probate assets, i.e., assets held at death, are valued at market value i.e., the price that would be achieved between a willing buyer and a willing seller. A question that might be asked is, are there currently ‘cheque books at the ready’ to purchase blocks of potential development land? The lack of available buyers and the impact on hope value would apply particularly to land without planning permission. It can be argued that not many lenders would be prepared to lend monies to purchase speculative blocks of potential development land as they can be difficult to resell.

Due to uncertainty of the value of development land many personal representatives (PRs) have perhaps relied on the fact that the district valuer (DV) will question the value and therefore why not submit a reasonable estimate and finalise the matter by negotiating with the DV? 

Tax Aspects of Valuation on Death

There are tax planning issues around the variance of probate values of potential development land. On the assumption that the beneficiaries will want to sell the land for development, a high probate value creates a high ‘base cost’ for Capital Gains Tax (CGT). Again on the assumption that 100% Business Property Relief (BPR) for IHT purposes will be obtained on the death value, the beneficiaries will want as high a value as possible to obtain as high a CGT base cost as possible. However, what happens if the BPR claim fails? Clearly a low value would then be desirable - the current 40% IHT rate is far more punitive than the CGT rate of 18% (and/or 28% from 23 June 2010) or the Entrepreneurs' Relief (ER) rate of 10%. There will be a need for serious judgement calls.

The Importance of Professional Valuations

The need to take reasonable care in obtaining a professional valuation was established in Cairns v Revenue and Customs [2009] UK FTT 00008 (TC). It had been suggested by HMRC that three different professional valuations are obtained by the PRs. However the key issue is the quality and depth of steps taken to support the valuations submitted.

New Penalty Regime

As HMRC have adopted a behaviour-based penalty regime through FA 2007 Sch 24 there is greater focus on a need for accuracy and good record-keeping applying from 1 April 2008, and emphasis on the need for compliance and good behaviour and penalties for those who do not comply. FA 2008 Sch 40 extended the above regime to IHT from 1 April 2009 so it is considered to be “goodbye benign correspondence" and "hello to aggressive stance” with penalties which range from 15% to 100% of the tax and are based on a range of behavioural failures.

Of particular concern is that penalties can be levied by a deliberate act of a third party. Perhaps the land agents or a member of the family supplied incorrect details to the valuer? Insufficient work to maps, etc. However, HMRC have to demonstrate that the third party intended to cause that other person’s return or document to be inaccurate.