HMRC have received legal advice regarding the application of IHTA 1984, s. 161(4) when valuing shares of land as related property, and have issued some new guidance accordingly.
Broadly, IHTA 1984, s. 161 provides that, when valuing a share of property for inheritance tax where the spouse or civil partner also has an interest in the same property, the spouse’s or civil partner’s interest is taken into account. The effect is to reduce the level of discount that smaller, un-aggregated shares of property can attract when valued. The precise basis on which this is done was the subject of litigation during 2004 and resulted in the High Court decision Arkwright and another v Inland Revenue Commissioners  EWHC 1720 (Ch).
The appeal had earlier been considered by the Special Commissioners who found that the Revenue could not rely on section 161(4) in the case of incorporeal shares of land. Section 161(4) requires the aggregate value to be apportioned in accordance with the proportion the smaller number of shares are held to the total held by both spouses/civil partners. The Special Commissioner found that whilst the measure could apply to property which had a distinct or individual existence as a unit, such as unit trusts or a set of furniture (for example twelve dining chairs), it did not apply to fractions of units. The Revenue did not pursue this point when its appeal was heard by the High Court.
The High Court decided that the question of the open market valuation was, in the absence of agreement between HMRC and the personal representatives, a matter for the Lands Tribunal.
In the course of seeking to reach agreement HMRC has received legal advice that section 161(4) may, in fact, apply to fractional shares of units.
Accordingly, HMRC will apply section 161(4) when valuing shares of land as related property in any inheritance tax case where the account is received by HMRC after 28 November 2007. HMRC will consider litigation in appropriate cases.
It is now not possible to have further judicial consideration of the section 161(4) point in the context of the Arkwright decision. Any existing cases in which section 161(4) is considered in point will therefore be dealt with on the basis of the Special Commissioners’ decision in the Arkwright case as it relates to the interpretation of section 161(4).
HMRC will, when so requested, also reconsider any cases involving land valuations which were concluded after the Arkwright decision was handed down on 16 July 2004 and determined on the basis that section 161(4) applied.