Where an estate is likely to be subject to inheritance tax and, amongst its assets, comprises a property or land, a Royal Institute of Chartered Surveyors (RICS) ‘Red Book’ valuation is advisable to calculate the amount of tax due to HM Revenue and Customs (HMRC).
Although no statutory obligation exists, HMRC usually requires a statement, by way of professional valuation, that has been prepared on instruction following the death of the land owner. This instruction comes from the personal representative, who has the authority to administer an estate and holds an obligation to HMRC to account for any inheritance tax rightfully due. HMRC recommends an RICS valuation when satisfying the requirement of s.160 Inheritance Tax Act 1984 (IHTA 1984)which states that the ‘market value’ is “the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time.”
To summarise, an RICS valuation relates to the value of the interest held in land by the deceased on the date the deceased passed away. It covers residential and commercial property, which are the two most common types of landholding in an estate.
An RICS report is prepared in accordance with the published guidance on property valuations for IHT, which sets out to meet, amongst other criteria, s.4 IHTA 1984. That is; “on the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death.”
The date of valuation is the date of death. An RICS report considers research, local property knowledge and often makes enquiries with local estate agents to attain a value of the land or property that the deceased held an interest in immediately prior to death. It is an analysis of the available and relevant comparable evidence of similar property sales in the locality.
Despite the requirements for this approach to valuing estate owned land and property, the starting point of the lay personal representative is often an estate agent valuation. The implied question that an estate agent valuation aims to answer is “what sale price would the property achieve, in its vacant state, in the current open market conditions”. Practically, it does make sense to obtain a market valuation as the property is often sold as part of the estate administration, but these valuations lack the detail and accountability that an RICS report provides, and HMRC expects. Whilst a figure is obtained through each respective valuation, there are wider issues for the personal representatives to consider, such as the duty to conclude the estate’s tax affairs using appropriate evidence.
In terms of the effect and considerations of these differing reports by HMRC, it is clear to see the advantage of obtaining an RICS valuation.
HMRC may also be more inclined to raise additional estate enquiries regarding the inheritance tax calculations if an estate agent’s valuation is relied upon as part of the IHT calculation. HMRC can, and often does, appoint a district valuer to consider whether the value of the property at the date of death reasonably reflects the value that is being relied upon in the inheritance tax account for the purposes of calculating the inheritance tax due. There is, of course, the possibility that an estate which has commissioned an RICS report will be subject to further enquiries and involvement of a district valuer, but such instances are, in our experience, less likely..
The purpose of an HMRC enquiry is to establish whether the value of the estate as noted in the IHT account is accurate as at the date of death. It may be that the true value is below the value presented to HMRC. Alternatively, if HMRC believe the true property value exceeds the property value relied upon in the IHT calculation and concludes that the information provided is deemed to be misleading, it has power to impose financial penalties against the estate and personal representatives.
Such enquiries by HMRC have no set time limit. It would depend upon the information at hand and the further information requested from the executors on behalf of the estate. For this reason, involvement could delay the administration of this estate beyond the timescales originally anticipated. As a knock on consequence of this, distribution,; interim or full, are often held over until any enquiries are satisfied in full.
It is therefore always best practice that, when acting in your role as an executor and discharging your obligations to the estate, the beneficiaries and HMRC, an RICS Red Book valuation is obtained to (a) value the estate accurately and account to HMRC for the appropriate amount of IHT, (b) conclude the estate administration as quickly and efficiently as possible and (c) discharge your obligations to the residuary beneficiaries and account to them with a full and accurate set of estate accounts based on professional valuations and assistance throughout.