A recent case heard before the Lands Chamber (Linda Frances Chadwick and another (Hobart’s Executors)) was won by the taxpayer. This case gives hope to the importance of fighting genuine market value figures for property valued at the date of death for Inheritance Tax (IHT) purposes in good faith and with strong research.
‘Behaviour Based’ Penalty Regime
The behaviour based penalty regime for errors in tax returns etc was introduced (by FA 2007, Schedule 24) from 1 April 2008. This regime was extended (by Schedule 40 FA 2008) to include IHT, with effect from 1 April 2009.
There are many who have seen a much more aggressive approach by HMRC since the introduction of the penalty regime.
What are the facts of the above case? The executors of a Will obtained valuations soon after the deceased died from two local estate agents, who both valued the property at £250,000. The property was subsequently used as a holiday home after it had been refurbished.
Over a year later HMRC visited the property and proposed £300,000. A compromise of £275,000 was suggested. The case went to Lands Tribunal and the taxpayers’ appeal was allowed.
The District Valuer (DV) on behalf of HMRC is so often dealing with the valuation a long time after date of death and arriving at a higher value, and therefore a higher IHT bill, and then forcing the taxpayer to reach a compromise.
The action plan for both the client and tax adviser is to stand by the correct valuation(s) obtained in good faith (under IHTA 1984, s 160).
In this victory for the taxpayer, the IHT at stake must have been £10,000. The calculation is £275,000 - £250,000 = £25,000 @ 40% = £10,000. There are many who might consider that this was a relatively low amount of tax over which to stand firm and debate the matter at Lands Tribunal.
Another factor that the case is considered to show is the need to encourage visits by the District Valuer as soon after death as possible and to ensure that there is evidence (photographic, etc) of the state of the property at the date of death, and to record and detail refurbishments.
Differences in valuation is an area that HMRC are known to look at closely, e.g. under-valuations when there are no IHT reliefs available and over-valuations when there are reliefs available. The latter is so that the beneficiary will start with as high a base cost as possible.
The reality is that on farms and estates for example where there is a dispute over the value of the property and eligibility for Business Property Relief (BPR) on some property included in the Estate (e.g. let property, hope value and buildings used for non-agricultural purposes), there is often a 'deal' offered by HMRC of a payment of IHT to settle the case.
Sometimes executors and beneficiaries who are involved in the decision making are exhausted or confused or simply just want to ’move on‘ and to be able to close the case and use the property. It is fair to say that they are often very vulnerable, and a deal appears an easy solution.
The Chadwick case emphasises the need to fight every decision where there are valid arguments and good evidence has been obtained, even if the tax saving is £10,000.