Valuation Mystique?

by Readers Question

10:18 AM, 20th November 2019
About 3 weeks ago

Valuation Mystique?

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Valuation Mystique?

I recently inherited a mid- terrace house currently arranged as 2 flats. All interests in the house ie Freehold, leasehold ground floor flat and leasehold first floor flat are in my sister’s name.

The leases are relatively short 57 years at a small ground rent, but the Freehold has a relatively high value because of the short leases. Although the property would readily convert back to a single house it would require planning consent.

The valuation officer for probate purposes wants to value the property as a house as it gives a greater value.

Has anybody come across the situation before and how was the problem solved as I would not like to have to pay the additional tax, valuing the property as a house.

Andrew



Comments

roly

7:52 AM, 21st November 2019
About 3 weeks ago

If both flats have a lease, then presumably they have separate titles at the Land Registry. I don't understand how a probate valuation could assume a title different from that which is registered. I would appeal.

Nick Blades

8:02 AM, 21st November 2019
About 3 weeks ago

I am not a professional accountant or solicitor but it strikes me as incorrect to value the property in a form that doesn't currently exist. On that basis you could value a piece of land as a potential building plot regardless of whether it was ever likely of getting planning consent. I would appeal under these circumstances.

Graham Bowcock

8:40 AM, 21st November 2019
About 3 weeks ago

Based on what you have said -

Firstly, if you sister has acquired both the freehold and the leasehold interests, then the interests will have been merged and the leaseholds extinguished. You cannot be simultaneously freeholder and leaseholder of the same property.

The Valuation Officer (I assume this is from HMRC - used to be the District Valuer) has to assess the market value. If clearly laid out as two flats, then initially the value would be as two flats, but if it were to be marketed and is more attractive as a single unit then this may increase the market value.

I wonder what valuation advice you have had in reaching your view. If you have not done so already, I suggest that get a chartered surveyor to represent you and to give you a formal valuation of the property, having seen the documentation. Generally solicitors dealing with the probate issue such instructions so that the valuer knows the extent of the respective interests.

Graham Bowcock

9:29 AM, 21st November 2019
About 3 weeks ago

Reply to the comment left by Nick Blades at 21/11/2019 - 08:02
The correct valuation will be the market value. If the market places a higher value on the property having regard to potential then that should be considered. The valuer may make assumptions, but these need to be realistic.

Historically probate valuations have tended to come out on the lower side, but HMRC are now more prone to challenging.

As I said, if the estate appoints a valuer they should be able to assess the correct value.

David Price

12:29 PM, 23rd November 2019
About 2 weeks ago

I have read the various comments on Andrew's query regarding the basis of valuation for Inheritance Tax purposes but unfortunately some of the contributors are under a misapprehension as to the basis of valuation and to say that "Historically probate valuations have tended to come out on the lower side" is totally misleading and undermines the reputation of this fine newsletter.
May I suggest that Andrew googles the Valuation Office Agency Inheritance Tax Manual particularly Section 7 which will provide him with the information he needs. Might I add that the Valuation Office has always provided advice on capital valuations for the Government since it was set up over a century ago firstly as a constituent part of the Board of Inland Revenue and more recently of HMRC.

Graham Bowcock

13:42 PM, 25th November 2019
About 2 weeks ago

Reply to the comment left by David Price at 23/11/2019 - 12:29
David
Your advice is, of course, correct and it was me who referred to IHT (often known as Probate) valuations being on the low side. Not all valuations are done by a qualified chartered surveyor; many are actually done by estate agents, who it seems are permitted to provide such advice and, on occasion, there is no formal valuation at all. Many times I have discussed with solicitors that they have used figures on the low side; usually they are aware of this and are going with their clients' instructions.

Nick Pope

9:42 AM, 5th December 2019
About 4 days ago

This question has come at an opportune moment as I am dealing with a similar situation. Please note that I am a chartered surveyor but you should not take any of my comments as advice as situations vary.
I am assuming that the overall estate is large enough to fall into the Inheritance Tax net. If not, then the value is academic if no tax is due. Just remember that if no tax is due and you intend to keep the property then the value agreed for IHT will form the basis for Capital Gains Tax when you sell so it can sometimes be useful to try to push up the value. IHT is currently 40% and CGT is 28%.
The valuation of properties for IHT purposes is based on "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."
The Valuation Officer (VO), acting on behalf of HMRC will consider the property in all its aspects and is permitted to have regard to all the circumstances. Thus if the property has a very large garden in a built-up area he will look at the possibility of obtaining planning permission and add an element for hope value. If the house next door has just got permission to build in its garden then hope is likely to be a very high percentage of the value of the building plot.
In this case, the VO has suggested that the property is worth more as a single house. That is an acceptable argument based on the legislation but it should be borne in mind that planning permission and building regulation approvals will be required and if it's a semi there will have to be Party Wall Act negotiations with the neighbour(s) and all this will take time and money resulting in a discount on the final value when it's a house again.
You mention that your sister owns both properties and the freehold. The leases are short and the flats would be difficult to mortgage as many lenders want 80+ years remaining but as she owns the freehold she can easily grant new long leases to herself though at 57 years the leases should be reviewed and brought up to date. Once again there is cost and time to be considered.
Are the properties let? If so then your sister cannot obtain vacant possession until the leases end. The value is calculated at the date of death. In the case I am dealing with a new 12 month lease was entered into 3 weeks before the owner died (not by design I must add) and hence the house is not available until October 2020 and the rent was all paid in advance so this will obviously affect saleability and value not least because it will be very difficult to get a mortgage as most offers are time limited. In addition a private occupier probably won't wait that long and a BTL landlord will have similar issues because no rent will be receivable until the same time. I am hoping that the VO will agree to a 12.5% reduction but I'll settle for 10%.
I have mentioned a number of factors above and there may be others which will affect value. There is an estate agent valuation available on the case I am dealing with which takes no account of the factors above and is at £60,000 above what I hope to agree with the VO. That's a saving of £24,000 in tax.
On that basis you might like to consider getting a local chartered surveyor to advise on value and if necessary negotiate with the VO. It will cost you a fee but may save you much more in tax.

David Price

10:12 AM, 5th December 2019
About 4 days ago

I am interested that yet another chartered surveyor has been kind enough to add his pennysworth to this debate. I am also a chartered surveyor and spent about half of my professional career with the Valuation Office Agency working in four offices. Although I am happy to point enquirers in the right direction, I always feel that it is wise not to give advice on a specific case without knowing all the facts.
David Price

Nick Pope

10:57 AM, 5th December 2019
About 4 days ago

Reply to the comment left by David Price at 05/12/2019 - 10:12
Which is why I put a little caveat in the first paragraph and advised contacting a local surveyor.

Puzzler

12:04 PM, 5th December 2019
About 4 days ago

Not sure who inherited what here. You say you did but then imply that it all went to your sister - did you mean that you each got one flat and both got the freehold? or did your sister already own one?
Owning both freehold and leasehold does not necessarily mean the interests have been officially merged. A lender won't allow it but otherwise the lease can be dormant in view of a future sale. I bought a flat cash under these circumstances and no change was made.


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