Why it’s important to get the right property valuation for probate
Losing a loved one can be a difficult time and very daunting especially if you have been given the task of acting as a Personal Representative (PR) or Executor to a will where property is involved. One of the responsibilities of the Personal Representatives (PRs) of an Estate is to value the assets of the Estate and then declare those to HMRC.
The declaration to HMRC must be made irrespective of whether Inheritance Tax is payable so the valuations declared must be accurate. The PRs are required to make full enquiries to show that the figures submitted to HMRC are correct.
This will involve the PRs:
- Writing to the bank to obtain date of death balances on all accounts including any accrued interest
- Obtaining share valuations by checking the share market price on the date of death
- Obtaining professional valuations of items such as a car and personal belongings like jewellery
- Obtaining a professional valuation for property of land
Where an Estate is likely to be subject to Inheritance Tax it is advisable to obtain professional valuations for all assets but most importantly the property or land.
Property valuation for probate
Whilst there is no strict requirement to obtain a professional valuation of property the value submitted to HMRC must be one which complies with section 160 of the Inheritance Tax Act 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 on the open market at that time.’
Case law since then has established that various assumptions have to be made when arriving at the market value, these are that:
- The sale is a hypothetical sale;
- The vendor is a hypothetical prudent and willing party to the transaction;
- The purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser);
- For the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price;
- All preliminary arrangements necessary for the sale to take place have been carried out prior to the original valuation date;
- The property is offered for sale on the open market by whichever method of sale will achieve the best price;
- There is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers; and
- The valuation should reflect the bid of any special purchaser in the market (provided that purchaser is willing and able to purchase).
RICS or Estate Agent Valuation of property for probate?
Many clients ask if an estate agent valuation (or three) is sufficient for probate and the answer is that if Inheritance Tax is payable it is not sufficient because an estate agent valuation is not one which takes into account the Inheritance Tax Act and the required assumptions. An estate agent valuation is a recommendation of a marketing price but not necessarily the value of the property taking into account the statutory requirements.
We advise clients to obtain a valuation prepared by a member of the Royal Institute of Chartered Surveyors (RICS) who prepare a professional ‘Red Book’ valuation which is complaint for all HMRC purposes taking into account all of the above requirements. This is significantly more involved than a standard estate agent valuation.
What can happen if you don’t give a true property valuation
If HMRC believe that the property value submitted on the Inheritance Tax return is incorrect, and this may be because an estate agent valuation has been relied upon thereby not taking into account all the valuation requirements, they can refer the Estate for a compliance check to a district valuer who checks if the value is correct. If the PR is found not to have used their best endeavours to obtain a true a correct value of the property for Inheritance Tax, HMRC can impose penalties as the PR personally.
It is therefore always our advice and best practice that when acting as a PR, a Red Book RICS valuation of property and land is obtained. If nothing else, to document that the PR has discharged their obligations to the Estate and HMRC.