What has hope got to do with it?

In a recent tax case, Pallister v Revenue & Customs, Pallister’s son (PJ) was left a share in his deceased parent’s investment property in June 2012. A local surveyor valued the property at £1.2m and this was the figure used to determine the deceased parent’s inheritance tax bill.

 

Subsequently, the property was sold in March 2014 for £2.5m.

 

HMRC were peeved. Less than two years had passed and PJ’s share of 88% in the property had seemingly increased in value by almost 100%. They therefore challenged the earlier valuation for inheritance tax purposes on the basis that “hope” value should have been considered in the probate valuation.

 

Hope in this context is defined by HMRC as:

 

A component part of the open market value in appropriate cases, whether or not planning permission had been sought or granted.

 

The courts agreed with HMRC and after a degree of wrangling the £1.2m probate valuation was increased to £1.6m. The increase in the valuation likely cost PJ a further £160,000 in inheritance tax.

 

In their IHT Tax Toolkit, HMRC have added the following advice:

 

It is important to properly ascertain the value of assets. For assets with a material value you are strongly advised to instruct a qualified independent valuer, to make sure the valuation is made for the purposes of the relevant legislation, and for houses, land and buildings, it meets Royal Institution of Chartered Surveyors (RICS) or equivalent standards. Some issues are easily overlooked when instructions are given. For example, the potential for the development of the land, the existence of tenancies or occupancy by people other than the deceased. Copies of relevant agreements, or full details where only an oral agreement exists, are often not given to the valuer so misunderstandings arise. Where we are satisfied that all the relevant information has been considered by the valuer, we are less likely to challenge the valuation.

 

No doubt surviving families will always be willing to proffer the lowest valuation for a property to keep IHT liabilities to a minimum, even if the surveyor appointed is not advised of past, lapsed, planning consents, or the impending likelihood of future changes that would not be resisted by planning authorities.

 

As we can witness in the Pallister case, overlooking hope value can have expensive consequences.

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