Valuation for tax purposes
A valuation for tax purposes will usually be required for:
- a disposal subject to capital gains tax,
- as part of tax planning when a property is being ‘gifted’,
- inheritance tax following a death.
A Chartered Valuation Surveyor can assist with valuations for many purposes but tax valuations are a rather specialist area where local expertise and experience really counts.
Valuations for tax purposes, whether inheritance tax, capital gains tax or to assess the value of a property being gifted as part of inheritance tax planning usually have to be negotiated and agreed with the Valuation Office Agency. So the valuation and the Chartered Valuation Surveyor’s ability to justify and defend it becomes critical. Most valuations for tax planning or tax management are generally required as the property being valued has not been sold, so there is no ‘arms length market transaction’ taking place.
So it is all about the homework, the comparable valuation evidence and how that is interpreted usually to a retrospective valuation date, i.e., value as at date of gift, date of inheritance, date of transfer etc... Then, the outcome will depend on the negotiation skills of the Chartered Surveyor acting for you.
A further complexity in tax valuations is that the valuation date is often a date in the past, either because it takes time for probate to be granted or because for capital gains tax one has to establish the value either at the acquisition date or where the property was bought before 1982 or 1965 to elect for a 1982 or 1965 valuation instead.
Valuations for inheritance tax
Here, the customer will be seeking a modest valuation, a valuation that takes into account all impediments of the property, the true condition and work required. A good Chartered Valuation Surveyor will not be taking an ‘overall’ view of the property but looking at what is the normal standard for a property to command best price, e.g.; it is the norm for modern central heating to be installed and a fully fitted kitchen and will then seek to discount both the cost of fitting normal modernisation as well as an allowance for profit, time and trouble to do so. Other factors may include where the property has not been decorated or refurbished for some time, then there are more likely to be concealed defects such as unventilated floor voids, timber and damp problems all of which can be expensive to treat.
The Valuation Surveyor may have to take into account apportioning the value of properties held as ‘tenants in common’ or ‘joint tenants’ and any respective shares or where a property was separately lived in but not physically divided. Agreed valuation principles enable the valuer to apply an undivided shares discount of 10% where the property is jointly owned. Tenancy structures in place may also have a significant impact on the valuation should say a family member be living in the property under a ‘lifetime tenancy’ or the property be subject to a Rent Act protected tenancy. The valuation date will be set as the date of death.
Valuations for property transferred under the ‘lifetime gift’ scheme
This is another type of inheritance tax valuation that occurs should the donor who gifts a property to the inheritor die before the ‘lifetime gift’ period expires. Essentially good tax planning provides that should a donor gift an asset whilst he or she is still alive then for each surviving year that both the donor and the inheritor are alive the tax burden reduces on a sliding scale depending on the number of years the donor survives after the gift.
Capital gains tax valuations
Assuming the asset disposal date is at ‘market value’ then the valuers job is to establish the base cost from which indexation and capital allowances are to be applied.
The RICS* International Valuation Standards define market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”
Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations must prevail. So the Chartered Valuation Surveyor also will be looking for conditions that render the disposal price above market value, such conditions could be ‘a special purchaser’ a ‘merger of land interests’ or just temporary market overheating or temporary shortage of supply.
For a Chartered Valuation Surveyor to assess the base price from which indexation is to be applied you will definitely need to select a local Valuer who actually holds historic records of property transactions at the base value date values. The base valuation date may well be 1982 or 1965 depending on when the property was acquired.
Rating and tax valuations...
ultimately rating and tax valuations have to be negotiated with the Valuation Office Agency who will be instructed by HMRC. Where the valuation remains unagreed then the Valuer will need familiarity and expertise at preparing representations for the Tribunal hearing.
The geographical areas that Ringley’s Valuation Team hold retrospective property transaction data for covers Hampstead, Belsize Park, Highgate, Holloway, Kings Cross, St Pancreas, Kentish Town, Mornington Crescent and Camden Town. We have some data outside these periphery areas and would always want to validate that we have sufficient evidence to assist you before taking an instruction on.
* RICS – The Royal Institution of Chartered Surveyors (RICS) represents the property profession in 146 countries, and regulates its ‘Chartered’ members. All valuations are subject to the RICS International Valuation Standards otherwise known as the ‘Red Book’.