6 June 2011

Publications that covered this story include the Independent on Sunday, 5 June 2011, and the Observer, 5 June 2011.

• £70 million additional tax raised with beneficiaries made to pay
• Average £24,600 extra per case
• Tax take set to increase as house prices creep back up to pre-recession levels in some areas

HMRC launched 9,368 investigations into inheritance tax valuations over the last year and is actively targeting estates and beneficiaries.

In instances where additional tax was payable, this averaged £24,600 per case.*

Based on HMRC’s figures, approximately £70 million of additional tax was raised as the result of HMRC challenging the valuations of properties included in the estate of a deceased person in 2010.

Inheritance tax is typically payable if the assets of an estate total in excess of £325,000. Recent data from the Land Registry in England and Wales shows that the average house price in the South East is £274,000 rising to £410,000 in Greater London.

If an IHT property valuation is found to be incorrect and HMRC considers that ‘reasonable care’ was not taken in establishing it, the estate and its beneficiaries could end up having to pay a maximum fine of up to 100% of the additional tax liability, as well as the additional tax due.

Mark Giddens, tax partner in our London office says: “Inheritance tax doesn’t just affect millionaires, but most of middle England where the estate may consist of little more than an average size property, and a family member may take on the task of administering the estate themselves.”

Mark says: “If a property is undervalued by £20,000, this could result in an additional £8,000 tax, plus, say, a 30% penalty of the additional tax, making a total of £10,400. That is a considerable sum of money to raise when the estate and its beneficiaries may not be very cash rich.”

HMRC has previously advised estate beneficiaries to obtain several property valuations and strongly recommends the engagement of a professional valuer or chartered surveyor.

HMRC may also ask additional questions ask to determine whether ‘reasonable care’ was taken including:

• Did you seek professional advice from a qualified independent valuer?
• Was the valuer’s attention drawn to particular features of the property (such as development potential or the existence of tenancy or occupancy by people other than the deceased)?
• Was anything unusual about the valuation questioned?”

Mark says: “Obtaining further valuation quotes from estate agents or surveyors adds significant additional costs on the estates and ultimately reduces the final value for those who inherit them. However, with house prices in London and the South East starting to return to pre-recession levels, beneficiaries need to be aware that the potential fine resulting from a mis-valuation will rise proportionately.”

HMRC payment deadlines

Mark says: “There is a window of up to twelve months, from the end of the month in which the death occurred, to submit IHT valuations before any penalty for a late account arises. However, interest starts to accrue six months after the end of the month in which the death occurs, so estate administrators are under pressure to get all the valuations in, question them if necessary, and pay the tax quickly.”

*Based on the latest available full year data 2009 – 2010. HMRC figures for the following year run until November 2010

Mark Giddens