I was just asked this by a friend. Her mother died a few months ago, leaving her house to my friend and her sister. They now want to sell the house, which is empty, and it looks like the proceeds will be quite a bit above the probate value.
I explained that the gain since the date of death would be caught by CGT, although the two sisters would each have the benefit of the first 8,000 Pounds being tax-free. Both sisters work, so anything above that would be taxable at 22% or 40%.
Both sisters are happily married and live with their respective families. I just wondered whether one of the sisters could nevertheless elect for the mother's house to be her principal private residence, and what the pitfalls would be?
They have two years from the date of mother's death during which they can rewrite her will (they must both agree obviously) by a Deed of Variation. A solicitor can draw it up for them.
Leaving more portions of house to more family members will utilise more £8,000s.
Can they not get the probate value changed ("corrected")? If a property experiences a major increase in value in only 4 months, without anything unusual having happened to cause it, suggests the probate value was too low.
Whether it's worth taking that approach, however, depends on the overall size of the estate. If it's over the limit, you'd be increasing the amount on which 40% is payable, whereas otherwise at least some of it will be taxed at 20%. If the estate is below the IHT threshold, then obviously the difference would be taxed at 0%.
This is not an option unless her husband also makes that election. It's also not an option if it's empty, since if it's unfurnished it is incapable of being anyone's residence, let alone principal. It's also not an option if there is clearly no intention to occupy permanently, i.e. if they know they're going to sell.
The estate is over the IHT threshold, so this would not help, but thanks for the suggestion.
I haven't got much experience with this, so it's very helpful to have your comments. It sounds like the PPR route is a non-starter. The sensible commercial course is to sell the house now, so there's really no way that one of them could claim an intention to occupy, even for a short time.
You may remember I took advice on how the valuation works, and whether HMRC can challenge it, and whether IHT or CGT could become due. I attach it because it may interest someone, and the Deed of Variation wiped away every problem. Maybe the OP's solicitors can find something equally neat.
I mentioned this one to you some time ago but my client Troy has become a bit concerned about it.
Troy owns one half of a property. His father died in Nov. 2004 and under the terms of his Will Troy could exercise an option to buy the other half at market value less 10%. [Valuers] valued the property at £390,000. Troy said this was too low - his two sisters are the beneficiaries. Another valuer put the value at £420,000. This was accepted by the District Valuer and was the amount entered on the IHT200.
Troy has handed me a letter from an estate agent dated Feb. 2006 putting the value at £600,000. There is also a letter from Foxtons dated March 2006 putting the value at £899,950!
Troy's accountants have assured him that once the District Valuer has approved the value the Revenue will not overturn his decision. Troy's concern is that if the Revenue raise enquiries on Troy's sale of the property, which won't be for at least two years, could it result in a huge IHT bill being landed on his father's estate, i.e. his two sisters?
Do you know of any instance where the Revenue has done this? Any help would be much appreciated.
'====== I would assume, in the first place, that Troy and his Father owned the property on the basis of a tenancy in common in equal shares. That the Father by his Will left his half share to his two Daughters but gave Troy an option to purchase. There would be certain criteria concerning that option in the Will.
As far as the valuation of the Father's share is concerned there are two issues. The first is the "practical" value of the property and hence the due proportion thereof. The second is what factors that are peculiar to the situation which may affect that value. The first is decided upon by the District Valuer, the latter after negotiation with the Examiner at the Capital Taxes Office. For example, in the first instance, the District Valuer will look at the area, the condition of the property, both internal and external, the size of the rooms, etc. and value therefrom. As to the second, the effect on that value of the rights of any joint owners, in certain circumstances tenants, the effect of any disputes and such like.
As to procedure, following receipt by the Capital Taxes Office of the Account, the Examiner will send to the appropriate District Valuer, the relevant schedule. The DV will check his records and report back that the valuation is either too high, too low or about right. For the former two, if instructed by the CTO, the DV will make contact accordingly and negotiate and agree with the Executor a probate value. He will then report accordingly to the CTO. The District Valuer's Office is, of course, an arm of the Inland Revenue.
If the second issue is not applicable that value then becomes the probate value for both Inheritance and Capital Gains Tax purposes.
On the first point, from a civil point of view, the Revenue could not subsequently challenge the agreed valuation. Obviously, from a criminal point of view, if there was fraud, corruption or bribery then they could. Where Inheritance Tax is paid by an Estate the Executor at the conclusion thereof will make application of the Capital Taxes Office for a Clearance Certificate. For a Certificate that all tax that is due to be paid has been paid. Prior to granting such the Revenue will check their files and if satisfied will issue a Certificate but it is limited with respect to the value of the assets disclosed and the information given with respect thereto. If an asset therefore subsequently comes to light, they will be able to claim the tax on that. Likewise, therefore, as far as the second point is concerned, if anything has been overlooked or misinterpreted then the Revenue can reassess the value and claim the tax accordingly.
That is the theoretical position. In practice, when it comes to the valuation of a property, the DV is most careful in checking the figures. As to the second point, any discount on the value will have had to have been carefully argued and the appropriate evidence supplied. Any mistake is highly unlikely.
Sections 190/198 of the Inheritance Tax Act 1984 do allow for the substitution of the sale price for the probate value but these are at the behest of the appropriate person. The person paying the tax. Not the Revenue. Such provision was originally introduced to cover the circumstances of a drop in the value of property. Frequently property was sold to pay the tax. The lower sale price could then in certain circumstances be substituted.
Attempts have been made to substitute the sale price for the probate value when the market value has risen and the value of the Estate is below the appropriate tax threshold. The Revenue do not like such applications, generally will not entertain them but there is nothing in the appropriate Sections to say that they apply only where house prices drop.
Essentially, unless there has been some malpractice, there is no way whereby the Revenue can increase the probate value and therefore the amount of Inheritance Tax due on the Father's death.
There is a problem though with Capital Gains Tax. On the February valuation there is a gross gain for each Sister of £45,000. That to some degree can be reduced - acquisition costs - but unless there have been any substantive improvements, there is quite a liability to the tax. If the Sisters are married they can halve their respective gains by gifts appropriately to their respective Husbands. There will still be quite some liability to the tax.
We have until November this year in which to effect a Deed of Variation. I imagine that Troy is raising the monies to pay out his Sisters by way of a mortgage and it seems a shame that in so doing a proportion will be paid to the Revenue. The subject of values, etc. by Variation, the half share given to the Sisters could be given to him but charged with the payment of a legacy to them. Surprise, surprise the legacy being equivalent to the half value but no Capital Gains Tax.
I was careful to say, earlier, that there was no further Inheritance Tax due on the probate value as at the date of the Father's death. I think options are unaffected by the Finance Bill but I would like to check. There is another reason for the Deed of Variation route.
If the Father owned the property absolutely and had left a half to Troy and a half to his Daughters, subject to the option, then basically the above is still applicable. There would then be no discount to take into account Troy's ownership of a half share at the time of the Father's death but again, essentially, unless there has been any malpractice the Revenue would have no grounds to challenge the probate value.
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