1) If the DV values a house for IHT purposes and the estate sells it for less, the DV's valuation *can* be challenged by the taxpayer and reduced, with less IHT to pay.
2) If the house sells for *more*, it cannot/will not be challenged by HMRC, so there cannot be any more IHT to pay.
Al buy's half of a house he already half-owns from his mother's estate, for 1/2 of £400k, which is a valuation approved by the DV. His sisters inherit the estate.
Shortly afterwards he sells the house for £900k.
Anyone care to calculate the tax payable by the sisters?
I don't fully understand it myself - hence the posting - but my solicitor tells me there is a simple solution involving a Deed of Variation.
Hey, Al is a she, not a he, one of the ice sisters. Do keep up with your own fairy tale, old son.
I'm not comfortable with the idea of "the estate" selling anything, because it doesn't feel right to me to think of the estate as being a legal person. It seems to me *the (other two) sisters* inherit the half house and *they* sell it to Al. Provided they sell it for what it was worth at probate, there will be no CGT implications for them.
Whatever Al sells it for does not affect the estate's, or the other two sisters' tax position, it's purely a CGT matter for Al. But if the whole house counts as Al's PPR, she escapes CGT entirely.
There is no IHT payable by the sisters, but by the estate.
If there are no other assets in the estate apart from the £200k half-house, it is below the threshold so there is no IHT payable at all, unless of course the other half of the house was gifted by ?Mary? to Al within the 7 years, in which case its then value is added to the estate and might bring it over the threshold, causing some IHT to become payable.
The purpose of a DoV is to change the will posthumously to whatever the assembled heirs unanimously want. In this case, if the will originally provided differently, it would be changed to give rise to the effect that the half house be left to Bern and Cand, while Al gets nothing and has to buy it off them.
On the face of it, it's a bum deal for Bern & Cand, of course, but I guess the idea is that the imbalance is Al's "reward" for caring for Mary in her final years while B&C kept a low profile living the high life.
I just love mixed metaphors. Is there a special name for those which mix incompatible scenarios? Low profile high life. Sitting on the fence while keeping your ear to the ground.
I one met a man who was so highly strung he would fly off the handle at the drop of a hat. He especially disliked paying through the nose when he was being charged an arm and a leg.
There is a CGT liability for the estate on the gain in value between time of death and time of sale. Here's the advice in full:
I would assume, in the first place, that Al and his Mother owned the property on the basis of a tenancy in common in equal shares. That the Mother by her Will left her half share to her two Daughters but gave Al an option to purchase. There would be certain criteria concerning that option in the Will.
As far as the valuation of the Mother'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 Mother's death.
There is a problem though with Capital Gains Tax. On the February valuation [of £600k]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 Al 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 Mother'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 Mother owned the property absolutely and had left a half to Al and a half to her Daughters, subject to the option, then basically the above is still applicable. There would then be no discount to take into account Al's ownership of a half share at the time of the Mother's death but again, essentially, unless there has been any malpractice the Revenue would have no grounds to challenge the probate value.
Al is thinking that the DOV should in fact skip a generation, and leave the property to Homey - Al's son who you may remember will always live at home...
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