Preparation for grant of probate
Head of Country Valuations
The Ministry of Justice proposal to increase probate fees from £215 to £20,000 from May 2017 for estates worth more than £2M, has been shelved as a result of the snap General Election. The proposal was dropped as the relevant Statutory Instrument could not be completed before the Election. It will be up to the next Government whether this proposal is reintroduced. From the start of any valuation for Inheritance Tax (IHT) purposes, establishment of the facts is essential, particularly where a claim for Agricultural Property Relief (APR) is likely because the deceased was a farmer and/or owned land and buildings that were used for agricultural purposes.
As a starting point, if the death certificate refers to ‘retired farmer’ that is not helpful in relation to any claim for APR on the farmhouse. Farmhouses and cottages that form part of an agricultural business are subject to particular scrutiny and there is a range of questions over ownership, occupation, farming practices and whether the deceased was a farmer.
The Valuation Office Agency, which is the valuation arm for Her Majesty’s Revenue & Customs (HMRC), requests a 30% deduction on the market value of any residential property on the basis that its use is agricultural. This effectively reduces the amount of APR that can be claimed. The 30% figure is not in any way sustainable as a matter of law, so the key aspect is to negotiate and reduce this figure where possible. The facts of the case based on the history of the farmhouse and its occupation for agricultural purposes will help. Prior to any valuation, the issue of due diligence enquiries and establishment of the facts will help in advising the executors, their solicitors and accountants in submission of a robust case to HMRC in any APR claim.
I recently undertook a valuation of a substantial commercial farm for bank lending with a range of different assets and ownership structures. While at the farm and working through the due-diligence process for the valuation instruction, it became clear that there was a wider issue of succession planning in the family that needed addressing to smoothly move assets to the next generation.
This had been a topic that was on their “to-do” list for quite some time, but none of them knew how to approach it. As a result, they all had their own views on the farming business and its future, although they had never taken the time to sit down as a family and understand each other’s viewpoints.
The valuation process enabled this to happen in a natural way and raised a number of pertinent points that had never been considered. The farmers were able to look at the business from a different angle and question why they were doing what they were. As part of this, I was able to offer advice and solutions to allow them to take the matter forward. It also came to light that some land was still registered at the Land Registry in the name of the vendor, even though the purchase was 10 years ago, so this was addressed at the same time.
A professional and realistic valuation is vital when borrowing against a property so that the borrower can get the best terms from their bank. The key to this is accurate, honest and up-to-date information from both the bank and borrower. Good plans and knowing exactly what is to be valued at the start may seem obvious, but on numerous occasions we are asked to quote on valuations with the bank knowing very little about the property.
As RICS-registered valuers we are governed by a complex set of professional standards – “The Red Book.” The questions asked and research required can appear intrusive, but as we are the “eyes and ears” for the bank, it is vital this information is accurate to enable a realistic valuation. Banks are also governed by strict rules and regulations, so providing this information enables us to deliver valuation reports within their timescales.
Without this information the bank and borrower are at risk of an inaccurate valuation that may lead to later financial problems. If a valuation is inflated, not only does this put the bank at risk, but it also puts the borrower at risk as they think it may be worth borrowing more, which can cause undue stress if this proves unsustainable. Alternatively, an under-valuation may reduce the loan amount or increase costs to the borrower. RICS-registered valuers are able to provide an accurate, robust and supportable valuation that reduces the risk for both the bank and borrower.
Capital Gains Tax (CGT) is chargeable on the sale of property assets subject to various reliefs. The key relief is Principal Private Residence (PPR) under the Taxation of Chargeable Gains Act 1992. This relief applies to the taxpayer’s principal house and its gardens and grounds that are required for the reasonable enjoyment of the house. Subject to specific circumstances it can also apply to ancillary buildings.
By this relief the increase in value of the PPR is exempt from CGT. Advice on the size, location and apportioned value of the PPR is crucial to owners of farms and houses with land in excess of what Her Majesty’s Revenue & Customs (HMRC) view as the standard permitted area, which is 0.5 hectares (1.25 acres).
In one case we were involved with following the death of a client, the foundation of the CGT advice needed was a valuation, using historic records, of the farm at the deemed acquisition date of 31 March 1982. This value was then apportioned, as was the sale price between the PPR and the assets subject to tax.
We were able to reduce the client’s tax liability by providing effective IHT and CGT advice. We were able to justify a larger than standard PPR with HMRC and then support an appropriate apportionment of value of the acquisition cost and sale price which ultimately reduced the client’s exposure to tax.
Crucial to our success in this case was our involvement from the outset. This allowed us to fully inspect the property and to access all available records to support our case.