Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from October 2003. Older articles are accessed through our main Property Tax page.

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The true value of a property can only be the sale price actually achieved after it has been efficiently marketed for a reasonable period of time, say a maximum of three months. How does the Inland Revenue decide on the value of a property (and other goods and chattels) when assessing the estate for Inheritance Tax (IHT) liability? Does it accept the executors' valuation based on the average of a number of local high-street estate agent valuations or is the district valuer involved?

As probate cannot be obtained until the Inheritance Tax (IHT) bill is paid, the amount of tax can only be based on a theoretical valuation and not on the true sale price subsequently obtained. In the meantime, unless the estate has sufficient liquid assets to pay the tax bill, money will have to be borrowed and interest charges incurred, which seems unfair.

In view of this dilemma, does the Inland Revenue have any flexibility to allow adjustment to be made to the Inheritance Tax (IHT) bill after the property and other assets are finally sold in order to correct for any over-(or under) valuation of the Inheritance Tax (IHT) bill at the pre-probate stage?

Maggie Fleming writes:

Where land or property has to be valued, the district valuer will usually be involved. The person responsible for obtaining probate will obtain a valuation from one or more local valuers and this will be checked by the district valuer.

This may lead to negotiation before an agreed value is reached. The principle is that, for Inheritance Tax (IHT) purposes, assets are valued at the price they might reasonably be expected to fetch if sold on the open market at the date of death. Any valuer should therefore be instructed to prepare an "open market" valuation.

Household goods and chattels should be valued on the same basis, although it is usually only necessary to obtain individual valuations of items specifically mentioned in the will or worth more than £500.

There is a provision for relief where land is sold by the executors within four years of the death for less than the value used to calculate Inheritance Tax (IHT). Where a claim is made, the gross sale proceeds will be substituted for the value originally used.

This relief only applies to a sale by the executors - so will not apply if the property has been transferred to a beneficiary who then sells it at a loss. Also, it applies to all land and buildings in the deceased's estate, so if the deceased owned several properties and only one was sold at a loss, a claim might not be to the executors' advantage.

I own a small flat in south Germany valued at £80,000, which I have left in my will to my two children. I am British; my children are aged over 40; we live in the UK. In both countries IHT (Inheritance Tax) applies only to property at a value higher than £200,000. Now, I have heard there is no law or tax agreement between the two countries and both can charge taxes to such an extent that my children are left with virtually nothing. What are these taxes? No tax office I have contacted could help me, nor could I find a lawyer who knows about it. The flat is my only asset and is not rented or let.

Maggie Fleming writes:

From what you say, you are clearly domiciled in the UK and therefore your estate, which comprises your worldwide assets, is liable to inheritance tax (IHT) on any excess over (currently) £255,000. If your total estate is less than this, you do not have a problem in the UK, as there is no tax payable here.

I cannot advise you on German inheritance and gift tax. You will need to speak to an accountant or lawyer with expertise in the area - the German embassy may be able to recommend an adviser in the UK. However, you state from your own knowledge that the tax affects only property worth more than your flat and so I cannot see how your estate could be affected if you have no other assets in Germany.

It is true that the UK and Germany do not have a double taxation convention covering inheritance taxes. In a situation where there is double taxation but no agreement. However, the Inland Revenue provides for unilateral tax relief. Normally, this means that credit is given against UK Inheritance Tax (IHT) due on an asset for foreign tax paid in respect of the same asset.

My house sits in a garden of about one acre and there is potential to obtain planning permission for two dwellings. If that consent should be given, what would be the tax position either if I sold the two sites or if I developed the two sites myself for either sale or let?

Maggie Fleming writes:

The Inland Revenue's view is that, if the total area of your house and gardens does not exceed half a hectare (about 1.23 acres), a disposal of the gardens is covered by the principal private residence exemption and no capital gains tax is payable. The matter is more complex if the site exceeds half a hectare; in those circumstances, part of the gain is likely to be chargeable.

As you state that the garden is about one acre, it is likely that the gain arising on a sale of the two sites to a developer would be exempt. If you developed the sites yourself and sold the properties built on them, this would probably be treated by the Revenue as an adventure in the nature of trade. The land would be appropriated to trading stock at its open market value at the date on which your "trade" began and the capital gain accruing to that date would be exempt. The subsequent profit on sale of the properties would be charged to income tax.

If you develop the sites yourself and let the properties, the eventual sale is likely to be treated as a capital gain. This is not a common situation and the amount of the gain and method of splitting it between the period when, as your garden, it was exempt and the period when it was let and thus chargeable would have to be negotiated with the Revenue.