Inheritance Tax Manual - Section 12 : Falls in value and other relief for sales of land within four years after death and following Compulsory Acquisitions

Section Contents

Section 12 : Inheritance Tax - Falls in Value and Other Relief for Sales of land within Four Years after Death and following Compulsory Acquisitions

12.1 Summary of main features of Falls in Value Relief
Sales within three years of death

If there is a valid claim for relief the “sale value” is substituted for the “value on death” for all interests in land sold within three years of death (see para 12.9 below for a definition of those terms).

Sales within the fourth year and Compulsory Purchase

If land is sold in the fourth year after death the “sale value” may be substituted if it is less than the “value on death”. The same applies for compulsory purchase if Notice to Treat was served either before death or within three years after death. See s.197A Inheritance Tax Act 1984 (inserted by Finance Act 1993) for sales in the fourth year and paras 12.64-70 below for compulsory purchase.

Purchases of other land

Where there is a qualifying sale within three years of death the relief may be reduced or eliminated if interests in land are purchased within a period ending four months after the last qualifying sale (see para 12.63 below). This period is not extended for sales within the fourth year or compulsory purchase.

Excluded sales

Sales to certain beneficiaries and their relatives and some trusts are excluded (see para 12.13 below). Those within specified de minimis limits are also excluded (see para 12.10 below).

Adjustments to arrive at “sale value”

These are detailed at para 12.14 below and cross referenced to the appropriate instruction.

Adjustments for changes between the death and the sale are generally limited to changes in the interest (tenure, terms of tenancies and occupation) and the physical state of the land itself, not to changes in other land. If the net effect of the relevant changes is to decrease the value the valuation date is the date of death. If it is to increase the value the valuation date is the date of sale. (See para 12.27-40 for details and examples.)

Separate case credit

Falls in value relief cases are a separate case from the original IHT case. See para 12.73 below for case registration.

A claim following a sale at less than the value at the date of death may not necessarily be advantageous because:

- there are various provisions for adjusting the sale price.

- the relief involves substitution of sale value for the date of death value for all interests in land sold by the claimant in the same capacity.

There is no provision for withdrawing a claim once it is made

This is particularly relevant in cases involving undivided shares in property (see Section 18). This is because at the date of death a discount will normally be made from the arithmetical fraction of the entirety to reflect the disadvantages of shared ownership; however if the entirety interest is subsequently sold HMRC will take the “sale value” as being the appropriate arithmetical share of the sale proceeds (see para 12.15 below). Accordingly, the discounted date of death value agreed for say the deceased’s one-half share of a property may turn out to be less than one-half of the share of the gross proceeds of sale from the whole of the property.

Example


The deceased owned a half-share of Blackacre.

At the date of death Blackacre was valued at £200,000 for the whole, £90,000 for the deceased’s half share.

A year after the death, the whole property was sold for £190,000.

The sale value of the property for the purposes of s191 is an arithmetic half share of the gross proceeds of sale, £95,000.

Any claim would therefore be disadvantageous as additional inheritance tax would in fact be payable as a result of the claim.

12.3-6 Reserved

Relief for falls in value of land

12.7 General

Relief for falls in value of land after death is provided by s.191 IHTA 1984 where an interest in land comprised in a person’s estate immediately before death is sold within three years of death and its “sale value” (this being the sale price adjusted for changed circumstances between the dates of death and sale as well as for various other matters) is less than its value as at the date of death, subject to do-minimis rules.

S.197A (inserted by FA 1993) provides that for deaths on or after 16 March 1990 sales in the fourth year after death (otherwise than on compulsory acquisitions see paras 12.64-12.70) are to be treated as sales within three years, if the sale value is less than the value on death. If the sale value exceeds the value on death s.197A does not apply. This has the result that any reliefs granted in respect of sales within the three year period will not be reduced because of a sale in the fourth year.

A further relief may be available under s.176 (see para 12.51 below), but this only applies to sales within three years.

12.8 Claim to be made by “appropriate person”

The sale must be by the person liable to pay the tax, the “appropriate person” as defined in s.190(1) and that person must claim relief. There is no specific time limit within which a claim has to be made, other than the six year period under s.241. Any claim made direct to the VOA should be forwarded to HMRC. The claimant should be informed of the action taken, but the caseworker should not comment on the claim.

12.9 Meaning of “sale price” “sale value” and “value on death”

For the purposes of Part VI Chapter IV IHTA 1984 there are specific definitions of “sale price”, “sale value” and “value on death” and these are set out in s.190. To summarise briefly:

“Sale price” means the price for which an interest in land is sold or, if greater, the best consideration that could reasonably have been obtained for it at the time of the sale.

“Sale value” means the sale price of an interest in land as increased or reduced under the provisions of ss.190-198.

“Value on death” in relation to any interest in land comprised in a person’s estate immediately before death means the value of that interest as part of the deceased’s estate which was ascertained for the purposes of IHT, before any substitution takes place under s.176 or s.191 in order to operate the reliefs.

12.10 De minimis rule

The relief is subject to the de minimis rule of s.191(2) in that the relief provisions will not apply if the difference between the “sale value” and the “value on death” is less than the lower of £1,000 and 5 per cent of the “value on death”.

Operation of relief

12.11 Sales of other interests in land within three years

The relief operates by the substitution of the “sale value” for the “value on death” in order to arrive at the tax payable. However, if the “appropriate person” acting in the same capacity, has within three years of the date of death sold any other interest in land comprised in the deceased’s estate, the “sale values” of any such sales (apart from those excluded from relief under the de minimis rule or under s.191(3)) will be substituted for the values on death (s.191(1)). Sales in the fourth year are only substituted if the sale value is less than the value on death.

12.12 Date of sale

The date of sale is the date of the contract to sell or in certain circumstances the date of the grant of an option to sell (s.198(1) and (2)). For the date of sale in the case of a compulsory acquisition see para 12.65 below. In all cases HMRC will notify the VOA of the date of sale.

12.13 Excluded sales

HMRC will decide whether or not a sale is by an “appropriate person” and whether or not the sale is excluded from relief under s.191(3). Sales to certain beneficiaries, relatives of those beneficiaries and some trusts are excluded.

12.14 Adjustments to be made to the price realised to arrive at “sale value”

Provided HMRC are satisfied as to the validity of a claim in respect of any sale the following action will be taken by HMRC with valuation and other advice from the VOA as required:

  • If the sale includes property not within the deceased’s estate an apportionment of the price realised will be necessary. See para 12.15 below;
  • If an interest in a deceased’s estate is sold for less than the best consideration that could reasonably have been obtained for it at the time of its sale, the “sale price” of the interest will be substituted for the price for which it was sold. See paras 12.16-12.19 below.
  • An apportionment of the “sale price” to natural lotting units will be necessary if the interest sold was not itself a single natural lotting unit in the valuation on death. See paras 12.20-12.21 below;
  • The value on death of the interest sold will have to be identified and apportioned, if necessary. See para 12.22 below.
  • An adjustment of the “sale price” of each natural lotting unit adopted in the valuation on death will be made to take account of certain changes in circumstances between the dates of death and sale in accordance with s.193. See paras 12.27-12.44 below;
  • If the interest sold is that of a lessee with no more than 50 years unexpired at the date of death an adjustment of the “sale price” in accordance with s.194 will be made to take account of the reduction in the unexpired term between the dates of death and sale. See para 12.45 below;
  • If the interest sold comprised part only of a natural lotting unit at the date of death or its value was enhanced by reference to other interest(s) in the deceased’s estate or it was valued under the “related property” provisions, an adjustment will be made under s.195 to the “sale price” of the interest. See paras 12.46-12.48 below.
  • Where the value on death was enhanced because it was valued with “related property” or in conjunction with other property in the deceased’s estate but never in the vendor’s ownership the property sold will be revalued at death under s.176. See paras 12.51-12.56 below;
  • If the “appropriate person” sells an interest comprised in the deceased’s estate to an excluded party as defined in s.191(3) (see para 12.10 above) or within three years of the date of death exchanges any such interest so that the “sale price” of the interest or its market value as at the date of exchange exceeds its value on death, an adjustment will be made in accordance with s.196. See paras 12.57-12.59 below;
  • If, during the period beginning with the date of death and ending four months after the date of the last sale made by the “appropriate person” within 3 years of the death, the “appropriate person” purchases any interest in land (acting in the same capacity as that in which the claim for relief was made) an adjustment will be made in accordance with s.192. See para 12.63 below.
12.15 Apportionment of price realised

Where land comprised in an estate on death is sold in one lot together with other land not so comprised the caseworker on request by HMRC should apportion the sale price. This apportionment should be made in accordance with the circumstances and conditions prevailing at the date of the sale on the basis of the contribution made by each part to the sale price. If for example the deceased’s estate comprised a one-half share in a property but it is sold together with the other one-half share then the price realised should be taken as one-half of the entirety (without any discount for joint ownership).

If such an approach does not provide a reasonable solution in any particular case the matter should be referred to CEO with full details.

Caseworker’s opinion of the “sale price” of the interest sold

12.16 General

HMRC may refer to the VOA for an opinion as to whether or not the price realised on the sale of any interest was the best consideration that could reasonably have been obtained for it at the time of the sale.

12.17 Natural lotting units

In considering whether or not the price realised for the interest represents its “sale price” as defined in s.190(1) the caseworker should have regard to natural lotting units as at the date of sale in accordance with the principle of the division of an estate into natural units of valuation with a view to obtaining the most favourable price reasonably obtainable. (See Practice Note 1).

12.18 Price realised not the best reasonably obtainable

If the caseworker considers that the price realised was not the best that could reasonably have been obtained at the time of the sale the caseworker should bear in mind that this may mean that a chargeable transfer of value has taken place. The caseworker should consider whether the decision conflicts in any way with the valuation as at the date of death of the interest sold and what evidence there is to support the decision. If it appears that an arms length sale price does not represent the best consideration obtainable the caseworker should bear in mind the heavy onus of proof likely to be required in support of such a view (see Wilcon Homes v CIR (266 EG 323).

12.19 Restrictions affecting the “sale price”

Statutory or other restrictions which affect the amount of the consideration obtainable for an interest (eg restrictions on the amount of a premium which may be charged on the assignment of a lease) are to be taken into account in ascertaining the “sale price” as defined in s.190(1) because what has to be ascertained is the best consideration reasonably obtainable in the real, as opposed to the hypothetical, market. (This is in contrast to the hypothetical assumptions made when applying the basis of valuation for IHT generally as set out in s.160.)

Apportionment of “sale price” to units of valuation adopted on death.

12.20 Sale of part only of a unit

If the interest sold comprises part only of a natural unit of valuation which was adopted for the value on death and the caseworker considers that the price realised at the time of the sale was the best that could reasonably have been obtained but is of opinion that the consideration was reduced by the partition of a natural unit of valuation, the caseworker should inform HMRC accordingly. However since an adjustment will fall to be made under s.195 in all such cases the caseworker should at the same time supply HMRC with the two valuations referred to in para 12.48 below.

12.21 Sale involving more than one unit

If the interest sold in one transaction includes more than one natural unit of valuation adopted at the date of death the “sale price” will have to be apportioned in order to apply the de minimis rule of s.191(2) to each unit in turn. In such circumstances HMRC will ask the VOA for the required apportionment. The caseworker, in reporting the apportionment, will usually be able to refer to an item number on Form IHT 405 (or equivalent) or an address for identification, but if not, the caseworker should give a sufficient description of the land to which the apportioned price relates including a plan, if necessary, to enable HMRC to identify it.

12.22 Identification or apportionment of value on death to the land sold

In advising HMRC of the “sale price” (apportioned when required in accordance with paras 12.20-12.21 above) the caseworker should identify and, if necessary, apportion the value on death to the land to which the “sale price” relates.

The apportionment of the value on death between the land sold and the remainder should be made on the basis of the value contribution which the part sold made to the value of the entire valuation unit, ie its value as an unsevered part of the whole as valued on death.

12.23-26 Reserved

Adjustment of “sale price” for changes between dates of death and sale

12.27 General

In the following paragraphs references to “sale prices” are to the price ascertained in accordance with paras 12.16-12.19 and/or apportioned under paras 12.20-12.21 above.

If, by the time of the sale, the interest or the state of the land sold has changed when compared to the interest or the state of the land as it existed at the date of death, then adjustments are made to the “sale price” to ensure that like is compared with like (s.193).

12.28 Conditions which if changed necessitate an adjustment

An adjustment is necessary if the conditions set out in s. 193(2) are not the same at the dates of death and sale.

The conditions are that:-

  • The interest was the same and with the same incidents at both dates, and
  • The land in which the interest subsists was in the same state and with the same incidents at both dates.

Matters to be considered under (a) will include the tenure, or terms of tenure of the interest, and occupation; and under (b) the physical state of the land and any proprietary rights (easements etc) enjoyed by or affecting it.

12.29 Responsibility for ascertainment of relevant changes

HMRC) will ascertain and notify to the VOA, when submitting a s.193 case, any changes which have occurred in the interest sold or its incidents and in any incidents applicable to the land itself. They may require the assistance of the caseworker who should assist as far as possible using office records.

The caseworker will be responsible for advising HMRC if any changes have occurred in the physical state of the land. Advice may be requested either as a preliminary enquiry or when the formal reference is made for valuations under s.193.

12.30 Changes in the state of the land, ascertainment by VOA

The state of the land at the date of death should be ascertained as far as possible from any inspection notes made for the valuation as at the date of death and from office rating or other records. The state of the land at the date of sale should be similarly ascertained by reference to office records and by making such inspection as is necessary (see para 12.72 below).

Changes in the state of the land relate only to physical changes in the state or condition of the land sold or in any property situated upon it.

12.31 VOA to report to HMRC any changes in the state of the land

When reporting a s.193 case the caseworker should set out briefly any changes in the state of the land which, to the caseworker’s knowledge, have taken place between the dates of death and sale. Only changes which have had a material effect on value need be reported to HMRC.

12.32 Changes in planning circumstances

Changes in planning circumstances affecting or planning permissions attaching to the land sold are not changes for which an adjustment is made under s.193 unless compensation has become payable to the “appropriate person” after the date of death and before the date of sale. (See paras 12.41-12.44 below). Thus if land at the date of death had valuable prospects of being granted planning permission which had evaporated by the date of the sale, the fall in value due to the changed planning circumstances would not be a change for which an adjustment is made under s.193. This has the effect of allowing relief for a fall in value which is due to a planning situation being less favourable at the date of sale than at the date of death

12.33 Changes in the state etc of other land

Any changes in the state of adjoining or neighbouring land, its legal interests, incidents or planning circumstances are not changes for which adjustments are made under s.193.

For example, if at the date of sale, a property has been seriously depreciated in value because an adjoining house has, since the date of death, been converted into a club with a very rowdy membership, this being a change in the state of adjoining land no adjustment will be made under s.193. The practical effect of this will be to allow relief for this fall in value as it is attributable to a change in the state of other land.

12.34 Method of adjustment dependent on whether changes increase or decrease value

The way in which the adjustment is made to the “sale price” of the interest in order to ascertain its “sale value” depends on whether the changes in the relevant conditions (see para 12.28 above) have increased or decreased the value on death. In decrease cases the valuation date for the adjustment calculation is the date of death and in increase cases it is the date of sale. In both cases the adjustment valuations are made on the basis of hypothetical assumptions relating to the relevant conditions. (See paras 12.35 and 12.36 below.)

12.35 Adjustment where value decreased

If the overall effect of the changes in the relevant conditions is a decrease in value then by s.193(1) the “sale price” of the interest is correspondingly increased. The addition is equal to the difference between:

  • The value on death of the interest and
  • The value of the interest as at the date of death on the assumption that the interest with any incidents affecting it and the state of the land with any incidents affecting it were such as existed as at the date of sale; (but see paras 12.41-12.44 below concerning the disregarding of certain events for which compensation has become payable between the dates of death and sale).

Valuation (a) will normally have been reported to HMRC in connection with the death but an apportionment may be necessary under para 12.22 above.

Valuation (b) will involve revaluing as at the date of death assuming the existence at that date of the prescribed circumstances (see (b) above) which prevailed at the “date of sale” (see para 12.9 above).

Should the caseworker find that valuation (b) is greater than (a) then the overall effect of the changes in the relevant conditions has been to increase the value and s 193(4) will apply instead. (See para 12.36 below). In such circumstances the caseworker should make the valuation on the basis of s.193(4) and inform HMRC accordingly when issuing the report.

Example where changes have decreased the value

Date of death 2 November 2006

Property: freehold dwelling house

2 November 2006 - value on death with vacant possession = £170,000

4 October 2008 - property vandalised since death and sold with vacant possession for £150,000

Addition to sale price by s.193(1):-

Value on death

= £170,000

Value as at date of death assuming property in vandalised state

= £150,000

Difference

= £ 15,000

Sale value = £165,000 (sale price £150,000 + £15,000 difference)

HMRC substitutes sale value £165,000 for value on death (£170,000) for IHT purposes.(s.191(1)).

Note: Since the £5,000 difference between the sale value and the value on death is not less than £1,000 (which is lower than 5% of the value on death) relief is not excluded by the de minimis rule.

12.36 Adjustment where value increased

If the overall effect of changes in the relevant conditions is an increase in value then by s 193(4) the “sale price” is correspondingly reduced to what it would have been on the assumption that, at the date of the sale, none of the changes had occurred. In this case therefore the interest is valued as at the date of sale on the assumption that the interest with any incidents affecting it and the state of the land with any incidents affecting it were such as existed as at the date of death; (but see paras 12.41-12.44 below concerning the disregarding of certain events for which compensation has become payable between the dates of death and sale).

Example where changes have increased the value

Date of death 2 February 2006

Property: vacant freehold building plot

2 February 2006

Value on death

£50,000

3 October 2008

House built on plot and sold with site for

£175,000

Reduction of sale price by s.193(4)

   

Value as at date of sale assuming vacant building plot in the same state as at date of death

 

£45,000

Sale value =

sale price as reduced =

£45,000

HMRC substitutes the sale value £45,000 for the value on death for IHT purposes

 

(£50,000)

Note 1: Since the £5,000 difference between the sale value and the value on death is not less than £1,000 (which is lower than 5% of the value on death) relief is not excluded by the de minimis rule.

Note 2: For the purposes of illustrating the operation of the relief, the value of the building plot is assumed to have fallen between February 2006 and October 2008.

12.37-40 Reserved

Compensation becomes payable after death but before sale for certain planning restrictions or other injuries

12.41 General

If, under any enactment, compensation becomes payable to the “appropriate person” after the date of death but before the date of sale because restrictions are imposed on the use or development of land (the subject of a claim for relief) or because the value of the claimant’s interest is reduced for any other reason, then by s.193(3) the imposition of the restriction or the other cause of the reduction in value of the interest shall be ignored when any adjustments are made under s.193 for relevant changes (see para 12.27 et seq above) between the dates of death and sale.

HMRC will decide whether, before the date of sale, such compensation has become payable to the person liable for IHT in respect of the relevant interest (the “appropriate person”) and when referring the case to the VOA for valuation assistance will give full particulars of any restriction imposed on or the source or cause of any injury to the claimant’s property and the amount of any compensation received or agreed to be payable.

12.42 Resultant reduction in value to be ignored

The caseworker in making a valuation on either the decreased value basis (para 12.35 above) or the increased value basis (para 12.36 above) should ignore the value effect of all matters for which compensation has become payable.

12.43 Amount of compensation payable, information to HMRC

HMRC may seek information from the VOA as to the amount of compensation paid or agreed to be paid in respect of such restrictions or sources of injury affecting the property sold. The caseworker should supply such information as is available from office records and if it is known that the amount of compensation has not been determined, HMRC should be so informed.

12.44 Adjustment to be made

In accordance with s.193(3) HMRC will add to the “sale price” of the relevant interest the amount of any such compensation which has become payable to the “appropriate person” in order to arrive at the “sale value” of the interest sold.

Adjustment for reduction in lessee’s term between dates of death and sale

12.45 General

If the interest sold is that of a lessee who, at the date of death, held an unexpired term not exceeding 50 years, an addition is made to the “sale price” of the lessee’s interest in accordance with the formula set out in s.194(2). This adjustment will be made by HMRC and the VOA will not be involved in the application of the formula.

Adjustment for valuation by reference to other interests

12.46 Falls in value necessitating adjustments

The adjustment to be made under s.195 cuts out any fall in value which is solely attributable to any depreciation caused by severance on the sale of:-

  • Part only of a natural valuation unit adopted for the value on death;
  • Property comprised in the deceased’s estate sold without the “related property” (as defined in s.161) with which it was valued on the death (s.176(1)(a));
  • Property comprised in the deceased’s estate sold without the property, also in the deceased’s estate, with which it was valued on the death but which has not at any time since the death been vested in the vendors (s.176(1)(b)).
12.47 Relief under s.176

Any fall in value solely attributable to para 12.46(b) or 12.46(c) above may be afforded relief under s.176. No relief is given for para 12.46(a) above in respect of a fall in value due solely to a vendor severing a natural unit of valuation, but if, exceptionally, such a unit had passed on death to two or more owners relief may be afforded under s.176 on the basis of para 12.46(c) above.

The qualifications and conditions for relief under s.176 are set out in paras 12.51-12.56 below.

12.48 Method of adjustment

The elimination of so much of a fall in value as is attributable to the matters referred to under items para 12.46(a), (b), or (c) above is effected by an addition under s.195 to the “sale price” of the interest sold. The addition is the difference between:-

  • the value on death of the interest sold; and
  • what that value would have been if the interest sold had been valued as at the date of death but without regard to any other interest taken into account under para 12.46(a), (b) or (c) above in arriving at the value on death.

HMRC will ask the VOA for the valuations under (a) and (b) above in order to make the required addition to arrive at the “sale value” of the interest sold.

For valuation (a) in cases under para 12.46(a) above the caseworker should apportion the value determined or agreed on the IHT death case for the natural valuation unit between the value, as at the date of death, of the interest sold as an integral part of the natural valuation unit and the value attributable to the remainder of the unit. (See para 12.22 above). In other cases under para 12.46(b) or (c) above the interest sold will probably have been separately valued on death but if not the caseworker should make the necessary apportionment which will be based on the value placed on the item sold for the IHT death case. (See para 12.22 above.)

For valuation (b) in cases falling under para 12.46(a) above the caseworker should value the interest sold as at the date of death as if severed from the natural valuation unit and without regard to any enhancement in its value that would occur if the entirety of the unit were in the market for sale. If the parties claim that the value should be increased to take account of the hope of a future marriage with the remainder of the valuation unit the case should be to CEO.

For valuation (b) in cases under para 12.46(b) and (c) above the caseworker should revalue the interest sold as at the date of death ignoring any enhancement in value which was attributable to the existence of the other interest in any:

i. “Related property” if the valuation on death was made in accordance with the provisions of s.161, or

ii. Other property with which the interest sold was valued for the IHT death occasion.

Example 1 Vendor severs a natural valuation unit

Date of death 12 June 2005

Property: house and garden valued at

£300,000

with adjoining building plot valued at

£40,000

   

2 May 2006 sale of half the building plot for

£10,000

to the adjoining owner who wishes to extend his house

 

Addition to sale price by s.195

a. Value on death of the interest sold

 

A pro-rata apportionment of £40,000 there being no

 

Difference in the value, as part of the whole, of the two

 

halves of the plot

£20,000

b.Value on death of the interest sold ignoring the

 

Deceased’s interest in the other half of the building plot, but

 

taking into account the likely special bid of the adjoining

 

owner who was in the market at that date

£12,500

Difference

£7,500

   

Sale value = £17,500 (sale price £10,000 + £7,500 difference)

 

HMRC substitutes the sale value of £17,500 for the apportioned value on death of half the building plot (£20,000). The unsold half remains at (£20,000) for IHT on death (s.191(1)).

Note 1: Since the £2,500 difference between the sale value and the value on death is not less than £1,000 (which is lower than 5% of the value on death) relief is not excluded by the de minimis rule

Note 2: For the purposes of illustrating the operation of the relief, the value of the building plot is assumed to have fallen between June 2005 and May 2006.

Example 2 Property is sold without the “related property” with which it was valued on death.

Date of death 20 May 2006

Property: freehold mansion house and grounds valued on

 

death, as enhanced by (but not including the value of) the

 

freehold interest of the deceased’s spouse in surrounding

 

(s.161)

£1,500,000

   

Value on death, ignoring the interest of the deceased’s

£1.350,000

spouse in (but not the presence of) the parkland

 
   

4 January 2008 sale of mansion house and grounds

 

without the surrounding parkland for

£1,225,000

   

Addition to sale price by s.195

 
   

a. Value on death of the interest sold

£1,500,000

   

b. Value as at the date of death ignoring the

 

spouse’s interest in the surrounding parkland

£1,350,000

   

Difference

£150,000

Sale value = £1,375,000 (Sale price £1,225,000 + £150,000 difference)

HMRC substitutes the sale value of £1,375,000 for the value on death of £1,500,000 (s.191(1).

Note: Taxpayer may in addition qualify for relief under s.176 (see para 12.51 below). If so, the value on death will be re-assessed at £1,350,000 (i.e. ignoring the interest of the spouse in the surrounding parkland). Relief from IHT on death would then total £275,000 (£150,000 under s.191 and £125,000 under s.176).

12.49-50 Reserved

Sale, within 3 years after death, of property valued with “related property”

12.51 Qualifying conditions

S.176 provides relief for deaths if, within 3 years after the date of death, there is a “qualifying sale” (see s. 176(3)) of any property comprised in a deceased’s estate which was valued on death in accordance with the “related property” provisions of s.161 or which was valued on death in conjunction with property (also comprised in the deceased’s estate) but not at any time since the death vested in the vendors (s.176(1)(b)).

S. 176(4) stipulates that relief will not apply unless the price obtained on the sale of the interest, with any adjustment needed to take account of any difference in circumstances at the date of the sale and at the date of the death, is less than the value of that interest which was determined or agreed for the IHT death case before any adjustments are made under s.191 and before the value on death is revalued under s.176.

12.52 Adjustment by VOA of price obtained

The VOA will advise HMRC what adjustment should be made to the price obtained for the interest in order to take account of any such difference in circumstances. This adjustment is made for the sole purpose of deciding whether or not a claim for relief overcomes the hurdle of s. 176(4) and it should not be confused with the adjustments made under s.193 to arrive at “sale value”.

In considering what adjustment, as at the date of the sale, requires to be made to the price obtained on the sale, the caseworker for s. 176(4) purposes only, should take into account inter alia, any changes which have occurred since the date of death in the condition or occupation of the property, in the duration of any leasehold or other terminable interest, in the use of planning circumstances affecting the relevant or adjoining land and any other factor pertinent to the valuation of the property. But the fact that the value of the land sold was enhanced as at the date of death because the valuation was made either on the “related property” basis or in conjunction with some other property comprised in the deceased’s estate should be ignored. It should be noted that the adjustments to be made to the sale price under s.176(4) for changes in circumstances are all embracing unlike those to be made under s.193 which are restricted to certain changes only (see paras 12.28 and 12.44 above).

A commonsense approach should be adopted and the benefit of any doubt should be given to the claimant.

Difficulties arising should be referred to CEO.

12.53 Difference between s.176 and ss.191 and 193 relief

Unlike s.191, s.176 is not a “fall in value” relief. S.176 relief fills in the gaps cut out by s.195 apart from the case of a vendor who by severing a natural valuation unit causes his or her own loss, when s.191 and s.176 both deny relief. There are no provisions in s.176 like those in s.193 concerning changes in circumstances between the dates of death and sale or for setting off profits on sales against losses on other sales within the 3 year period from the date of death. (See para 12.8 above.)

12.54 Basis of s.176 relief

S.176 relief is achieved by a revaluation, for IHT purposes on death, of the interest sold. The revaluation will be based on the value of the interest sold, as at the date of death, without regard to the special valuation rule of s.161 concerning “related property” and without valuing the interest sold in conjunction with any other property comprised in the deceased’s estate, which had not at any time since the death vested in the vendors (s.176(1)).

12.55 Reference of case to VOA

When HMRC refer a s.176 relief case for a revaluation on death, the caseworker should make a report on the basis of para 12.54 above, provided the caseworker is satisfied or has previously reported to HMRC that the claim passes the test under s.176(4) referred to in paras 12.51 and 12.52 above.

12.56 Sale qualifying under both s.176 and ss.191-195 relief

A sale may qualify for relief under both s.176 and ss.191-195, although the qualifying conditions vary in each case. Whether a sale qualifies under either or both is a matter for HMRC.

Example

Date of death 14 August 2006

Property: vacant freehold works premises valued under “related property”

 

s.161 rule as enhanced by (but not including) the spouse’s freehold

 

interest in an adjoining site formerly used as additional car park

 
   

Value on death under s.161

£80,000

   

Value on death ignoring the enhancement attributable to spouse’s interest

 

in (but not the presence of) the car park site

£60,000

   

7 July 2008 works tenanted since death and sold, subject to tenancy,

 

without the spouse’s car park site

£50,000

   

Addition to sale price by s.193(1)

 
   

a. Value on death of vacant works

£80,000

   

b. Value as at date of death assuming works are tenanted

£76,000

   

Difference

£4,000

   

Note: s.161 “related property” valuation rule applies to both

 

(a) and (b) above

 
   

Addition to sale price by s.195:

 
   

a. Value on death under s.161

£80,000

   

b. Value as at date of death, ignoring the enhancement attributable to

 

spouse’s interest in (but not the presence of) the car park site

£60,000

   

Difference

£20,000

   

Sale value = £74,000 (sale price £50,000 + £24,000

 

(£4,000 + £20,000 differences)).

 
   

S.176 relief

 
   

Adjustment of sale price under s.176(4)

 
   

Sale price of tenanted works

£50,000

   

Different circumstances at date of death

 
   

1. Vacant possession; add say

£5,000

   

2. Greater hope of redevelopment of site including better planning

 

prospects;

 

add say

£10,000

   

Sale price considered obtainable on 7 July 2008 adjusted for changed

 

circumstances

£65,000

   

Test under s.176(4)

 
   

Since the adjusted sale price (£65,000) is less than the value on death

 

(£80,000) relief is available.

 
   

Relief under s.176

 
   

Value on death ignoring the “related property” valuation rule under s.161

£60,000

Relief from IHT on death is granted in respect of £6,000 under ss.191-195 (£80,000 - £74,000) and in respect of £20,000 under s.176 (£80,000 - £60,000) thus reinstating the £20,000 for relief which had been excluded by s.195.

Adjustment for non-qualifying sales and exchanges

12.57 General

Under s.196 relief for a qualifying sale by an “appropriate person” is cut down by any “profit” realised on a sale excluded from relief by s.191(3) (see para 12.10 above) or on an exchange of land made within 3 years of the death by the “appropriate person” acting in the same capacity. The “profit” is ascertained by making a comparison between:-

  • the value on death of the interest sold or exchanged; and
  • i. the “sale price” of the interest sold; or

    ii.
    the market value of the “appropriate person’s” interest in the land or property exchanged as at the date of the contract to exchange or at any other relevant date notified by HMRC to the VOA.

There is no provision for taking into account any losses on non-qualifying sales or exchanges. S.196(1) refers only to the excess of (b) over (a) above.

No adjustments are made for any relevant changes under s.193 (see paras 12.27 to 12.44 above) which have occurred between the dates of death and the non-qualifying sale or exchange.

S.196(2) provides for an addition corresponding to the “profit” on any non-qualifying sale or exchange to be made to the “sale price” of the qualifying sale, which will then be adjusted, if necessary, under ss.193-196 to determine the “sale value” (see paras 12.27 to 12.45 above). Where there is more than one qualifying sale s.196(2)(b) and (3) provide that the profit from the non-qualifying sale or exchange shall be apportioned between the qualifying sales of all the interests in proportion to the profit or loss (adjusted if necessary under ss.193-195) arising from each qualifying sale. HMRC will make all the necessary additions to the sale prices of any qualifying sales.

12.58 Valuations required by HMRC

The VOA will supply HMRC with any valuations necessary to ascertain whether or not a “profit” has been made in respect of a non-qualifying sale. Normally valuation (a) in para 12.57 above will have previously been reported to HMRC as the value on death of the interest sold or exchanged, but if the non-qualifying sale or exchange has taken place in respect of part only of a single item or unit of valuation adopted on death the caseworker should make the required apportionment on the basis set out in para 12.22 above.

HMRC will only require a valuation under (b) of para 12.57 above if either the interest was sold at less than its best price or the interest has been exchanged for other land or property. In the case of a sale at undervalue the caseworker should inform HMRC of an opinion of the “sale price” of the interest in accordance with paras 12.16-12.19 above. If the interest has been exchanged for other land the caseworker should inform HMRC of the market value of the “appropriate person’s” interest exchanged as at the date of the contract to exchange or in certain circumstances as at the date of any option to exchange (ss.196(1) and 198). HMRC will inform the caseworker of the valuation date.

12.59 “Market value” of land exchanged

The “market value” of the “appropriate person’s” interest in the land exchanged is the best consideration that could reasonably be obtained for it on a sale in the open market at the date of the exchange.

12.60-62 Reserved

Adjustment for purchases

12.63 General

If the “appropriate person” purchases any interests in land in the same capacity as that in which a claim is made for relief, an adjustment is made under s.192. This adjustment will reduce or eliminate the relief otherwise applicable in respect of all qualified sales within the three year period after death. An adjustment is only made in respect of purchases by the “appropriate person” in the period beginning with the date of death and ending four months after the date of the last qualifying sale within three years. This period is not extended because an interest comprised in the deceased’s estate has been compulsorily acquired from the “appropriate person” more than 3 years after the date of death, or because a sale took place in the fourth year after death.

The principle behind this adjustment is that the relief for a fall in the value of land comprised in a deceased’s estate is intended to alleviate the financial position of the person liable for the payment of IHT on death who, in order to pay the tax, is forced to sell land or property comprised in the deceased’s estate at a time when its value has become less than its value on death for tax purposes. Relief is therefore not available to an “appropriate person”, who, having sold such land at a loss uses the cash to repurchase the same or purchase other land.

The VOA will not be involved in any adjustments to be made under s.192, which will be made by HMRC.

Compulsory acquisitions

12.64 Within the 3 year period

If an interest is compulsorily acquired from an “appropriate person” within three years of the date of death, that person may claim relief in respect of any fall in value resulting from the compensation paid for the interest acquired. (See para 12.67 below). Subject to para 12.65 below such a claim would be dealt with in the same manner as a claim for any interest sold to a private person or body or by agreement to a public authority.

Apart from the exceptions referred to in para 12.8 above the “sale values” of all interests sold by or acquired from the “appropriate person” within the three year period after the death will be substituted for the values on death even though this might result in a higher tax liability on death in respect of any of the sales or compulsory acquisitions (s.191(1)).

12.65 Relevant date of compulsory acquisition

The date on which an interest is sold to an authority following the service of a notice to treat is the date when the compensation was agreed or determined by the Lands Tribunal or, if earlier, the date of entry (s.198(3)). In the case of an acquisition under a general vesting declaration, the relevant date is the last day specified in the declaration (s.198(4)).

12.66 More than 3 years after death

S.197 provides that if an interest in land is compulsorily acquired from the “appropriate person” more than three years after the date of death in pursuance of a notice to treat served before the death or within three years of the death then relief for any fall in value will apply as it applies to interests sold within three years after the date of death provided the “sale value” is less than the value on death.

If the “sale value” exceeds the value on death s.197 does not apply (s.197(2)). This has the result that any reliefs granted in respect of sales within the three year period will not be reduced because the compulsory acquisition after the period has expired gives rise to a “sale value” greater than the value on death of the interest acquired (see para 12.8 above).

12.67 Advice from VOA as to compensation paid and valuations to be made

In considering whether or not a fall in value has resulted from a compulsory acquisition the relevant factor is the price paid for the interest exclusive of any payments for severance, injurious affection or disturbance. It will be necessary to consider whether the price paid for the interest compulsorily acquired is equivalent to its “sale price” and to supply any valuations required to enable HMRC to calculate the “sale value”.

A compulsory acquisition which is included for relief under s.197 will not have the effect of extending the period for taking purchases into account under s.192 (see para 12.63 above).

12.68-70 Reserved

Assistance to HMRC

12.71 Reference of cases by HMRC

When asking the VOA for valuation or other assistance in connection with the operation of these reliefs HMRC will advise the VOA of:

  • The name of the deceased, the date of death and the VOA’s reference;
  • The name, address and telephone number of the “appropriate person” or agent, if any;
  • Any case in which the required valuations are not to be notified by the VOA to the parties;
  • The relevant section(s) of the legislation;
  • The purpose for which the information, valuation or apportionment is required;
  • The address or other identification of the property sold, including a plan, if necessary;
  • The date of the contract for sale or other relevant date per s.198 and the price obtained.
  • The interest sold and if leasehold, particulars of the duration and main terms of the lease or tenancy;
  • The incidents appertaining to the interest at the date of sale stating whether sold with vacant possession or if not, giving full particulars of the tenancies etc.
  • The incidents appertaining to the land at the date of the sale;
  • Whether the information given at (h), (i) and (j) above differs from that pertaining at the date of death; and
  • Any other information likely to be of assistance to the VOA, such as statements by the parties relating to changes in circumstances or in the state or condition of the property between the dates of death and sale.

    In cases in which s.193(3) applies HMRC will additionally inform the VOA of:

    i.
    The amount of compensation paid or agreed to be paid for planning restrictions or other injury to the land sold;

    ii.
    The Act and Section under which the entitlement to compensation was authorised;

    iii.
    Particulars of the restriction or injury for which compensation became payable;

    iv.
    The name of the person or body liable to pay the compensation.
12.72 Inspections

The VOA’s authority to inspect is contained in para 12A of Schedule 36 of the FA2008 (inserted by paragraph 5 of Schedule 48 of the FA 2009). While there may be doubt that the VOA has authority to reinspect after a value has been determined, a claim under s.176 or ss.191-195 will lead to the determination of a new value with associated rights of appeal. The caseworker should therefore carry out any necessary inspection before making any required valuations under s.176 or ss.191-195.

It may be necessary to make an internal inspection of a property which has been sold or to make enquiries of a tenant or purchaser. The caseworker should first direct enquiries to the “appropriate person” or agent. No information as to the reason for the valuation should be given to any person other than the “appropriate person” or their representative.

If any difficulties are encountered in arranging an essential inspection the caseworker should refer the matter to CEO in accordance with Section 27, paragraph 27.28 explaining the circumstances and await instructions on how to proceed.

12.73 Case registration

Any fall in value or s.176 relief case received from HMRC should be treated as a new case with credit type 01. Cases originally reported under this Section and referred back by HMRC should be credit type 03.

The case type allotted to the original formal IHT death case should be maintained.

12.74 Identification of possible claims by VOA

If whilst dealing with a request for a valuation on death the caseworker becomes aware of a sale at a price lower than the value at the date of death and the conditions for fall-in-value relief under s.191 seem to be met, agreement of the value on death may be unnecessary. In such circumstances the caseworker should report a not negotiated or unagreed opinion of value to HMRC and they will then invite the parties to claim relief.

The caseworker should report the opinion of value in the normal way (see Section 27 Part 4), outlining any material changes.

The caseworker must not give the parties the impression that where the sale price is less than the returned value that FIV relief will be granted and must make it clear that it is for HMRC to decide whether relief is applicable.

Further guidance is contained in paragraphs 12.75-12.76 below.

12.75 Identification of possible claims by VOA – Initial Appraisal cases

In an Initial Appraisal case, if a caseworker considers the returned value is too high, the subsequent action to be taken will depend on whether it is considered that the parties are likely to claim FIV Relief or whether the value has been deliberately overstated.

If the market has fallen since the date of death and the caseworker is of the opinion that the need be raised” (see IHT Manual para 27.9). If the property has been sold HMRC(IHT) should be advised accordingly (see IHT Manual 27.10). The caseworker should make it clear in any contact with the parties that it is for HMRC(IHT) to decide whether FIV relief is applicable.

In some cases the parties may have deliberately overstated the value of the property because no, or, little IHT is likely to be payable (because the estate is on or near the IHT threshold or Agricultural Relief (AR) or Business Property Relief (BPR) is available) and the value determined for IHT purposes will be used as the base value for Capital Gains Tax (CGT) purposes. If a caseworker considers this to be the case then the case should be made formal in accordance with para 27.14 of the IHT Manual.

12.76 Identification of possible claims by VOA – Formal cases

The procedure to be followed will depend upon whether the caseworker considers that the parties are likely to claim FIV Relief, or whether the value has been deliberately overstated.

If the market has fallen since the date of death and the caseworker is of the opinion that the returned value is not understated, the case should be reported with the endorsement “As returned” and sub-paragraph i of Form VO1120 should completed (see IHT Manual para 27.55). The caseworker should make it clear in any contact with the parties that it is for HMRC(IHT) to decide whether FIV relief is applicable.

If a caseworker considers values are overstated for the reasons set out in para 3.3 above they should enter into negotiations with the parties. The caseworker should also liaise closely with HMRC(IHT) since it may well be that a reduction in the value returned will take the estate below the chargeable threshold or 100% AR or BPR may be available. If this is the case then the need to agree a valuation may prove to be unnecessary and the value returned will not be regarded as having been ascertained for CGT purposes.

12.77-99 Reserved

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