Section 17: Inheritance Tax - Valuation of Property Subject to a Land Charge following an RTB Discount or a Renovation Grant
Under the RTB provisions of the Housing Acts (Pt V HA 1985 as amended by the Housing and Planning Act 1986, the Housing Act 1988, the Local Government and Housing Act 1988, the Housing Act 1996 and the Housing Act 2004) tenants of public sector houses or flats, in England and Wales, are given the right to purchase the freehold or a new leasehold interest at a discount. This discount or a proportion thereof is repayable if there is a relevant disposal within 5 years (3 years before 18 January 2005) of the sale to the secure tenant. The authority's interest can be protected by registration as a charge on the property under the Land Charges Act 1972 or the Land Registration Act 2002(as appropriate).
17.2 Amount of liability
The sum to be repaid is the discount reduced by 20% (one third of the discount for disposals occurring before 18 January 2005) for each complete year between the date of the conveyance to the secure tenant and the date of the "relevant disposal". Additionally for houses acquired on or after 18 January 2005, the amount of discount to be repaid will be adjusted so it represents the same percentage of the disposal value as it represented of the acquisition value:
e.g. for a house acquired on 20 January 2005 for £120,000 (based on a value of £150,000), which was subsequently sold on 5 January 2007 for £225,000, the amount repayable would be £36,000. This is because the original discount of £30,000 represented 20% of the acquisition cost; 20% of the disposal value is £45,000 and this figure needs to be reduced by 20%, to reflect the time between acquisition and disposal (it is also assumed the vendor made no improvements between acquisition and disposal).
17.3 Right to Buy in Scotland
The main Scottish legislation can be found in the Housing (Scotland) Act 1987 and the Housing (Scotland) Act 2001. The amount of discount will depend on whether the secure tenancy commenced before or on or after 30 September 2002 (if it commenced on or after that date, the amount of discount will be capped at £15,000 or 35% whichever is the lower). The amount of the discount will be repayable if there is a sale within 3 years reduced by one third for each complete year between the date of the conveyance to the secure tenant and the date of the "relevant disposal".
17.4 Effect on valuation for IHT purposes
Death is not a "relevant disposal" which triggers off an actual obligation to repay the discount (or a proportion thereof). The charge is therefore not a debt due from the estate but is a potential liability within the meaning of s.162(4) IHTA 1984 to be reflected in the valuation of the property.
17.5 Valuation approach
For valuation approach see paras 17.20-29 below.
Where, in England and Wales, a renovation or similar grant has been made under the provisions of the Housing Grants Regeneration and Construction Act 1996, and the recipient breaches one of the grant conditions the local housing authority may demand repayment of the grant with interest. The liability to reimburse the authority is a local land charge which can be protected by registration as a charge on the property under the Local Land Charges Act 1975.
17.11 Duration of liability (s44(3) Housing Grants Regeneration and Construction Act 1996)
Conditions will normally remain in force for a period of 5 years from the date on which the local authority certified that the eligible works have been completed to their satisfaction ("the certified date").
17.12 Amount of liability
The sum to be repaid will be the grant together with compound interest (at a reasonable rate to be determined by the local housing authority) from the "certified date". The authority may demand a smaller amount or waive the repayment entirely.
17.13 Improvement Grants in Scotland
The main Scottish legislation covering improvement grants can be found in the Housing (Scotland) Act 1987 and the Housing (Scotland) Act 2001. Details of the grant will either be recorded in the Register of Sasines or the Land Register. Conditions will normally remain in force for a period of 5 years from the date on which, in the opinion of the local authority, the house first became fit for habitation after the completion of the improvement works.
17.14 Effect on valuation for IHT purposes
Death does not constitute a breach of the grant conditions. It does not trigger off an obligation to repay the grant and so no debt is deductible from the estate. The charge is however a potential liability within the meaning of s.162(4) IHTA 1984 to be reflected in the valuation of the property.
17.20 Hypothetical sale
In valuing a property for IHT purposes a hypothetical sale in a hypothetical market is to be envisaged (IRC v Crossman). There is no actual sale and therefore no actual liability to reimburse the authority. See Practice Note 1 para 5.
17.21 Basis of valuation
If the property is subject to a potential liability, then the value for IHT purposes under s.160 IHTA 1984 is the price that would be paid by a person to stand in the deceased's shoes. The value must reflect what a hypothetical purchaser would pay at the valuation date. The acquisition does not trigger payment of the liability but the hypothetical purchaser knows that if reselling within a certain period, or breaching the conditions of the grant, then a liability will arise to repay the local authority all or part of the discount or grant.
17.22 Alexander v CIR
This case concerned the valuation of a flat. At the date of valuation there was a potential liability to repay an RTB discount under the Housing Act 1980. The Lands Tribunal did not follow the reasoning set out above, but determined the full vacant possession value without any deduction for the potential liability. The Revenue successfully appealed to the Court of Appeal. In giving his decision Lord Justice Ralph Gibson said.
"I have no doubt that the principles stated in Crossman's case are applicable .... the Lands Tribunal is required to determine the amount which, on a hypothetical sale, a person would be willing to pay to acquire the lease held by the deceased subject to the obligation which would fall on the hypothetical purchaser to make a repayment to the landlord in the event of a disposal within section 8(3) of the 1980 Act but on the footing that his own hypothetical acquisition did not itself give rise to such a disposal."
17.23 Effect on value
Such a restriction may affect the market value of the property but the measure of this is a matter for the DV's judgement. The DV should have regard to the following when considering the effect on value.
- The amount of the potential liability.
The total amount needed to discharge the obligation at the date of death would obviously set a maximum by which the value is likely to be reduced.
- The effective duration of the restriction.
In cases where the liability is about to lapse there may be little or no effect on value.
- How onerous it is to comply with any restrictions.
With grants under the Housing Grants Regeneration and Construction Act 1996 where the application was accompanied by a certificate of owner-occupation there is usually a condition that the property be occupied by a qualifying person as the only or main residence. As the term 'qualifying owner’s interest' includes any person deriving title from the applicant this condition would not be breached on sale provided any new owner so occupied. This condition is therefore unlikely to be onerous and may have little or no effect on value. Similarly a requirement to make available for letting may have little effect on the value of the house, which is already let, unless there was otherwise some prospect of obtaining early vacant possession.
- The type of property.
A restriction on disposal may be more onerous on a type of property that usually changes hands frequently than for a type of property that is usually held for a long period of time.
- The state of the property market at the valuation date.
When the housing market is very active purchasers may accept restrictions more readily. Alternatively when the market is in a depressed state any restriction may make a property very difficult to sell. In times of economic recession purchasers may also see the possibility of their being forced to sell within a given period as more likely.
17.30 RTB cases
If HMRC(IHT) is aware that the property is subject to the liability to repay an RTB discount, they will supply the following information:-
- date of conveyance by authority to secure tenant
- amount of original discount
17.31 Obtained by DV
If during the course of inspection or negotiation the DV becomes aware of such a liability the parties should be asked to supply the above information. If this is not forthcoming within 4 weeks the case should be returned to HMRC(IHT) with a covering memorandum setting out the situation.
17.32 Improvement etc grant cases
In improvement etc grant cases HMRC(IHT) will supply:-
- certified date
- amount of grant
As the attitude of local housing authorities towards the repayment of grants varies considerably DVs will wish to verify the situation with the authority concerned.
On reporting, Form VO 1110 should be endorsed with the following words:
“The value of the property (item no…) reflects the contingent liability for the repayment of a RTB discount/grant”