The number of property valuations challenged by HMRC has increased by more than a fifth over the past year, driven by frozen inheritance tax thresholds and rising property prices pushing more estates into the IHT net.
With residential property accounting for not far off 50% of the net value of estates, challenging valuations is an easy way for HMRC to boost tax revenues, especially as AI can now be used to identify inconsistencies.
Advice from experts
There can be significant financial consequences if an executor understates the value of property in an IHT return:
- Apart from the additional IHT payable, late payment interest – currently set at 7.75% – will be due on the underpayment.
- A penalty can also be charged if the underpayment results from a return containing an inaccuracy due to reasonable care not being taken.
Best advice is for executors to instruct a professional valuer, rather than just relying on an estimate from a high street estate agent. However, taking the average from three estate agent valuations will mean reasonable care has been taken.
What the future holds
Unfortunately, the situation is unlikely to improve over the next few years. IHT thresholds are set to remain frozen until 5 April 2031, while the property market, although subdued as a result of the inflationary impact of the Middle East conflict, remains resilient and is unlikely to see falling values, except for London and the South East of England.
The inclusion of most unused pension pots within the IHT net from April 2027 (unless inherited by a spouse or civil partner) will increase the number of estates subject to IHT.
Planning for your estate
Wills should be up to date, taking into account realistic property values and the coming inclusion of pension pots. Make sure that, where possible, the residence nil rate band is fully utilised as this can save IHT of £140,000 for a couple.
Lifetime gifts are becoming increasingly popular as a means to mitigate potential IHT liabilities. One problem is that the main residence might be the only sizeable asset, but downsizing could be a way of releasing funds for lifetime gifting.
The government’s guide to how to value an estate for IHT and report its value can be found here.
For more information, contact us on 0330 1070 873 or email info@smh.group.
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