Section 12: Reliefs for Loss on Sale of Land After Death
The Valuation Office Agency's (VOA) technical manual relating to Inheritance聽Tax.
IHT is normally charged on the value of the deceased鈥檚 assets at the date of death. However, in certain circumstances claims can be made to substitute a lower value for assets which have been sold after the date of death.
- when an interest in land is sold for a price different from its date of death value within four years of the death, relief may be available under ss.190-198 IHTA84. In simple terms, the relief allows the sale price to be substituted for the date of death value.
- there is a second and completely separate relieving provision in s.176 IHTA84 that applies only when the property sold was originally valued in conjunction with other property for Inheritance Tax purposes
It is possible that claims for relief could be made under both ss.190-198 and s.176 IHTA84. The way the reliefs operate differs and the amount of relief available may be different (see para 12.44 for an example). In these circumstances executors may choose which of the reliefs to claim.
The provisions relating to Loss on Sale of Land Relief (ss.190-198 IHTA84) are dealt with in paragraphs 12.2-12.40 below and the provisions relating to Sales of Related Property Relief (s.176 IHTA84) in paragraphs 12.41-12.44 below.
A separate relief applies to land that is transferred during the deceased鈥檚 lifetime. Section 131 IHTA84 (Fall in Value Relief) considers claims for relief if the value of this land falls.
Loss on Sale of Land Relief (ss.190 -S198 IHTA84.)
Under s.191(1) IHTA84, loss on sale of land relief may be claimed when:
- the 鈥榓ppropriate person鈥� (most commonly the executors),
- sells 鈥榓n interest in land鈥� included in the deceased鈥檚 estate,
- within four years of the death (which may be extended in the case of compulsory purchases)
- for a value different to its date of death value. (Only sales at a loss in the fourth year after death are treated as qualifying sales) (s197A IHTA84)
When this happens, the appropriate person may claim that the 鈥樷€榮ale value鈥欌€� should be substituted for the 鈥樷€榲alue on the death鈥欌€�.
Where the only interest in land included in a deceased鈥檚 estate is the residence, the relief is normally straightforward.
Example
Terry died in August 2006. His house was valued for probate at 拢300,000. He had no other interests in land.
In December 2008, Terry鈥檚 executors sold the house at arm鈥檚 length to a complete stranger for 拢250,000.
The executors claimed relief under s.191(1) IHTA84. The date of death value of the house for IHT purposes was reduced to 拢250,000.
But once the relief is claimed, the sale price of all interests in land sold within the 4-year period must be substituted for their date of death value. This includes those interests sold for more than the date of death value. The exception is property sold for a higher price in the fourth year.
There are situations where the sale price must be adjusted to take account of special circumstances.
The relief is not available where:
- the difference between the date of death value and the sale price is less than 拢1,000 or 5% of the value on death whichever is the lower, (s191(2)IHTA84)
- where the only sale is of an interest whose value on death is covered by agricultural or business relief (or both) at 100%, as no tax was payable
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 (unless the sale is in the fourth year)
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 鈥渟ale value鈥� as being the appropriate arithmetical share of the sale proceeds (see para 12.16). Accordingly, the discounted date of death value agreed for say the deceased鈥檚 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 拢200,000 for the whole, 拢90,000 for the deceased鈥檚 half share.
A year after the death, the whole property was sold for 拢190,000.
The sale value of the property for the purposes of s.191 is an arithmetic half share of the gross proceeds of sale, 拢95,000.
Any claim would therefore be disadvantageous as additional inheritance tax would in fact be payable as a result of the claim.
If the other half share is related property the approach is set out in para 12.41.
The taxpayer may try to make a claim following a sale at more than the date of death value even though it is clearly disadvantageous for IHT purposes. Where no tax is due on the sold land because:
- the chargeable estate is below the nil rate band, or
- the sold land is exempt from IHT, or
- the sold land attracts 100% relief (APR/BPR)
HMRC will deny the claim.
In denying the claim in these circumstances HMRC has not considered the value of the relevant interests in land at the date of death for Inheritance Tax purposes. Accordingly, the value has not been ascertained within the meaning of s.274 TCGA92 and for Capital Gains Tax. See also VOA CGT Manual Section 6.137.
The sale must be by the person liable to pay the tax, the 鈥渁ppropriate person鈥� as defined in s.190(1) IHTA84 and that person must claim relief. In most cases the appropriate person will be the personal representative of the deceased or the trustees of a settlement.
But no relief can be given if, for example, a personal representative or trustee accounts for tax and then transfers the land to a beneficiary who then sells at a loss. The beneficiary cannot claim because they are not the 鈥榓ppropriate person鈥�, and the personal representative or trustee cannot claim because they have not sold the land.
The claim must be made within four years of the end of the three-year period during which qualifying sales can be made (s.191(1A) IHTA84). 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.
The relief operates by the substitution of the 鈥渟ale value鈥� for the 鈥渧alue on death鈥� in order to arrive at the tax payable. However, if the 鈥渁ppropriate person鈥� acting in the same capacity, has within three years of the date of death sold any other interest in land comprised in the deceased鈥檚 estate, the 鈥渟ale values鈥� of any such sales (apart from those excluded from relief under the de minimis rule or excluded sales under s.191(3) IHTA84) will be substituted for the values on death (s.191(1) IHTA84).
To calculate the overall loss, HMRC aggregate together all profits and losses in the 3-year period, and any resulting loss is deducted from the value of the estate for IHT purposes.
Sales in the fourth year are only substituted if the sale value is less than the value on death.
If the Executors purchase land and buildings within the period from the date of death until 4 months after the final sale in the first 3 years, these purchases will restrict the amount of the allowable loss. (s.192 IHTA84).
HMRC will undertake the appropriate calculations.
HMRC will decide whether or not a sale is by an 鈥渁ppropriate person鈥� and whether or not the sale is excluded from relief under s.191(3) IHTA84. Sales to certain beneficiaries, relatives of those beneficiaries and some trusts are excluded.
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) IHTA84).
For the date of sale in the case of a compulsory acquisition see para 12.35 below.
In all cases HMRC will notify the VOA of the date of sale.
For the relief there are specific definitions of 鈥渟ale price鈥�, 鈥渟ale value鈥� and 鈥渧alue on death鈥� and these are set out in s.190 IHTA84. To summarise briefly:
鈥淪ale price鈥� 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.
No account is taken of incidental expenses such as stamp duty, legal fees or estate agents鈥� commission. So, in a straightforward case the gross price realised is taken as the value for IHT purposes on the death.
鈥淪ale value鈥� means the sale price of an interest in land as increased or reduced under the provisions of ss.190-198 IHTA84.
鈥淰alue on death鈥� in relation to any interest in land comprised in a person鈥檚 estate immediately before death means the value of that interest as part of the deceased鈥檚 estate which was ascertained for the purposes of IHT, before any substitution takes place under s.176 or s.191 IHTA84 in order to operate the reliefs.
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.
If best consideration is greater, it is this amount that should be apportioned or adjusted as described in other paragraphs in this section.
Natural lotting units
In considering whether or not the price realised for the interest represents its 鈥渟ale price鈥� as defined in s.190(1) IHTA84 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).
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 arm鈥檚 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 (1983) (266 EG 323)).
Issues to consider include the
- method of marketing - was the property appropriately exposed for sale or was it a private sale
- marketing period - was this appropriate for the asset being sold
- number and level of other unsuccessful bids
Statutory or other restrictions which affect the amount of the consideration obtainable for an interest (e.g. restrictions on the amount of a premium which may be charged on the assignment of a聽lease are to be taken into account in ascertaining the 鈥渟ale price鈥� as defined in s.190(1) IHTA84 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 IHTA84.)
Apportionment and Adjustments of Sale Price
If the unit of sale does not accord with the unit of valuation at death an apportionment of the sale valuation may be required.
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 鈥渟ale price鈥� to ensure that like is compared with like (s.193 IHTA84). An adjustment is necessary if the conditions set out in s.193(2) IHTA 84 are not the same at the dates of death and sale.
The conditions are that: -
a) The interest was the same and with the same incidents at both dates, and
b) 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, or any change in the planning circumstances.
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 based on the contribution made by each part to the sale price.
If for example the deceased鈥檚 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).
See example in Section 12.3.
If such an approach does not provide a reasonable solution in any particular case the matter should be referred to CVG DVS Professional Guidance Team with full details.
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 IHTA84 in all such cases the caseworker should at the same time supply HMRC with the two valuations referred to in Section 12.23.
If the interest sold in one transaction includes more than one natural unit of valuation adopted at the date of death the 鈥渟ale price鈥� will have to be apportioned in order to apply the de minimis rule of s.191(2) IHTA84 to each unit in turn. In such circumstances HMRC will ask the VOA for the required apportionment.
In reporting the apportionment, it will usually be possible to refer to an item number on Form IHT 405 (or equivalent) or an address for identification, but if not, a sufficient description of the land to which the apportioned price relates including a plan, if necessary, should be provided to enable HMRC to identify it.
In advising HMRC of the 鈥渟ale price鈥� (apportioned when required in accordance with paras 12.16-12.18) the report should identify and, if necessary, apportion the value on death to the land to which the 鈥渟ale price鈥� 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, i.e. its value as an un-severed part of the whole as valued on death.
HMRC will ascertain and notify to the VOA 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 VOA caseworker who should assist.
The VOA 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 IHTA84.
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 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.
The caseworker should set out briefly any changes in the state of the land which, to the caseworker鈥檚 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.
The way in which the adjustment is made to the 鈥渟ale price鈥� of the interest in order to ascertain its 鈥渟ale value鈥� depends on whether the changes in the relevant conditions (see para 12.15) have increased or decreased the value on death.
In decrease cases the聽valuation date for the adjustment calculation is the date of death.
In increase cases the聽valuation date for the adjustment calculation is the date of sale.
In both cases the adjustment valuations are made based on hypothetical assumptions relating to the relevant conditions. (See paras 12.23 and 12.24)
If the overall effect of the changes in the relevant conditions is a decrease in value, then by s.193(1) IHTA84 the 鈥渟ale price鈥� of the interest is correspondingly increased. The addition is equal to the difference between:
a. The value of the interest as at the date of death and
b. 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 12.31 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 paras 12.16-12.18.
Valuation (b) will involve revaluing as at the date of death assuming the existence at that date of the prescribed circumstances which prevailed at the 鈥渄ate of sale鈥�.
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) IHTA84 will apply instead. In such circumstances the caseworker should make the valuation based on s.193(4) IHTA84 and inform HMRC accordingly when issuing the report. (See para 12.24).
Example where changes have decreased the value
Date of death 2 November 2016
Property: freehold dwelling house
2 November 2016 - value on death with vacant possession = 拢270,000
4 October 2018 - property vandalised since death and sold with vacant possession for 拢230,000
Addition to sale price by s.193(1) IHTA84: -
Value on death = 拢270,000
Value as at date of death assuming property in vandalised state = 拢240,000
Difference = 拢 30,000
Sale value = 拢260,000 (sale price 拢230,000 + 拢30,000 difference)
HMRC substitutes sale value 拢260,000 for value on death (拢270,000) for IHT purposes (s.191(1)) IHTA84.
If the overall effect of changes in the relevant conditions is an increase in value then by s.193(4) IHTA 84 the 鈥渟ale price鈥� 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 12.30 concerning the disregarding of certain events for which compensation has become payable between the dates of death and sale).
Example
At the date of death the market value of a parcel of land is 拢50,000.
Within the four-year period a house is built on the land.
The market value at the date of sale of the land with the house is 拢300,000.
But, without the house, the value of the land at the date of sale would have been 拢45,000.
If the house had been on the land at the date of death its value would have been more than 拢50,000 (the value of the land at the date of death).
For relief purposes the sale value is taken to be 拢45,000.
Note 1: Since the 拢5,000 difference between the sale value and the value on death is not less than 拢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 death and sale.
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 IHT84.
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 IHTA84. 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.
If the 鈥渁ppropriate person鈥� 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 IHTA84. 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 鈥渁ppropriate person鈥� 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鈥檚 estate has been compulsorily acquired from the 鈥渁ppropriate person鈥� 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 loss on sale of land comprised in a deceased鈥檚 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鈥檚 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 鈥渁ppropriate person鈥�, 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 IHTA84, which will be made by HMRC.
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 鈥渟ale price鈥� of the lessee鈥檚 interest in accordance with the formula set out in s.194(2) IHTA84. This adjustment will be made by HMRC and the VOA will not be involved in the application of the formula.
Under s.196 IHTA84 relief for a qualifying sale by an 鈥渁ppropriate person鈥� is reduced by any 鈥減rofit鈥� realised on a sale excluded from relief by s.191(3) IHTA84 (see para 12.7) or on an exchange of land made within 3 years of the death by the 鈥渁ppropriate person鈥� acting in the same capacity.
S.196(2) IHTA84 provides for an addition corresponding to the 鈥減rofit鈥� on any non-qualifying sale or exchange to be made to the 鈥渟ale price鈥� (or 鈥榮ale value鈥� if adjustment is required) of the qualifying sale of the asset on which the relief is claimed.
The 鈥減rofit鈥� is ascertained by making a comparison between: -
a. the value on death of the interest sold or exchanged; and
b. i. the 鈥渟ale price鈥� of the interest sold; or
ii. the market value of the 鈥渁ppropriate person鈥檚鈥� 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) IHTA 84 refers only to the excess of (b) over (a) above.
No adjustments are made for any relevant changes under s.193 IHTA84 which have occurred between the dates of death and the non-qualifying sale or exchange.
Where there is more than one qualifying sale s.196(2)(b) and (3) IHTA84 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鈥�. HMRC will make all the necessary additions to the sale prices of any qualifying sales.
Valuations required by HMRC
The VOA will supply HMRC with any valuations necessary to ascertain whether or not a 鈥減rofit鈥� has been made in respect of a non-qualifying sale. Normally valuation (a) 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 12.17.
HMRC will only require a valuation under (b) 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 鈥渟ale price鈥� of the interest in accordance with paras 12.12. If the interest has been exchanged for other land the caseworker should inform HMRC of the market value of the 鈥渁ppropriate person鈥檚鈥� 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 IHTA84). HMRC will inform the caseworker of the聽valuation date.
鈥淢arket value鈥� of land exchanged
The 鈥渕arket value鈥� of the 鈥渁ppropriate person鈥檚鈥� 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.
Where there has been a sale of a structurally unsound property which was repaired between the date of death and the date of sale, the sale price is reduced because the property has been improved. (s.193(4) IHTA84)
HMRC will require the value of the property: - at the date of sale, reflecting the condition of the property as at the date of death excluding the value of the insurance policy, and - at the date of death in its defective or damaged state.
The difference between the two values is the value of the loss on sale claim. The value of the policy or right of action is treated as a separate asset of the estate.
See also Section 7, para. 7.36.
Where an interest in land
- was valued at the date of death in conjunction with any other interest, and
- the value of the interest on this basis is greater than it would have been if it was valued on its own
then the sale price is increased by the difference between
- the value of the interest on death, and
- the value which would have been the date of death value if no other interests had been taken into account, (s195 IHTA84)
Example
At death, a field owned by the deceased is valued as part of a parcel of land which included adjoining land also owned by the deceased
The value of the field is 拢10,000
The separate value of the field at death would have been 拢8,000
Within three years of death it is sold without the adjoining land by a qualifying sale for 拢6,500.
The 鈥榮ale value鈥� is 拢6,500 + (拢10,000 - 拢8,000) = 拢8,500
Where the interest was valued with related property, relief may also be available under s.176 IHTA84 and takes the form of聽revaluation聽on death without reference to other interests. (See 12.41 et seq.)
General
If, under any enactment, compensation becomes payable to the 鈥渁ppropriate person鈥� 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鈥檚 interest is reduced for any other reason, then by s.193(3) IHTA84 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 IHTA84 for relevant changes (see para 12.21 et seq.) 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 鈥渁ppropriate person鈥�) 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鈥檚 property and the amount of any compensation received or agreed to be payable.
Resultant reduction in value to be ignored
In making a valuation on either the decreased value basis (para 12.23 above) or the increased value basis (para 12.24 above) the value effect of all matters for which compensation has become payable should be ignored.
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 VOA 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.
Adjustment to be made
In accordance with s.193(3) IHTA84 HMRC will add to the 鈥渟ale price鈥� of the relevant interest the amount of any such compensation which has become payable to the 鈥渁ppropriate person鈥� in order to arrive at the 鈥渟ale value鈥� of the interest sold.
Example
Plot of land with planning permission - value at date of death = 拢750,000
Value at date of death without planning permission = 拢650,000
Value at date of sale without planning permission = 拢600,000
Scenario 1
If lack of planning permission is due to expiry of time, then this is an incident for which an adjustment is made under s.193(1) IHTA84- see para 12.23.
An addition is made equal to the difference between:
a. The value on death of the interest (拢750,000), and
b. 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 (拢650,000).
Therefore, an addition of 拢100,000 (拢750,000 - 拢650,000) is made to the sale price of 拢600,000 to give 拢700,000 which is substituted for the death value. The amount of relief is 拢50,000.
Scenario 2
Assuming plaining permission revoked by local planning authority and compensation payable of 拢100,000.
S.193(3) IHTA84 disallows the normal 拢100,000 addition to the sale price under s.193(1) IHTA84, as calculated in scenario 1, but allows the compensation received to be added to the sale price.
The adjusted sale price becomes 拢700,000 (sale price plus compensation amount) and again the amount the relief is 拢50,000.
This example assumes the amount of compensation for revocation is equal to the fall in value consequent on the expiry of planning permission. There may of course be a difference between the two figures depending on when the planning permission is revoked and the date of valuation for establishing compensation.
If an interest is compulsorily acquired from an 鈥渁ppropriate person鈥� within three years of the date of death, that person may claim relief in respect of a loss on sale any fall in value resulting from the compensation paid for the interest acquired in the same manner as a claim for any interest sold to a private person or body or by agreement to a public authority.
The 鈥渟ale values鈥� of all interests sold by or acquired from the 鈥渁ppropriate person鈥� 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) IHTA84).
S.197 IHTA84 provides that if an interest in land is compulsorily acquired from the 鈥渁ppropriate person鈥� 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 loss in value will apply as it applies to interests sold within three years after the date of death provided the 鈥渟ale value鈥� is less than the value on death.
If the 鈥渟ale value鈥� exceeds the value on death s.197 IHTA84 does not apply (s.197(2) IHTA84). This means that a sale by compulsory purchase outside the three-year period can only increase the amount of relief given.
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 Upper Tribunal (Lands Chamber) or, if earlier, the date of entry (s.198(3) IHTA84).
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) IHTA84).
In considering whether or not a loss on sale 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 鈥渟ale price鈥�, and if any adjustments are required to enable HMRC to calculate the 鈥渟ale value鈥�.
Sales of Related Property Relief (s.176 IHTA84)
There are special rules for valuing property that is included in an estate if there is other property that is 鈥榬elated鈥� to it (s.161 IHTA84). See Section 15.
The rules apply where, if by valuing the property together, you get a higher value than by the normal method of valuation. Broadly speaking, related property is property that is:
- in the estate of a spouse/civil partner, or
- belonging to a charity or one of the political, national or public bodies to which exempt transfers may be made
The rules apply to both lifetime transfers and transfers on death.
If property in the death estate is valued by the related property rule and is then sold for a lower amount within 3 years of death, the taxpayer may be able to claim relief.
S.176 IHTA84 relief is achieved by a聽revaluation, for IHT purposes on death, of the interest sold. The聽revaluation聽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 IHTA84 concerning 鈥渞elated property鈥� and without valuing the interest sold in conjunction with any other property comprised in the deceased鈥檚 estate, which had not at any time since the death vested in the vendors (s.176(1) IHTA84).
The relief does not substitute the date of sale value for the sold property. The date of valuation is immediately before the death.
No relief is available for the property that was valued in conjunction with the sold property unless it has itself been sold.
Example
At death of death:
Anne owned a 50% share, with her husband Ben owning the other 50% share, in an investment property.
Investment property valued at 拢1 million pounds. Under the related property provisions her interest is valued as 拢1 million x 50% = 拢500,000.
Date of sale:
The property is sold by the Executors within 3 years of death to an unconnected party for less than the related property value, so a claim under s.176 IHTA84 can be made.
The claim will remove the related property value (拢500,000) from the estate and replace it with the 鈥渟tand-alone鈥� value of a 50% share being 拢500,000 less 10% undivided share discount = 拢450,000.
The effect of a s.176 IHTA84 claim is therefore to reduce the value of the estate by 拢50,000.
S.176 IHTA 84 provides relief for deaths if, within 3 years after the date of death, there is a 鈥渜ualifying sale鈥� (see s.176(3) IHTA84) of any property:
- comprised in a deceased鈥檚 estate which was valued on death in accordance with the 鈥渞elated property鈥� provisions of s.161 IHTA84, or
- which was valued on death in conjunction with property (also comprised in the deceased鈥檚 estate) but not at any time since the death vested in the vendors (s.176(1)(b) IHTA84). An example is a qualifying interest in possession trust
The sale will not qualify for relief if the person concerned as vendor or having an interest in the proceeds of the sale is connected with any person as purchaser or having an interest in the purchase (s.176 (3)(c) IHTA84).
The sale will not qualify for relief if it is made in conjunction with a sale of any of the related or other property with which it was originally valued (s.176(3)(b) IHTA84).
The relief only applies if the price obtained on sale, after making any adjustment for any difference in circumstances is less than the amount at which the property concerned was originally valued. (s.176 (4) IHTA84).
For this purpose, in arriving at the original value both the availability of this relief and loss on sale of land relief should be disregarded.
Adjustment should be made to the sale price 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) IHTA84. The relief only applies if the price obtained on sale, after making any adjustment for any difference in circumstances is less than the amount at which the property concerned was originally valued.
It should not be confused with the adjustments made under s.193 IHTA84 to arrive at 鈥渟ale value鈥�. If the s.176(4) IHTA84 test is satisfied, the actual amount substituted is the聽revaluation聽at the date of death - see para 12.41.
In considering what adjustment, as at the date of the sale, requires to be made to the price obtained on the sale, for s.176(4) IHTA84 purposes only, account should be taken of 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 鈥渞elated property鈥� basis or in conjunction with some other property comprised in the deceased鈥檚 estate should be ignored. It should be noted that the adjustments to be made to the sale price under s.176(4) IHTA84 for changes in circumstances are all embracing unlike those to be made under s.193 IHTA84 which are restricted to certain changes only (see paras 12.15).
A common sense approach should be adopted, and the benefit of any doubt should be given to the claimant.
Difficulties arising should be referred to CVG DVS Professional Guidance Team
A sale may qualify for relief under both s.176 IHTA84 (sale of related property) and ss191-195 IHTA84 (loss on sale of land), although the qualifying conditions vary in each case. Whether a sale qualifies under either or both is a matter for HMRC.
Example
At death, a field owned by the deceased is valued as part of a parcel of land which included adjoining land, which is related property.
The value of the field is 拢10,000
The separate value of the field at death would have been 拢8,000
Within three years of death it is sold without the adjoining land by a qualifying sale for 拢6,500.
Under s.195 IHTA 84 the 鈥榮ale value鈥� is 拢6,500 + (拢10,000 - 拢8,000) = 拢8,500
Under s.176 IHTA84 in this example there have been no change of circumstances and the sale price requires no adjustment. The sale price (拢6,500) is less than the original value at death (拢10,000) satisfying the s.176(4) IHTA test. Therefore, the asset is revalued separately at death (拢8,000).
In this example a claim under s.176 IHTA84 is more favourable.