IHT property valuations are coming under closer scrutiny. HMRC challenged more property valuations over the past year, with the number rising by more than a fifth.
This is not especially surprising. Frozen inheritance tax thresholds and higher property prices mean more estates are falling within the IHT net.
Residential property also makes up a large share of estate values. It accounts for not far off 50% of the net value of estates. Because of this, property valuations are an obvious area for HMRC to review.
AI can now also help HMRC identify inconsistencies. That makes careful reporting even more important.
Why property valuations matter for IHT
When an executor reports an estate for inheritance tax, the property value needs to be realistic.
If the value is understated, the estate could face additional IHT. Late payment interest may also be due on the underpaid tax. The current interest rate is 7.75%.
HMRC can also charge a penalty. This may happen if the underpayment results from an inaccurate return and the executor has not taken reasonable care.
In practice, this means a rough estimate may not be enough.
Getting proper valuation advice
Executors should consider instructing a professional valuer, rather than relying only on an estimate from a high street estate agent.
However, there is another route. Taking the average from three estate agent valuations should show that reasonable care has been taken.
The right approach will depend on the estate, the property and the level of risk involved.
Where property forms a large part of the estate, accurate IHT property valuations can help reduce the risk of questions later.
Why more estates may be affected
The position is unlikely to ease over the next few years.
IHT thresholds are set to remain frozen until 5 April 2031. At the same time, the property market remains resilient.
The market has been subdued because of the inflationary impact of the Middle East conflict. Even so, property values are not expected to fall widely, except in London and the South East of England.
This means more estates may continue to fall within the IHT net.
Pension pots will also come into the IHT net
Another change is also on the way.
From April 2027, most unused pension pots will come within the IHT net. This will not apply where the pension is inherited by a spouse or civil partner.
This change will increase the number of estates subject to IHT.
For some families, the combination of property, pensions and frozen thresholds could make estate planning more important.
Estate planning should be reviewed
Wills should be kept up to date. They should also reflect realistic property values and the coming inclusion of pension pots.
Where possible, the residence nil rate band should be used fully. For a couple, this can save IHT of £140,000.
This is an important planning point, especially where the family home is the main asset.
Lifetime gifts and downsizing
Lifetime gifts are becoming more popular as a way to reduce potential IHT liabilities.
However, this is not always straightforward. For many people, the main residence may be their only sizeable asset.
In that situation, downsizing could be one way to release funds for lifetime gifting.
As with any IHT planning, the timing and wider financial position need to be considered carefully.
Before submitting an IHT return
Before an IHT return is submitted, it is worth checking how the property value has been reached.
That may mean using a professional valuer, or keeping clear evidence from estate agent valuations. Either way, the executor should be able to show that reasonable care has been taken.
This is especially important where property makes up a large part of the estate, or where pension values could bring the estate closer to the IHT threshold from April 2027.
The government’s guide explains how to value an estate for IHT and report its value. However, where the figures are significant, advice before submission can be easier than dealing with questions later.