Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help. Here, Jack Sharpe of Carter Jonas advises on the importance of getting a formal valuation for probate.
Q. We have recently suffered a death in the family and need a valuation for probate. Aside from the distress we are all feeling at this time, money is tight and one of the family is insisting we use a free market valuation of the farm. I am not happy with this, please can you advise?
A. I’m very sorry to hear of your loss. Unfortunately, the task of completing any forms or documents relating to a death, and some of the costs involved, often add to the strain.
For this reason, people can be reluctant to obtain a formal valuation for probate. Some are keen to avoid what they consider to be additional stress and maybe an unnecessary expense.
While an informal estimate may be cheaper and seem less hassle in the short term, relying on it may prove inadequate and costly.
For probate purposes, attention to detail is key and critical points that a formal valuation would uncover may be missed on a less rigorous market appraisal.
Factors that could be overlooked include restrictions on the land registry title, a planning constraint and tenancy occupations, to name a few. There is also the identification of agricultural and non-agricultural value to consider.
Our team was recently involved in a formal probate valuation for a rural property where the client had initially obtained a free market estimate. The property was a smallholding with equestrian buildings and two residential properties. The initial estimate given was £650,000.
A formal valuation requires clarification of points by looking at terms of business, a review of occupations on-site, a review of land registry documentation and then a thorough inspection of the property and to comment on the availability of Agricultural Property Relief from Inheritance Tax (IHT). The valuation itself is at the date of death.
In this example, through the formal due diligence process, it was established that a bungalow located in the centre of the holding was subject to a protected tenancy with no rent passing. This significantly affected the valuation.
Cases for the termination of protected tenancies of this nature are restricted, and the location of the bungalow in the centre of the holding influenced the potential marketability of the property.
Eventually, due to matters which only became apparent from the formal valuation due diligence process, the property was valued at £475,000, a difference of £125,000 (21%) of the initial estimate.
With IHT rates at 40% once any nil-rate thresholds and reliefs have been used, the free of charge value could have led to significantly more tax being paid than the cost of the formal valuation.
Also, should HMRC ask the District Valuer to look at a case, the executor’s position is far stronger where a valuer is formally instructed. The valuer can then negotiate with the District Valuer from a known and tested base position.
HMRC guidance assumes that a reasonable person would seek professional help with matters such as valuations; it advises to instruct a professional valuer for inheritance tax purposes.
The valuation of an asset for probate is generally considered the base cost of the asset for capital gains tax purposes for those inheriting the asset. Therefore, the value will have a bearing on the tax position of the beneficiaries of the estate in the future.
We recommend obtaining a formal red book valuation. While there is an initial cost, it might help you and your family avoid further distress and unnecessary expenditure in the long term.
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