Why valuation preparation is key under new IHT relief regime

The new limits on agricultural property relief or business property relief from inheritance tax mean there’s a lot more valuation work when a death happens than under the previous regime.

This means the process will take more preparation, it will require more time and cost more than in the past, says Jonathan Purkiss, a director of land agent and valuer Cheffins.

See also: How to minimise IHT impact on pensions

Inheritance tax (IHT) is a self-assessed tax, so it is up to the taxpayer (or in the case of IHT, their executors and advisers) to assess their estate and make a correct claim for relief.

Market value

The value of assets for an IHT relief claim should be their market value at the date of death.

As well as valuing the agricultural land and buildings, a market value must be attributed to livestock, machinery, stocks and growing crops in order to complete a claim for agricultural property relief (APR) or business property relief (BPR) and, in many cases, both of these reliefs.

Land values can be difficult to pin down and the current uncertainty surrounding food and farming profits and policy makes the process all the more challenging.

Also in the mix are changes in land use, such as habitat creation for biodiversity net gain (BNG), making valuation as much an art as it is a science.

Valuers frequently rely on being able to demonstrate values for similar, comparable assets but because BNG and other regimes such as nutrient mitigation are relatively recent introductions, there are so far no comparables to turn to in these markets.

Jonathan gives the example of land which is inherited in year three of a BNG habitat creation project and which carries a legal commitment to create and maintain the habitat for at least 30 years.

“If all the units have been sold, that would make it marginally easier to value, but if only, say, 40% have been sold, there’s a big unknown element.”

The land must be agricultural and used for agricultural purposes in order to claim the relief.

Like many other advisers, Jonathan points to the risk in the changing use of farming assets in general, with most farms having some form of alternative enterprise, many of which are likely to take assets out of eligibility for APR as they are no longer in use for agriculture.

These may attract BPR, but only if the business overall is mainly trading rather than judged from a tax perspective tax to be an investment business.

Grain stores that have been converted to general storage, dog walking fields, holiday lets, sheds that have been turned into lock-ups or let are typical examples of assets being taken out of agricultural use, as are holiday properties. These run the risk of tipping the trading/investment balance.

Delay brings risks

Jeremy Moody, secretary and adviser to the Central Association of Agricultural Valuers (CAAV), reiterates his earlier call for families to invite their chosen valuer “as soon as is decently possible” following a death.

Leaving time to pass risks loss of information and knowledge, and changes since the death.

Jeremy also suggests that on the day, or days, that a valuer appraises farm stock, and machinery in particular, it would often be helpful to have a member of the farm staff on hand to operate machinery, checking hours worked and any other practical information that might help the valuer.

Ironically, many people whose estates fall below the £2.5m 100% APR/BPR limit may need a valuation simply in order to prove that the assets in question do not breach the threshold, says Jeremy.

He points out that hope value has to be taken into account for a probate valuation, even if there is no intention whatsoever that a piece of land or a building will ever be developed away from agricultural use.

Clarifying ownership

Advisers across all professions, whether valuers, lawyers or accountants, stress the importance of sorting out documentation during lifetime. Ownership is often confused and needs disentangling, says Jeremy. 

Tom Barrow, a partner in Knight Frank’s valuation and advisory department, suggests keeping a permanent file of such documents and reviewing it at least once a year. As well as any business documents such as tenancies and ownership details, the file should include items such as marriage and death certificates and wills.

“Ideally details of registered titles should be included, and it is also possible to register a will, so that is something to consider,” says Tom.

He also points out that it can help both the family and advisers at a difficult time, if all likely documents are easily to hand and up to date.

“Don’t put it off, don’t leave a problem, you don’t want to put the family on the back foot when they are already not in a good place,” he says.

“The value of a Red Book valuation [one carried out by a Royal Institution of Chartered Surveyors qualified valuer] is that it must be transparent, the rationale must be shown, there must be comparables and there is nothing to hide.”

Equally, Tom stresses the importance of being able to demonstrate working farmer status.

“Was the person really a farmer, were they running the business from the farmhouse, are there diary notes and minutes of meetings? Were they making the decisions, was there an element of risk? If not, this could take the farmhouse out of the APR claim.”

Partnership agreements

Jeanette Dennis, a partner in law firm Ashtons Legal, stresses the importance of having a written partnership agreement.

“The advantage of this is that everyone is agreeing it at a time when there is no distress and it is just recording clearly what has been agreed,” she says.

Jeanette adds that the terms of partnership agreements will have to be taken into account in valuing estates.

 “Because everything was relievable in the past, it wasn’t looked at but now where an asset is in a partnership the terms of the partnership agreement need to be considered because it will influence the valuer as to whether it can be freely sold on the open market or if the remaining partners’ consent is needed to release the asset, which would discount the value.”

As well as written agreement, partnerships should have a document which records the ownership of all the most valuable assets, says Jeanette. This can also be helpful to advisers post-death in sorting out what is to be valued in the estate.

Her colleague Natalie Westgate, a senior associate, highlights the importance of knowing who owns what and taking the opportunity to register any unregistered land, as this can save time post-death.

“Get those deeds to your solicitor and get them registered if you can, and at the very least know where those deeds are and what they say,” says Natalie.

She also highlights a common misunderstanding that assets gifted in a will do not form part of the estate. 

Jeanette also warns against land use slipping away from agriculture and thereby changing values as well as putting APR eligibility at risk.

“Land use arrangements are sometimes far too informal, whether that is with a contractor or a change of land use such as growing an energy crop, which is not food and so would disqualify the land. Solar panels are another example.”