Valuable opportunities

The covid-19 pandemic has affected the lives of every person in the UK. The challenges caused by the virus to practitioners in the private client arena, particularly in probate and the property sectors, will undoubtedly impact us and our clients for some time to come. There are, however, some tax planning opportunities which could be taken advantage of.

Market value

Valuations are calculated by estimating the price a hypothetical buyer would pay to a willing seller at a given point in time. There are many factors that go into establishing a price or market value including reviewing recent similar sales and establishing if any uncertainty surrounding the property or the market may affect its value.

For practitioners dealing with probate valuations for land and property during this pandemic, the issue of valuation has been extremely challenging. Often, practitioners turn to the Royal Institution of Chartered Surveyors (RICS) to carry out assessments. Given the current market conditions, this can give rise to a level of uncertainty in providing valuations.

The RICS Red Book Global Standards refers to “material uncertainty”; and covid-19 meets that criteria which could, therefore, have an impact on the value of property. In a statement released by the RICS on 2 April 2020 on the pandemic’s impact on valuation, it stated that “if an RICS regulated member concludes that declaring material uncertainty is not appropriate, there should be a sound rationale to explain the decision-making process and this should be recorded for future reference”.

It goes on to state that “in considering the degree of uncertainty at a specified valuation date, careful regard should be had to the level of activity in the relevant market and the existence, and degree of reliability, of recent or contemporary evidence”.

For deaths that have occurred during the pandemic and, in particular, while the lockdown provisions prevented the sale of properties, this undoubtedly would have had an impact on the valuation of a deceased person’s property. It would theoretically be possible to state that a deceased person’s property was worthless at the date of death as a hypothetical buyer could not legally purchase the property.

It would be a brave practitioner who would be prepared to submit an inheritance tax (IHT) account showing a nil value for a deceased property. But are we going to see challenges to valuations given during this time when submitted to HMRC?

On the face of it, a lower value for IHT purposes is attractive if you are saving 40 per cent tax; and clearly there are justifications for submitting low values for assets at the present time.

However, practitioners will be aware, on a subsequent sale if the value has significantly recovered, the estate would then be faced with a capital gains tax (CGT) hit, although at a lower rate of 28 per cent. For executors who are responsible for submitting inheritance tax returns and dealing with an estate, tax relief may be available where certain assets have been sold at a value less than their probate value.

It is also not inconceivable that house prices won’t recover for some time and may actually decline. It’s worth remembering that if an estate is liable for IHT on the value of land or buildings which were part of the deceased’s estate, a claim for relief can be made when the land or buildings are sold at a loss. The sale must occur within four years of the date of death.

Practitioners will also have seen extreme volatility in the financial markets and the effect this has had on share prices. For estates that are having to sell shares to raise liquidity, there is the ability to claim relief if shares are sold at a loss within 12 months of the date of death. This time frame is not long and can easily be missed; and requires executors to be alert and monitor share prices regularly if this relief is to be utilised effectively. For investments or assets currently standing at a loss, practitioners may wish to be able to crystallise the loss and mitigate the loss in value with a saving on the IHT.

Practical steps

During the lockdown, the restrictions imposed have restricted the marketing and sale of properties. Consequently, probate property sales have experienced and are experiencing long delays before properties in estates can be sold. Legal professional representatives or beneficiaries may choose to have properties transferred into their names, for them to sell at a later date rather than delay the administration of the estate.

The recent relaxation of the government restrictions in place for property sales will hopefully now begin to assist. Insurance Practitioners may have also faced problems with obtaining and complying with probate property insurance. Where properties are unoccupied, insurance policies usually have conditions in place requiring properties to be visited regularly.

During the lockdown it is difficult to comply with such conditions, especially for executors who may be self-isolating or unable to physically visit the property. Unoccupied property insurance policies without regular visiting requirements are available but are few and far between; therefore, practitioners will need to find practical ways of ensuring the insurance conditions are met despite the difficult circumstances.

This could involve, for example, asking estate agents to regularly check the property now that they are able to do so. Covid-19 also presents tax planning opportunities as follows:

Gifts and CGT planning – Transfers of most types of property, to anyone other than a spouse, will generally mean you have to pay CGT as if you had sold the property at its market value. Adding to that pain, any taxable capital gain arising for disposals taking place after 5 April 2020 must be reported within 30 days with an estimate of the capital gains tax due, paid by the same date. A reduction in market value during the current crisis may give an opportunity to make a transfer with a more acceptable CGT cost than previously. There may be opportunities to consider gifting assets such as property and investment portfolios, and assets currently standing at a loss which could be gifted without incurring a large CGT charge which, before the pandemic, may not have been possible.  

Trusts – Establishing new trusts which are no longer as attractive from a tax point of view as they once were, may see a resurgence. With the ability to transfer assets to a trust where the CGT arising can be held over, if the asset has significantly reduced in value, a gift to the trust up to the nil rate band (currently £325,000) could be considered. The gifting of the asset may now be more achievable than it was previously if its value has significantly decreased. The gift should not incur an immediate charge to IHT provided the donor survives seven years from the date of the gift and will have removed the asset from their estate for IHT purposes. Having placed the asset in trust, the value of the asset will hopefully increase.

Family businesses – Due to the economic impact of covid-19, now could be an opportune time to think about succession planning for family businesses and pass on shares in the company to other family members as the company shares may now not be as valuable as previously. Again, an opportunity to transfer an asset that has reduced in value that may have a potential upswing in value after the pandemic could be considered.

The pandemic has been challenging for practitioners. However, being able to spot opportunities and deal with issues from a practical standpoint will assist clients greatly during this crisis and when we emerge from it.  

Matthew Duncan is a partner at Druces druces.com