The quantity of property valuations disputed by HMRC has increased by over 20% in the last year. This is not surprising considering that stagnant inheritance tax (IHT) thresholds and rising property prices have led more individuals to fall within the IHT bracket.
With residential properties representing nearly 50% of the net worth of estates, disputing valuations presents an effective method for HMRC to enhance tax revenues, particularly as artificial intelligence can now be employed to detect discrepancies.
Expert Recommendations
There can be considerable financial repercussions if an executor undervalues property in an IHT declaration:
- In addition to the extra IHT owed, late payment interest – currently at 7.75% – will be applicable on the shortfall.
- A penalty may also be imposed if the underpayment arises from a return that contains inaccuracies due to a lack of reasonable care.
The best course of action for executors is to engage a professional valuer instead of merely depending on an estimate from a local estate agent. However, averaging the valuations from three estate agents will demonstrate that reasonable care has been exercised.
Future Outlook
Regrettably, the circumstances are not expected to improve in the coming years. IHT thresholds are projected to remain frozen until 5 April 2031, while the property market, despite being subdued due to the inflationary effects of the Middle East conflict, continues to show resilience and is unlikely to experience declining values, with the exception of London and the South East of England.
The incorporation of most unused pension pots into the IHT net starting April 2027 (unless inherited by a spouse or civil partner) will further increase the number of estates liable for IHT.
Estate Planning
Wills should be current, reflecting realistic property valuations and the impending inclusion of pension pots. Ensure that, whenever feasible, the residence nil rate band is fully utilized, as this can result in an IHT saving of £140,000 for couples.
Lifetime gifts are becoming increasingly popular as a means to mitigate potential IHT liabilities. One problem is that the main residence might be the only sizeable asset, but downsizing could be a way of releasing funds for lifetime gifting.
The government’s guide to how to value an estate for IHT and report its value can be found here.