HOW TO VALUE ASSETS FOR THE PURPOSE OF CALCULATING THE VALUE TRANSFERRED

Assets are valued for the purposes of inheritance tax at their open market value, that is to say at the price which would be obtained for them in a sale at arm’s length to a stranger and between a willing seller and a willing buyer. Such a valuation will differ from an insurance valuation, which would be on the basis of the cost of replacing the asset new or a valuation on the basis of a forced sale. Like any other valuation, an open market valuation is a matter of opinion and conjecture unless the market has been thoroughly tested, but certain rules exist to assist the valuation and the Revenue can impose penalties if valuations are fraudulently or negligently made.

Unit trusts

Unit trusts have two prices: one at which the trust managers are prepared to sell the units and a lower price at which the trust managers are prepared to buy them back. For inheritance tax purposes unit trusts are valued at the lower of the two prices. The Financial Times newspaper gives the prices for the previous day.

Corporate bonds, government stock and other stocks and shares quoted on a recognised stock exchange

These securities also have a buying price and a lower selling price. The taxpayer can choose which of two figures he wishes to use.

The first figure is calculated by adding to the lower selling price at which the security last traded on the relevant day one-quarter of the difference between the selling and the buying price. The second figure is the figure which is halfway between the highest and the lowest price recorded for bargains (excluding special bargains) for the relevant day. If the stock exchange was not open for trading on the relevant day, either the previous or the next trading day may be used. For a small fee the London Stock Exchange Historic Price Service, which can be consulted on its website http://www.londonstockexchange.co.uk or in writing, will supply the final prices for the relevant day for any quoted security and, if the security was quoted ex-dividend, the dividend rate per share. The current fee can be obtained by telephoning, emailing or faxing the service. Alternatively valuations of stocks or shares for inheritance tax purposes can be obtained from most banks, stockbrokers or from www.sharedata.co.uk but they do charge for the service and it might be wise to ask for an indication of the likely fee in advance.

If a share is quoted ‘ex-dividend’, the dividend which has been declared must be included in the valuation for inheritance tax purposes; if debenture or loan stock is quoted ex-interest, the interest (less tax at the appropriate rate) must be included.

Unquoted stocks and shares

The basis upon which stocks or shares that are not quoted on a recognised stock exchange are valued depends upon the percentage of the company’s share capital held by the taxpayer. A shareholding of 50% or less is valued according to the dividend yield; a holding of between 50% and 90% on an earnings yield basis; and a holding of 90% or over on an assets basis.

Life policies

If the occasion for the valuation of the life policy is the policyholder’s death, the value is the sum paid out by the life assurance company, but if the transfer occurs upon any other occasion the value is the open market value at which the policy could be sold (not the surrender value which will usually be less).

Related property

Related property is property which would have an increased value if owned with other property that is:

• owned by the taxpayer’s spouse or civil partner, or
• was owned within the last five years by a charity, housing authority, political party which qualifies for exempt transfers, or an institution specified in the amended Schedule 3 of the Inheritance Tax Act 1986 (roughly speaking, bodies to which exempt transfers can be made such as national, local and university museums and art galleries, the National Trust and other bodies established for the preservation of the national heritage), to which it was transferred by the taxpayer or his spouse or civil partner after 15 April 1976.

An example will assist: suppose a taxpayer owns a set of antique chairs and his wife owns a matching table. The set of chairs and the table will be worth more in total as a set than they would be worth when owned separately and even though the taxpayer may have bought his at an auction and wife inherited hers, they will be related property for inheritance tax purposes.

Related property is valued in special ways when calculating inheritance tax. There are what is known as the General Rule Method and the Special Rule Method. The General Rule Method is used when the items of related property have different attributes, e.g. the chairs and the table, and the Special Rule Method is used when the items are identical, such as shares of the same class of shares in a company which is an investment company and accordingly not entitled to business relief.

To ascertain the inheritance tax valuation of an asset using the General Rule Method, apportion the combined value of the assets in proportion to their value as separate items or to put it another way, divide the asset’s normal value by the total of its normal value and the normal value of the related property and multiply the result by their combined value.

To ascertain the inheritance tax valuation of an asset using the Special Rule Method, the apportionment is based upon the quantum and not the value of each asset. Therefore in the case of holdings of the same class of shares in a company it does not matter, for example, that one of the holdings is a majority shareholding and the other holding is a minority holding (shares in a majority holding being worth more than shares in a minority holding); all that matters is the number of shares in each holding. To ascertain the value of a holding, divide the number of shares held in the holding by the total number of shares in the holding and the related holding, and multiply the result by the value of the combined holding.

Land, shares, unit trusts and common investment funds sold within a short time of death

If the values of shares (other than those quoted on the Alternative Investment Market – AIM), unit trusts, common investment funds and land or buildings fall during the period of the administration of an estate, and in the course of administration of the estate they are transferred to a beneficiary or sold at a loss compared with their value at the date of death, it is possible to have the value revised to reflect the fall.

It should be borne in mind that if assets are revalued for inheritance tax purposes to reflect a fall in value between the date of death and the date they are disposed of by transfer to the beneficiary or sale, the reduced value becomes the base cost (i.e. the value at which the assets are deemed to have been acquired by the transferee or beneficiary) for capital gains tax purposes.

To obtain agreement by the Revenue to a revaluation in the case of stock exchange securities and unit trusts, the personal representatives must have sold them within 12 months of the date of the death. To recalculate the amount of tax properly payable, the loss is deducted from the declared value of the estate and is calculated by deducting the gross proceeds of sale from the value declared for probate purposes. No allowance is made for the expenses of sale and all the quoted investments in the estate must be revised, not merely those sold at a loss. If the personal representatives reinvest the proceeds of sale by buying further unit trusts or quoted investments within two months of the last sale during the 12-month period, the amount of repayable tax will be restricted.

Similar principles apply in the case of land or buildings, the differences being that the period for the sale is four years instead of 12 months; the period for reinvestment is four months after the last qualifying sale in the period of four years from death instead of two months during the period of 12 months from death and sales at a profit in the fourth year after death or which result in a profit or loss of less than 5% or £1,000.00, whichever is the lower, are ignored.

Grossing up gifts

Inheritance tax payable on immediately chargeable lifetime gifts is payable by the donor unless the donor and the donee agree otherwise. If the tax is to be paid by the donor the gift must be ‘grossed up’ for the purpose of calculating inheritance tax; that is to say the gift is considered to be the amount of the gift and the tax because that is the amount by which the donor’s wealth is diminished. If additional tax becomes payable because the donor dies within seven years of the making of the gift, it is always payable by the donee.

The wording of a will can decide who pays any inheritance tax referable to a gift contained in the will. Unless the gift is one of jointly owned or foreign property, if the will does not state that any tax in respect of the value of the bequest is to be paid out of the bequest, i.e. that it is given ‘subject to tax’ as opposed to ‘free of tax,’ any tax in respect of it is borne by the residuary estate. If the residue of the estate is exempt from inheritance tax because it is left to an exempt beneficiary such as a registered charity or a spouse, any legacies given ‘free of tax’ are ‘grossed up’ and treated for inheritance tax purposes as a legacy of the stated amount and the tax. The Revenue will have its pound of flesh!

The rates of tax

Current inheritance tax rates, exemptions and allowances can be obtained from the Inland Revenue and Customs website www.hmrc.gov.uk.