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Valuation of shared assets: discounts for part shares

The values of part shares of land and buildings are invariably less than the arithmetical fractions of the value of the whole. This can be really significant for lifetime tax planning.

10% discount on nearly 90%

The recent Lands Tribunal case of Palliser [2018] UKUT 0071 (LC) illustrates this. The dispute was about the probate value of an 88.4% share in a flat, near Hampstead Heath, in London. The flat was sold, about 18 months after death, for a figure far in excess of the professional valuation included in the probate papers.

The point that was significant, to my eyes, was that the tribunal judge ruled, “There is no dispute that there should be a 10% reduction in value to reflect the undivided share.”

Until reading this case, I had worried about claiming as large a discount as 10% for very large part shares, but this emboldens me, considerably. 88.4% is just over 7/8ths.

Discounts HMRC accept

My experience is that HMRC invariably accept (and when it suits them argue for) a 10% discount in any case of co-ownership. For shares of less than 50%, and particularly for very small fractional shares, there is a good argument for a bigger discount, as happens, for example, with small minority shareholdings in unlisted companies; but I am not aware of any practice followed or accepted by HMRC and their valuers here.

The one higher discount that is always agreed is for co-ownership of residential property, when both owners have the right to live there. HMRC always accept 15% here. This goes back to the 1982 Lands Tribunal case of Wight.

Married couples – IHT related property

The position is, of course, different for married couples who are co-owners. The “related property rules”, in IHTA section 161, mean that, for IHT, spouses’ shares are valued at an arithmetical fraction of the value of the whole. (These rules apply not only to land and buildings but: to “sets”, such as a set of dining chairs; and to shareholdings in family companies, where two spouses may, individually, have minority holdings but are treated for IHT as controlling shareholders.)

The related property rules apply on the first death of spouses, but, once one has died, if the part share is not given by Will to the survivor, the rules have no application. This opens the way to planning with Will trusts, which can save IHT by splitting the ownership of an asset such as the family home.

Discounts can increase taxable value

The discounts for part shares of property can increase the taxable value of lifetime gifts. This is because the measure of a lifetime transfer of value (the taxable value for IHT) is the “loss to the donor”. 

So, if an individual owns an entire property and gives away part, the IHT value of the gift is more than the value given away. Suppose Dorothy shares her home, worth £800,000, with her son Jamie and decides to give him half. Because they both occupy the house:

  • The value after Dorothy’s gift is, conventionally, discounted by 15%, so is worth £340,000; and
  • The IHT transfer of value is therefore £460,000, not just £400,000.

Capital Gains Tax(CGT) rules are different - a trap

Where CGT is charged on a gift, on the other hand, the relevant value for tax is the actual value of the asset given. This comes from the wording of TCGA section 17, which provides that, on a transaction which is not at arm’s length, it is the market value of the asset given, which is deemed to be the consideration, both for the disposal and the acquisition.

This can cause problems, perhaps more often with let, rather than owner-occupied, property.

Let us suppose Felicity owns an investment property worth £1.5 million and decides to give two thirds of it to her children Dawn and Florence.

  • The measure of her gift for IHT is (£1,500,000 – (90% of £500,000)) or £1,050,000
  • But she will pay CGT on a market value of the two-thirds she has given away (90% of £1,000,000) £900,000
  • Suppose Felicity dies just 18 months after her gift
  • She will have saved no IHT, since her lifetime gift and her retained one-third still add up to £1.5 million
  • Worse, if Dawn and Florence want to sell the property soon after their mother’s death, their combined acquisition values are £900,000 for the lifetime gift and £450,000 for the fraction acquired on death.  These total £1,350,000, compared with what would have been an acquisition value of £1,500,000 had Felicity done nothing in her lifetime, and her children benefited from the usual CGT-free uplift on her death. A taxable gain of £150,000 has been conjured out of thin air.

To conclude

As will be obvious, these valuation principles need careful consideration in any lifetime planning that involves part shares.

Published: 26 June 2018


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June 2018

 

Key Contact

Anthony Nixon