Upcoming changes to the Inheritance Tax (IHT) rules that will see the introduction of the cap on Agricultural Property Relief (APR) and Business Property Relief (BPR) will make accurate valuations more vital than ever in the probate process. The increasing importance of valuations was underlined by Professor Lesley King at Mercia’s Probate Practitioners Conference.
Professor King explained the valuation process to delegates, including when and why to value, the differences between IHT valuations and Capital Gains Tax (CGT) valuations, divisions of estates and where to find HMRC guidance.
Biggest risk
Part of HMRC’s guidance on the topic is the IHT Toolkit, which says: ‘Valuations are the biggest single area of risk, accounting for a large part of HMRC’s compliance checks. It is important to properly ascertain the value of assets.
‘For assets with a material value you are strongly advised to instruct a qualified independent valuer, to make sure valuation is made for the purposes of the relevant legislation, and for houses, land and buildings, it meets Royal Institution of Chartered Surveyors (RICS) or equivalent standard.’
Sizeable penalties
Professor King told the conference that wrong valuations are one of the biggest reasons for HMRC handing out penalties to valuers.
Fines are a proportion of the underpaid tax, it is a sliding scale and HMRC has discretion. If it is a careless error then they can impose a penalty of between 0-30% of the underpaid tax, for a deliberate and concealed error it can be 100%.
Professor King adds: ‘You can see that you can very quickly get into quite sizeable amounts if you have put in an inaccurate amount. The difficulty is deciding what is open market value at date of death.
‘The law says, ‘reasonably be expected to fetch if sold on in the open market at that time.’’
Incorrect valuations
The difficulty is establishing open market value, says Professor King. HMRC complains it receives ‘incorrect valuations based on insurance values, replacement values or book values’.
The tax authority will then ask if the practitioners have followed the guidance.
Professor Kings says: ‘There is a lot of guidance. The IHT Toolkit which designed for people who don’t put in IHT 400s on a regular basis. They gather together the most common errors and tell you how to try and avoid those errors.’
HMRC also publishes an IHT Manual, which is actually an internal document that is made available to the public under Freedom of Information. Additionally, there is also guidance on the IHT forms themselves.
Absolutely key
Professor King says: ‘Valuations on farms will be even more important from 6 April 2026, which is rapidly approaching, when APR/BPR will be reduced to 50% with 100% limited to the first £1 million worth of combined agricultural and business property. Valuations are going to be absolutely key.’
Compliance visits
The conference also heard from Daniel White of the Institute of Chartered Accountants in England and Wales (ICAEW) on the institute’s Probate Monitoring visits.
Firms are visited within two years of being granted probate accreditation. Visits are onsite and will cover Practice Assurance and probate.
Core areas covered include eligibility, fit and proper requirements, competence, compliance review and client file reviews.
The ICAEW also checks that firms have Professional Indemnity insurance with a minimum level of £500,000 per claim, which is additional for probate firms.
White says: ‘Typically the visits are procedural and compliance with the regulations. So, we won’t be looking in detail at things like tax calculations and reperforming that.
‘We won’t be testing the accuracy of the work you have performed. It is, have you complied with the probate regulations and have you complied with your own processes and procedures? That’s the focus of the visits that we do.’
New and contentious
The one-day conference provides essential CPD and updates for accountants who offer probate services to their clients.
It also heard from Mercia’s Andy Holton on ‘identifying contentious probate early’, while Pat Nown explained the ‘new tax status rules’.
Mercia’s accountancy conferences
Mercia’s one day accounting and tax conferences focus on providing essential information on specialist topics. They aim to help you gain a wider appreciation of the factors affecting your clients through conference panels hosted by industry experts.
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