Inheritance tax and increasing value of land

[AhBiscuits]

My dad died very recently. I met with my siblings yesterday to reminisce and discuss funeral arrangements. As we don't live close, we also took the opportunity to discuss what we may do with his property. We all have different skills and the probate and legal stuff will fall to me. I'm also an executor. This isn't an area I know much about so I'm finding my feet with it all and the different things I need to consider are constantly whirring around my brain.

My dad was a Widower, my mum died 7 years ago and everything went to him. His will leaves everything to my siblings and I equally. My understanding is that as he was a widower and is leaving his property to his children, that there will be no inheritance tax if the estate is valued below 1 million, which it will be.

One of things my dad owns is a paddock in his village. It currently has a few animals that live there which we are rehoming. He always said to us that when he was gone we should apply for planning permission and build on the land. He really liked the idea that we could make a considerable amount of money from that, provide house deposits for our children etc. The village contains a lot of bungalows where elderly people live and we could fit several on the paddock. There's a good chance we'd get permission.

I don't know what the paddock is worth now, we'll get it valued. It's value will increase a lot when it has planning permission. Once we have it, we'll either build and sell the houses ourselves or sell to a developer. Are there any tax implications if the value of the estate increases above the IHT threshold after the grant of probate is obtained and the estate distributed? Is there anything else I need to consider that I may not have thought of?

Out of the 4 of us, definitely yes.

the probate process is a pain but manageable, however you definitely need to take tax advice on the potential increase in value. Good luck and I hope you are able to follow your dad’s plans, sounds like a wonderful legacy.

I don't need a solicitor to apply for the grant, it's an uncomplicated estate and I can do it myself. I more than likely will seek some advice regarding developing the land in the future but wondered if mumsnet had any thoughts.

There could well be yes - if you search for “hope” value and inheritance tax you will get lots of information but I agree you need a solicitor

Isn't the inheritance tax band £325k?
You may well be able to utilise your late Mother's £325k but this will depend on how her will was worded.
Anything over £650k you will definitely be taxed on so you've got problems if the estate is valued around a million.
Firstly for goodness sake use a professional and secondly you do realise as an executor you are personally liable for any mistakes or unpaid tax.
The tax office can and will go back years.

I think you would need the services of a land agent to manage it.

I think it increases to 500k each because of leaving the property to their children.

Yes of course. I'll be very careful to ensure everything that needs to be paid is paid.

The valuation for IHT is that at the date of death. A subsequent increase because planning permission has been granted won't affect IHT but may create a liability to Capital Gains.

If there's a reasonable prospect of getting planning then that will increase the IHT value compared with land that will only ever be grazing. PP mentions this as 'hope value' and a properly conducted valuation will cover that.

You can add the £150K from each parent if the property is being passed to direct descendents.
I think if there is an increase before distribution you will have to pay the tax on it. It's the same as if you got valuations for probate but actually sold for a lot more. I think for claiming tax back (eg if a property sells for less) you have 2 years, so it may be the same. If course there's capital gains tax as well as a possibility.
You need to speak to HMRC.

You are not correct. There is an extra allowance where property ie house/land is left to a direct descendant eg child/grandchild and this is £175k. The £175K is applies to both estates, in this case the mother and then the father which equals £1 million.

If you're anywhere near the IHT limit I think you need professional advice. It's really complicated but the complications work both ways; some of them you gain form.

The residence nil rate £175k (the £1m comes from nil rate £325k + £175k residence x 2 if deceased spouse isn't use any nil rate band on death) is, as the name implies, applicable to the deceased residence.
https://www.gov.uk/guidance/check-if-you-can-get-an-additional-inheritance-tax-threshold

The paddock wouldn't, necessarily, form part of the residence therefore depending on values the Estate may have IHT issues.

Whilst form completion may not be an issue, full knowledge and understanding of the law is what you may need to pay for.

Sorry, quoted wrong post.

Yes there are IHT implications.

You will need a formal valuation from a RICS surveyor. The value is the ‘open market value at the date of death’. This will include the ‘hope value’ of getting the planning permission. It is important that the valuer is correctly instructed as to the type of valuation needed and that this is in accordance with s160 IHTA 1984. With this value added to his other assets, will this still be under the thresholds? I’m not sure how you can say that it’s under £1m and also say that you have no idea what the land is worth! In any event, It’s not quite as simple as a £1m allowance. As this is made up of his own allowances of 325k nil rate band (NRB) 175k residence NRB (RNRB). If your parents were married he potentially inherits your mum’s allowances too giving you the £1m. however there are other things to consider, for example lifetime gifts could have used up part of NRB for either of them. Also if the value of the residence is under £350k you won’t get the full benefit of the RNRB.

so you have your valuation and submit the forms and then get the planning permission and sell the land. HMRC may then seek to argue that the land was undervalued and (more) IHT is due. If still under the IHT thresholds, CGT will be due in any event between the date of death value and date of sale value.

It might be a long shot but depending on the exact use of the land and agreements in place for the animals there it could qualify for ‘agricultural property Relief’ for IHT.

You should take advice from a solicitor.

you are correct - if you have both parents' personal allowance and a house being passed down to children then the total allowance is £1 million.

With the paddock - not 100% as simple - if it can be argued to have been farmed by your father (you would need evidence of the active farming) then there is 100% inheritance tax relief on it as a paddock. (Agricultural Property Relief - APR).

IHT is paid on the value of an asset at the point of death / sale / inheritance - not its value in 2 years time or 5 years time. As mentioned above though there is a concept of 'hope' - ie. how do you value a piece of agricultural land at the time of death if planning may be gained for development - is it the agricultural value (low / no IHT) or is it the market value where a purchaser may 'hope' there is a planning opportunity and pay more - therefore the and is worth more than the agricultural value at the time of death...

So you have to get a valuation for the land and there are 4 options:

• land has no chance of planning permission - agricultural value
• 'hope' based 'ground up' - you start at the agricultural value and add on value based on a perception of likelihood of getting planning / barriers to doing so etc.
• 'hope' based 'top down' start at full planning permission value and then deduct value for possible issues in getting planning
• Full planning permission in place

It sounds as though 1 and 4 are not applicable - so you will need the land valued based on a possibility of getting planning - you will prefer ground up as it gives a lower valuation - HMRC will prefer top down as it give a higher valuation...

either way - you need to get a professional valuation based on potential of planning... and this may then take you over your £1m allowance for IHT - if it does then you pay IHT (40%) on the excess above £1m.

You also need to be aware that you have 6 months to pay that IHT (if relevant) and you may not have sold property in that time or even gained probate - but the IHT will still be due... If the property is valued with a combined estate value of under the £1m you won't have that timescale - but the value of the estate / land may be challenged by HMRC later leading to a tax bill then.

link to a useful firm here: https://www.womblebonddickinson.com/uk/insights/articles-and-briefings/land-development-value-there-any-hope
(ignore the references to CGT at £20% and 28% - that is for gifts of land made when the owner - your father - is alive, not relevant to your situation).

The plan to develop the paddock is a long term one, we won't be doing it for a while. We'll get some accurate valuations of the house and paddock (separate title) for the purposes of valuing the estate. It seems that it will be CGT that we need to think about and not IHT.

We're in the very, very early stages of all this. I'm just pondering. I will seek professional advice where needed, but thought the legal board would be a good place to get an idea where we stand.

There's some really useful advice on this thread, thank you.

@akkakk that Foster v Revenue & Customs Commissioners case is really interesting and has helped a lot with understanding our position. Thanks!

Obviously I don’t know your paddock but my experience with MiLs house and paddock was that planning permission is far from straightforward and needs a prolonged campaign - based on advice from planning consultants - we didn’t bother in the end. So if I were you I would ignore any hope value in your probate calculations. If by any chance you do get permission then you can adjust the probate calc but i wouldn’t spend money on lawyers to fill in the forms just because of the chance of planning permission. (There may be other reasons to seek advice of course)

As per that article above - you shouldn't really ignore the potential for the paddock valuation to be higher now - HMRC may well challenge an agricultural only valuation especially as it is held on its own in a setting where planning might be considered - it is clearly not a part of a wider farm...

on the other hand it is equally possible that they won't even look at this estate - who knows how their algorithm works!

I would also consider having this thread removed - any discussion talking about possible planning value and HMRC can claim that is your intention and that a) the land should be valued as with planning and b) they could even argue that you are trying to avoid paying tax...

all the best - and hope you are all dealing well with the death of your father - ultimately that is never a nice time...

you are brave if you are wanting to administer this large and potentially complex estate all by yourself, given you have no experience