Section 18: undivided shares
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
Undivided shares
The law relating to undivided shares can be found in the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996) (for valuations on and after 1 January 1997) and the Law of Property Act 1925 (LPA 1925) (for earlier valuation dates). Whilst the distinction between a joint tenancy and a tenancy in common can be important in determining the extent of a co-owner’s interest, once the extent of the interest has been ascertained, the valuation approach will in practice be the same. When submitting cases of this type, HMRC(IHT) will indicate the share to be valued. Should the parties dispute the basis of valuation because of the manner in which the share is held, the papers should be referred to CEO for advice before proceeding.
A detailed explanation of the nature of undivided shares and the approach to valuing such interests is contained in Practice Note 2. The following paragraphs contain the practical essentials.
Valuation Approach
All undivided shares are held either on a trust of land (1 January 1997 onwards) or a trust for sale (prior to 1 January 1997) and there will always be a purpose behind the creation of that trust. The difficulty is that it is not always easy to determine what that purpose is. It is not necessarily set down in writing and sometimes may not be explicitly agreed between the parties, leaving the purpose to be implied from their actions.
The purpose behind the trust will usually be relevant for valuation purposes because if it becomes necessary to consider whether a Court would have been likely to grant an Order for Sale (Section 14 TLATA 1996 or Section 30 LPA 1925), one of the factors that the Court will have regard to is whether or not the purpose is still continuing. Indeed, when considering whether to grant an Order in respect of a trust of land, the Court is expressly required to have regard to the purpose behind the trust (Section 15(1)(b) TLATA 1996
Where at the valuation date any co-owner remains in occupation of the property, as their main residence, (other than the co-owner whose share is being valued) the normal approach is to take half the freehold vacant possession value and deduct 15%. This approach is in accordance with the Lands Tribunal decision of Wight and Moss v CIR (264/935/82) full details of which are at paragraph 9 of Practice Note 2.
Example VP Value £300,000 Mathematical half share £150,000 Deduction 15 % £22,500 Value of half share £127,500
Where at the valuation date a co-owner has a right to occupy the property, as their main residence, but, by choice, did not actually occupy, it is necessary to consider the purpose behind the trust for sale or trust of land. If this purpose still exists and is capable of being fulfilled the discount would normally be 15% and in other cases 10%.
Example
Mr and Mrs A bought a house for their joint occupation. When Mr A died he left his one-half share to his son Mr B who lives elsewhere. Mrs A has now died and it is therefore necessary to value her one half-share.
When Mrs A dies the other co-owner is Mr B. Mr B is not in occupation and the house was not purchased for his occupation. When valuing Mrs A’s one-half share a 10% discount should be applied.
If Mr B had died before Mrs A then, at the date of Mr B’s death, the other co-owner, Mrs A, would still have been in occupation and the purpose behind the trust would still have existed. When valuing Mr B’s one-half share a 15% discount should be applied.
Provided that the shareowner is deriving some current benefit from the ownership of the share, this type of half share should normally be valued by taking the full value of the property and making an allowance of 10% from the share fraction.
The Lands Tribunal endorsed this principle in the case of James Anson St Clair-Ford (As executor of the estate of Norman Peter Youlden deceased) v HMRC (2006). For further details of this case, see Practice Note 2, para 9.6.
Minority shares
The Lands Tribunal considered the valuation of various minority shares in the 1997 case, involving a trust for sale, of Charkham v CIR (RVR vol. 40 p7) (see Practice Note 2 para. 10.3). In cases, where the prospects of a Court granting an order for sale are thought to be less than “highly likely”, or the costs of such an action would be prohibitive, then some greater discount than 10% may be appropriate. The amount of such a discount will vary depending on factors such as the likely attitude of the other co-owners (see Practice Note 2 paras. 5.3, 5.4 & 10.4). However, it is envisaged that only in very exceptional circumstances (such as those prevailing in the valuation of the Alderney Street properties at the earlier dates in the Charkham case) will the amount of such a discount exceed 20%.
The Lands Tribunal also considered the valuation of a minority interest in the 2006 case, involving a trust of land, of HSBC Trust Company (UK) Ltd (As executor of the estate of Gwendoline Maisie Farmbrough deceased) v HMRC (see Practice Note 2 para 10.5 et seq).
Majority shares
A majority shareholder is normally in a more powerful position than a minority one (see Practice Note 2 paras. 4.2, 4.3 & 7.4). However, the ownership of such a share still has its disadvantages and a discount of up to 10% should be applied in normal circumstances (see Practice Note 2 para. 10.10).
In the majority of cases, valuations in accordance with the principles above and Practice Note 2 will give acceptable results.
There may be some instances where discounts different from the normal discounts indicated are appropriate but there is a need to achieve reasonable consistency in the valuation of undivided shares across various taxes and other matters for which such valuations are required. The approval of CEO is therefore required in any case where it is proposed to adopt a discount which either
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exceeds 20% and the amount of the discount from the mathematical share also exceeds £20,000, or
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is less than 10% of the mathematical share.
Lifetime Transfers
In lifetime transfer cases involving the valuation of undivided shares, the caseworker will need to consider whether the “value transferred” differs from the “value of the property transferred” (see Section 4 para. 4.16).
When considering the “loss to the estate” the parties may sometimes put forward a valuation of a share retained by the transferor, which reflects little or no discount from the mathematical share. Any such valuations should be considered in accordance with the principle above and Practice Note 2 and if a discount of less than 10% is considered appropriate CEO approval should be sought in accordance with para. 18.8 above.
Section 27 para. 27.63 outlines the procedure to be followed when reporting cases involving lifetime transfers.
Related property
Special provisions apply to the valuation of an undivided share where another share is held by the transferor’s spouse, or civil partner. See Section 15.
Partnership property
HMRC(IHT) may require a valuation of property which comprises an asset of a partnership of which the transferor is a member. Detailed instructions can be found at Section 19.