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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Special valuation matters: property subject to damage affecting its value

Where property is damaged or defective, commonly from subsidence or damage from fire or storms, the personal representatives (IHTM05012) can step into the deceased’s shoes and may be able to make a claim under an insurance policy or against a third party, for example a neighbour or negligent surveyor.

In view of IHTA84/S5 (1) we need to consider the value of all assets forming the deceased’s estate (IHTM04029). In cases involving damaged or defective property it is necessary to consider what someone would pay to acquire the property as it stood at the valuation date but with the right to recover some or all of the cost of remedying the defects or damage under an insurance policy or a right of action against a third party. Therefore, you first need to find out whether there was a right of action against a third party or a policy of insurance which covered the damage.

Where there is such a policy or right of action you should ask the taxpayer to provide copies of

  • the insurance policy
  • the structural survey which first brought the damage to light
  • any correspondence with the insurers (or appropriate third party) or their loss adjusters that may have ensued

and obtain the taxpayer’s agreement to the following valuations being settled with the VOA (IHTM23002)

  • the value of the property as at the date of valuation, together with the benefit of any insurance policy or right of action that exists, and
  • the value of the property as at the date of valuation in its defective or damaged state.

The latter value is normally used to determine a loss on sale (IHTM33001) claim. However, in cases where the taxpayer refuses to agree values it will help to determine the tax at stake.

The taxpayer may not agree to the valuations because they want to wait until the insurers or third party accept the liability and the cost of remedying the defects. In that case you should remind them that we are looking at the position at the date of death without the benefit of hindsight. In addition, settling the claim can take a long time and it should be possible to ascertain the date of death value without such lengthy delays. You should tell the taxpayer that the VOA will take into account such factors as the risk of the liability being disputed and the inconvenience to the purchaser of dealing with the claim.

Once you have obtained the information requested and the taxpayer’s agreement to the basis of valuation, the papers and the information should be referred to the VOA with a request for the two valuations above and bringing his attention to Ch 1B:7.35.

If no policy or right of action exists the VOA should simply be instructed to value the property in its defective or damaged state.

You should refer any case to TG where

  • a policy existed but no claim is to be made under it. Before referring please ask the taxpayer why the claim is not being pursued
  • the property is sold before repair. Before referring please ask whether the policy was assigned to the purchasers and, if so, what value was given to the policy rights
  • the deceased dies after the defects had been discovered and a binding contract for the work to be done has been entered into but before the work is completed
  • cases involving flats - obtain a copy of the lease before referring
  • any cases of doubt or difficulty

There are separate instructions where damaged property is subject to a loss on sale claim.