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Section 15: related property

Valuation Office Agency

June 30
13:02 2022

There are special rules for valuing property that is included in an estate if there is other property that is related to it, s.161 IHTA 1984. The rules apply in situations where valuing the property together with the related property produces a higher value than by valuing the property on its own.

Broadly speaking, related property is property that

  • in the estate of a spouse/civil partner, or
  • comprises, or has comprised within the preceding five years, property donated by either spouse or civil partner to a charity, charitable trust or to one of the political, national or public bodies to which exempt transfers may be made

The rules apply to both lifetime transfers and transfers on death.

HMRC will decide what property is to be regarded as related property.

Related property provisions apply for IHT purposes only. There are no similar provisions in CGT legislation.

15.2 Purpose of the Rule

The rule is intended to prevent the reduction in value, for IHT purposes, of property by fragmentation of ownership, aimed at passing the family estate within the family at minimum charge to IHT. The fact that transfers between spouses or civil partners are exempt from IHT would enable the prior fragmentation of the estate between spouses or civil partners to take place at no cost in IHT. Controlling shareholdings could be split into minority holdings, farms into isolated fields, buildings or building plots severed from essential access etc. The application of the rule has the effect of recombining the spouses or civil partners ownerships for valuation purposes.

15.3 When the Rule is not applicable

The rule does not apply if the value arrived at by s.161 IHTA 1984 apportionment is equal to or less than the value of the transferors property on its own. In other words, the rule does not apply if the transferors property would not realise a better price by being sold with the related property.

15.4 Application of the Valuation Rule

The value to be included in the deceased/transferors estate is the appropriate portion of the value of the aggregate of the transferors and related property.

This is a two-step process:

  1. Establishing the enhanced value of the aggregate of the transferors property and the related property (see para 15.5).

  2. Calculation of the appropriate proportion (see para 15.6).

The first step is to value the property in the transferors estate together with the related property (the aggregate referred to in s.161(1) IHTA 1984). For this purpose the VOA should value both interests together, as if already merged, and make no reduction in the aggregate value because the related property is owned by the spouse or civil partner and not by the transferor. If vacant possession would become available on the merging of the interests the property should be valued with vacant possession. In all cases the aggregate value should reflect the full enhancement attributable to the merging of the transferors property with the related property and no deduction should be made because more than one ownership is involved.

15.6 Calculation of the appropriate portion

The next step is to arrive at the appropriate portion of the enhanced aggregate value referred to in para 15.5 above, which is to be attributed to the transferors property.

There are two methods of calculating the appropriate portion:

  • the general rule, s.161 (3) IHTA 1984 (see para 15.7)
  • the special rule, s.161 (4) IHTA 1984 (see para 15.10)

The general rule is used where the items of property being aggregated for valuation purposes are different, such as freehold and leasehold interests in the same piece of land, or for example if the related property comprises adjacent parcels of land owned and the relationship between the two parcels of land one has no access without the other they together make a more valuable natural unit.

The special rule is mainly used for calculating the value of shareholdings, but also applies to undivided shares in property.

15.7 The General Rule Different interests

For disparate or unequal items of property the appropriate portion is determined in accordance with s.161(3) IHTA 1984 by applying the Formula 1:

Where;

A = the enhanced value of the aggregate of the transferors property and the related property, the aggregate being valued in accordance with para. 15.5,

T = the value of the transferors property, and

R = the value of the related property

Both T and R are valued separately as if each property did not form part of the aggregate (see para.15.8).

HMRC will calculate the appropriate portion based on the VOAs valuations for T, R and A.

Where related property consists of a separate estate or interest in the transferors property (eg a freehold reversion, a leasehold or a tenancy) the principles set out in para 15.5 apply. For example, if a transferor had leased freehold premises to a spouse or civil partner theleasewould be regarded as having merged with the ownership of the freehold and the s.161(1) IHTA 1984 aggregate value would be the freehold vacant possession value of the premises.

However in order to arrive at the appropriate portion under s.161(3) IHTA 1984 the value of the aggregate, the transferors freehold should be valued subject to thelease. Similarly, the spouses or civil partners leasehold interest would be valued separately. In valuing both the freehold reversion and theleaseas if it did not form part of the aggregate under s.161(3) IHTA 1984 consideration should be given to the possibility that either the freeholder or leaseholder would be in the market as a special purchaser of th

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