Revenue & Customs Brief 71/07
Inheritance Tax and the valuation of property owned jointly by spouses or civil partners
Background
In general terms Section 161 Inheritance Tax Act 1984 provides that, when valuing a share of property for inheritance tax where the spouse or civil partner also has an interest in the same property, the spouse’s or civil partner’s interest is taken into account. The effect is broadly to reduce the level of discount that smaller, un-aggregated shares of property can attract when valued. The precise basis on which this is done was the subject of litigation during 2004 and resulted in the High Court decision Arkwright and another v Inland Revenue Commissioners [2004] EWHC 1720 (Ch).
The appeal had earlier been considered by the Special Commissioners who found that the Revenue could not rely on section 161(4) in the case of incorporeal shares of land. Section 161(4) requires the aggregate value to be apportioned in accordance with the proportion the smaller number of shares are held to the total held by both spouses/civil partners. The Special Commissioner found that whilst the measure could apply to property which had a distinct or individual existence as a unit, such as unit trusts or a set of furniture (for example twelve dining chairs), it did not apply to fractions of units. The Revenue did not pursue this point when its appeal was heard by the High Court.
HMRC treatment of existing and future cases
The High Court decided that the question of the open market valuation was, in the absence of agreement between HMRC and the personal representatives, a matter for the Lands Tribunal.
In the course of seeking to reach agreement HMRC has received legal advice that in some circumstances section 161(4) may, in fact, apply to fractional shares of units.
Future cases
Accordingly, HMRC will take our legal advice into account and apply section 161(4) when valuing shares of land as related property in any inheritance tax case where the account is received by HMRC after the publication date of this Brief. We will consider litigation in appropriate cases.
Existing cases
It is now not possible to have further judicial consideration of the section 161(4) point in the context of the Arkwright decision. Any existing cases in which section 161(4) is considered in point will therefore be dealt with on the basis of the Special Commissioners’ decision in the Arkwright case as it relates to the interpretation of section 161(4).
HMRC will, when so requested, also reconsider any cases involving land valuations which were concluded after the Arkwright decision was handed down on 16 July 2004 and determined on the basis that section 161(4) applied.
If you believe a valuation was concluded on this basis and wish to have the matter reconsidered, you should write to
HMRC Inheritance Tax
Ferrers House
P O Box 38
Castle Meadow Road
Nottingham
NG2 1BB
Please state the name of the deceased, transferor or settlement and quote the official reference. To assist us, please also refer to this Brief in the heading to your letter.
Discounted Gifts Schemes
We will review the guidance we give about valuation of joint settlor schemes in the Technical Note (PDF 45K) and make appropriate changes in the light of any future developments. Until then we will continue to value schemes on the basis of the guidance in the note.
