Chester and Forrest were brothers who jointly owned, in equal half shares, the freehold interest (worth GBP450, 000) of a small shop that they inherited from their father. The shop was in an English market town and had been let to a well-known retailer.
Sadly, Chester died last year and his executor had the freehold of the premises valued. A valuation of an undivided share, such as Chester's, is not straightforward because half interests in land rarely change hands in the open market. The value put forward by Chester's executor will have to be agreed with the district valuer (DV) acting for HMRS.
The DV's approach will usually be on the 'entirety basis'. This involves first valuing the whole freehold interest, applying the appropriate fraction - one-half, as Chester and Forrest had equal interests - then discounting the resulting figure. The purpose of the discount is to reflect the inherent disadvantage of owning a share of a property, which may be difficult to sell, rather than the whole.
In Chester's case, the executor's surveyor proposed a discount of 15 per cent, but the DV insisted that a 10 per cent discount was appropriate. In the end, the DV's view prevailed and the following was agreed:
- The entirety value, i.e. the value of the whole freehold premises, is GBP450,000
- After applying the appropriate fraction in this case one-half, the figure (before applying the 10 per cent discount) is GBP225, 000.
- The 10 per cent discount proposed by the DV is accepted and results in a (discounted) valuation of Chester's interest of GBP202, 500. This is treated as the open market value for inheritance tax purposes.
The DV's approach to valuation of Chester's share follows the ruling in a Lands Tribunal case in which tribunal member PR Francis FRICS stated the principle: '10 per cent is indeed the customary discount applied to half shares particularly when they are undivided and there is no likelihood that the surviving (co-owner) will remain in occupation (as in residential property with tenants in common). There is evidence to suggest higher discounts for minority shares and where there may be other complications…'
As a general guide, the level of discount to be applied when valuing an undivided half-share interest is as follows:
- 10 per cent where any other co-owner is not in occupation and the purpose behind the trust of land no longer exists
- 15 per cent where any other co-owner is not in occupation but they have a clear right to occupy as their main residence and the purpose behind the trust still exists; and
- 15 per cent where the other co-owner is in occupation as their main residence. If the other co-owner is in occupation and the transferor has been excluded from possession, or is likely to be excluded from occupation, the value of any compensation will have to be assessed and compared with the notional value of the interest on the assumption that exclusion had not been authorised.
Valuations of minority interests are rather more complex. There are also other considerations when valuing 'related property'. Broadly, property is related property for inheritance tax purposes if it is part of the estate of a person's spouse or civil partner. The rules have the effect of combining spouses' and civil partners' interests for valuation purposes so that valuation of the deceased's or transferor's interest is the appropriate proportion of the aggregated value of the whole jointly held property, with no discount.
This article first appeared in the STEP Journal in May 2013.