CAP TAX Flashcards
Was the residential property let? If it was let could you adopt the investment method?
The residential property was let, I could have potentially adopted the investment method, however there was comparable evidence available of similar properties.
If you maintained your comparable method approach, and there was an AST in place at the valuation date, would you apply a discount?
Yes, in accordance with Akanwvo v Revenue and Customs Commissioner’s 2018 I would have applied a discount which ranges from 10-15% depending on the amount terms of the tenancy and local market conditions.
For the estate in Croydon, the when did the subject property’s lease commence? How did you determine it was rack rented?
The subject property was leased in January 2022 (6 months before the valuation date).
I reviewed the rent, comparing it to current market rates.
The rent was market rent.
The property is rack rented but there is tenants break clause in 5 years and it is assumed the tenant will exercise their break option.
Market evidence suggests a 12 month void period. How would you review this?
I would apply a higher risk to reflect that the property would be vacant for 12 months.
What would you advise if it was under rented or over rented?
Term and reversion - under rented
Hardcore and layer - over rented
What yield for you adopt? Why? What adjustments did you make to the comparable yield evidence? How risky was the subject property? How did you reflect this in your yield?
Market yields are 7.5% gross - all risk yield.
I adjusted for the fact that my property was in a secondary location, weak tenant, and a short lease.
You sensed check your valuation using comparable sales. Could you have adopted any other investment approach?
Yes, I could have adopted the DCF (independent review- may ask).
The comparable and investment method was more straight forward for the type of properties I was valuing. The evidence was readily available.
The traditional investment method was more suitable given the straightforward nature of the rental income and market evidence.
If your client instructed you to provide a value less purchasing costs, what would your approach be?
If instructed to provide a value excluding purchasing costs, I would adjust market value by deducting the typical costs associated with purchasing the property (legal fees, stamp duty and agency fees) which are 5-6%.
Can you describe the composition of the mixed use estate and explain why a valuation for IHT purposes was required?
The estate comprised both residential and commercial.
A valuation was required for IHT purposes to determine the estates total value at the time of death, ensuring the correct tax liability was calculated.
How did you determine the appropriate valuation method for the different types of properties within the estate?
For the residential properties I used the comparable method, as there were transaction evidence available of similar properties.
For the commercial properties, I applied the investment method, and identified transactional evidence of similar properties and yield evidence.
What were the main challenges you faced in valuing an estate with both residential and commercial components?
The main challenge was ensuring accuracy when applying different valuation method methods.
Cross referencing market evidence for both property types.
Balancing different data sources and adjusting for tenancy situations.
How did you confirm that the commercial properties were rack-rented, and why was this important for your valuation?
It determined my approach.
I cross checked the rent against market evidence.
If the rent was over or under rented then I would have applied a different investment approach.
What case did you apply to your undivided share example? And hpw did you apply it?
The Wright and Moss v CIR case.
Case established that discounts for undivided half share interests should range between 10%-15% depending on whether the co-owner was in occupation.
I applied 15%.
Why did you apply a 15% discount?
The 15% discount was applied because the co-owner was in occupation as their main residence.
If the co-owner was not in occupation, the discount would have been lower, around 10% depending on whether the purpose behind the trust still exists (James Andon St Claire-Ford v HMRC).
Can you explain the specifics of the property and why a valuation of the 50% share was required for IHT purposes?
The valuation was needed because the property was jointly owned by two sisters, and one had passed away.
For IHT purposes, the value of the deceased sisters 50% share needed to be established.
What challenges are associated with valuing a partial ownership interest in a property, particularly when the co-owner occupies the property as their main residence?
Challenges include the appropriate discount since the occupancy and existing trust complicates selling or transferring the property.
The shared ownership and right of residence make the property less marketable, effecting its value.
Can you describe the comparable method of valuation and how you applied it to this specific case?
- I identified comparable evidence.
- I verified the comparable evidence.
- I adjusted the comparable evidence (size, layout, valuation date).
- I analysed the comparable evidence to arrive at an opinion of value.
- I reported my value.
Are there circumstances where you might depart from the case law for undivided shares and apply your own %?
Minority shares (Charkham v CIR): Discount greater than the typical 10% might be necessary for minority shares, discounts over 20% are rare but were applied in the Charkham case.
Majority shares: although the owner of a majority share has more control, there can still be disadvantages, such as dealing with a co-owner who might not want to tell. In such cases, a did king of up to 10% is typical.
What can you you tell me about any CGT reliefs? Was this 0.5 required for reasonable enjoying of the residence?
Principal Private Residence Relief.
Applies to up to 0.5 hectares of land if it’s necessary for enjoying the property. If the land is more than this, only the part needed for enjoyment gets relief.
Vary v Lynes: the court looked at whether extra land was needed for enjoying the property. They considered things like privacy, the houses size, and how the land was used. The decision was based on principal needs, not just personal performance.
What is apportionment and how is it worded in the legislation?
The Taxation of Chargeable Gains Act 1992, section 42.
States that where an asset is required in parts (e.g. land and buildings), the acquisition cost should be apportioned between those parts on a just and reasonable basis. This allows for a fair reflection of the respective values of the different components of the property.
How did you identify your comparables for your Residential and Land case?
I used our internal database, Rightmove and auction sites like EiG.
Houses - I identified similar transactional evidence.
Land - I identified similar transactions of land sold without planning permission.
Can you explain the specific circumstances of the property acquisition and why an apportionment of the acquisition cost was necessary?
The acquisition in March 2016 included both the residential property and parcel of land.
HMRC instructed us to apportion to accurately determine the value of each for CHT purposes, as the land was redeveloped to construct a detached dwelling which was sold in March 2021.
How did you ensure the values you determined for the house and land were accurate and reflective of the market at the time of the acquisition?
I compared the apportioned values with comparable evidence at the acquisition date.
Considered market trends.
Stood back and look.
How did you determine the market value of the house and land separately?
I utilised the comparable method.
I identified transactions of similar properties and plots of land.
I was unable to identify direct transactional evidence of similar plots of land, therefore I broke down the cost to a £ per acre and adjusted and analysed to arrive at a value.
Can you explain the CGT implications of apportioning the acquisition cost in this manner? What impact did it have on the final CGT calculation?
Since the land was redeveloped and sold separately in 2020, it is essential to apportion the original acquisition cost accurately between the house and land.
Required to calculate the capital gain on the land. Failing to apportion correctly cold lead to an inaccurate calculation of the capital gain, resulting in over or underpayment of CGT.
Need to ensure that the valuation of the residential and land are valued correctly.
In cases where market comparable are difficult to find, how would you approach the valuation and apportionment process?
If comparable evidence was difficult to find then I would have considered market data, or identified comparable evidence further afield and adjusted accordingly.
What would you do if there was a significant discrepancy between the combined value of the house and land and the total acquisition cost?
I would first, cross check my valuation and methodology.
If after sense checking my valuations, I consider them to be accurate, then I would have advised HMRC of my valuations, providing a clear rationale for the values determined.
If the client disagreed with your valuation or apportionment, how would you handle this situation?
I would have arranged to discuss my valuation with them (over the phone or via email).
I would have clearly explained to them my methodology, detailing comparable evidence relied upon.
I would ask the client if they could provide any additional evidence, that I may have not considered.
I would review this evidence, and if necessary, revisit my valuation.
If we could not reach an agreement, then I would refer them to appeal / ADR.
What was the declared value for the development CGT case?
£580,000.
Talk me through your GDV?
The development was mixed use, with GF commercial and residential above.
I utilised the comparable method for the residential part and the investment method for the commercial part, identifying comparable rental evidence and yield evidence.
How did you sense check your Residential Land Value?
I cross checked it against multiple sources such as comparable land sales and market trends.
What do you mean by special value?
Special value refers to the additional worth or premium that a particular buyer might place on an asset above its general market value, due to the buyers unique circumstances, interests or needs.
Can you provide an overview of the property and why it required a valuation for CGT purposes?
The property was a two-bed, semi detached ex council house located in Tottenham Hale.
It resisted a valuation for CGT as it was a connected party sale.
How would you have valued if there was no planning permission?
I would have valued it in its existing use.
However, due to it having planning permission, I took the view that the site will have development value and that in these circumstances the taxpayer should be considered to be a special purchaser and would be prepared to reflect this value in their bid.
Why was it important to consider the property’s development potential rather than just its existing use?
Market Value, CGT S272: estimate the property’s market value, which is what I reasonably expect the property to fetch if sold on the ground that the whole of the property is placed on the market as one at that time.
The planning permission significantly impacted its value, in this context the MV should account for the additional value derived from the planning permission.
Statutory valuations can also take into account special purchaser.
Can you explain how you determined the current market value of the property in its existing condition? What factors did you consider?
I considered its existing use as a dated, 2
-bedroom semi detached house.
I identified similar transactional evidence.
I adjusted the evidence downwards to reflect that the subject was in poor condition.
I analysed this evidence to arrive at an opinion of value.
How did you estimate the GDV for the site, and what method did you use to subtract the total development costs?
GDV- estimated the valuation of the development using the comparable method for the residential flats and investment method for the commercial units.
I used BCIS to calculate and deduct the costs for demolishing the existing structure and building the mixed use development.
As well as deducting associated costs for marketing, agents and professional fees, statutory costs and site prep.
As well as finance on a straight line basis assuming 100% debt compounded over the estimated length of the development. I estimated a conservative length of 12 months at an interest rate of 5%.
I also deduced a profit of 20% and made a contingency allowance of 2.5%.
Following these deductions, I was able to establish the total residual value.
Was this a red book valuation? Can you reflect special value in a red book valuation?
No, this was not a RB. You cannot reflect special value in a RB valuation.
How did you approximate the apportionment of the total residual land value between the two semi-detached houses on the site? What factors influenced this apportionment?
I used our VMS software to determine the area of the subject.
I then apportioned the share to the subject area and then deducted the existing use value.
How did you handle the disagreement with the agent regarding the basis of the valuation? What arguements did you present to justify considering the development potential?
The agent argued that the property should be valued in its existing use.
I advised that that the property’s development potential needed to be considered in the valuation and I would also need to reflect the special purchaser.
What would you have done if the agent had not agreed with your reasoning? How would you have resolved this dispute?
I would have tried to negotiate a value with the agent, but if we did not reach an agreement then I would have advised HMRC of my valuation stating that it was un-agreed.
Is it your role to always increase the value of inheritance tax?
No, it is not my role to increase the value of inheritance tax. My responsibility is to provide a fair and accurate valuation based on current market conditions, property characteristics, and relevant guidelines.
How did you source an appropriate yield for your investment method?
I considered market transactions of similar properties sold near the valuation date and analysed and adjusted to arrive at an appropriate yield.
Analysed for the secondary location, tenant profile, and length of tenancy.
Was the residential properties in the estate occupied? How did you reflect that the property was occupied in your valuation?
Yes, the property was occupied.
I applied a 5% discount to reflect that the properties were occupied.
Was the tenant contracted into the 1954? If so, how does this affect the valuation?
The 1954 act gives the tenant security of tenure. In my example, it was at market rent, therefore I did not to do a term & reversion or hardcore method, but if I did, I would factor this in by applying a higher risk.
Was the tenant contracted into the 1954? If so, how does this affect the valuation?
The 1954 act gives the tenant security of tenure. In my example, it was at market rent, therefore I did not to do a term & reversion or hardcore method, but if I did, I would factor this in by applying a higher risk.
You stated that you managed to agree on a value with the executor, what would have happened if you hadn’t been able to agree?
DOA (defendable on appeal), ADR
Is there any legislation regarding undivided shares?
The Trusts of Land and Appointment Trustees Act 1996
Are you aware of any other case law regarding half shares?
Wight and Moss v CIR 1982 (Nellie Wight Case)
Provides us with importance guidance on the valuation of undivided half-shares, where a co-ower was in occupation of the property at the valuation date.
- 15% if the other co-owner is in occupation
- 15% if the co-owner is not in occupation but the purpose behind the trust exists
St Clair Ford v HMRC - where the other co-owner is not in occupation and the purpose behind the trust no longer exists (10%)
What’s the difference between a joint tenancy and tenants in common occupation?
Joint tenancy - equal ownership (50/50)
Tenancy in common (differing share interests 25/75)
Where do you find the definitions of market value for IHT and CHT?
Section 160 IHT Act (1984)
* This definition is focused on the hypothetical sale value at the date of death for tax purposes.
* It assumes a willing buyer and seller in an arm’s length transaction.
Section 272 TCGA (1992)
* Similar to IHT, this definition is also concerned with a hypothetical sale value, assuming a willing buyer and seller.
* It’s used to determine gains for taxation purposes at the point of disposal (e.g., sale, gift, or transfer).
VPS4 Market Value (RICS Valuation - Global Standards)
* Doesn’t consider special purchaser
* Doesn’t disregard flooding of market
* Doesn’t disregard prudent lotting
What is SDLT and what are the rates?
The Finance Act 2003
Up to £250,000 - 0%
£250,001 - £925,000 - 5%
£925,001 - £1.5M - 10%
Above £1.5M - 12%
If you’re buying an additional property you have to pay an additional 3% in SD on top of standard rates.
£40,000 - £125,000 - 3%
£125,001 - £250,000 - 5%
£250,001 - £925,000 - 8%
£925,001 - £1.5M - 13%
£1.5M + - 15%
Can you tell me what AED is?
Annual Tax on Enveloped Dwellings.
ATED is an annual tax payable mainly by companies that own UK residential property over £500K.
Can you give me inheritance tax reliefs?
• Quick succession relief, this is to prevent estates being decimated by successive beneficiaries dying within a short time of each other.
• Agricultural
• Business property relief
• Loss on sale relief
• Tapered relief
Can you give me exemptions from IHT?
Potentially Exempt Gifts up to 7 years prior
Spouse or Civil Partner
Annual Tax Exemption up to £3,000
Gifts registered to UK charities
What was the market like in Croydon at that time?
Rental evidence was around £350/ZA.
The market was recovering, there were a number of vacant units, trend towards local and independent businesses.
