Capital Taxation - Level 3

Question 1

Tell me about the house in Knebworth?

Answer 1

• I valued a house with 3.5 acres of land for IHT purposes.
• The returned value seemed too low when looking at comparables
• I also was considering the potential hope value.
• Having inspected the property i was of the opinion that the returned value was too low.
• I contacted the executor to inform him of my opinion of value, taking into consideration the size, potential and evidence.
• After negotiations i reached an agreement and i was able to report a higher value to HMRC which was in line with the condition and characteristic of the property

Question 2

What is Hope Value?

Answer 2

Hope value is the value based on the expectation that land will get permission for development in the future, meaning that it is likely to be worth more.

Question 3

Knebworth – Why did you think there was hope value?

Answer 3

As there was 3.5 acreas of land it suggested there was development potential.

On inspection i noted that the property was in need of modernisation and had the consideration that a potential buyer would spend money to improve the property and even the potential to increase the value

Question 4

Knebworth – What considerations did you take?

Answer 4

Planning permission - what would likelihood of them recieving permission

Location

Comparable evidence

Question 5

Knebworth – What was the construction of the property and condition.

Answer 5

5 bed deatched property. Cavity wall construction, pitched roof, double glazed windows

Question 6

Knebworth – how did you source your comparables given the large land coverage?

Answer 6

I looked at external sources such as Rightmove, and our internal data system

Question 7

Knebworth – What potential for hope value did you advise there was?

Answer 7

• Based on the fact that the property had a large plot of land, I advised that there was potential to build onto the property based on the property down the road who received planning permission for works
• I advised the client a potential buyer would likely develop on the land to achieve a higher value.
• Based on the comparable evidence a larger property would have achieved a higher value

Question 8

Knebworth – Talk me through your comparable evidence and how you arrived at your valuation.

Answer 8

When searching for the comparable evidence, my main focus was to find comparables with a similar size land in order to get a better understanding of the values.

After looking at the comparable evidence i was able to advice HMRC of my approporate value.

Question 9

Knebworth – how did you value the land for IHT purposes?

Answer 9

• I started by looking at comparable evidence, then when i decided there was planning permission, i carried out a residual valuation. Based on my evidence i advised the executor of my opinion and then advised my client my value.

Question 10

Knebworth – Why did you think the returned value was too low?

Answer 10

When looking at the size of the land and the size of the property, during my desk based research the returned value seemed to be low.

Question 11

Knebworth – How did you advise on the characteristics and condition of the property?

Answer 11

During my inspection, i made notes of the construction and condition in order to reflect it in my valaution.

Question 12

Knebworth – How did you advise on your opinion of value?

Answer 12

I first prepared my opinion letter which included the facts that i found during my inspection. I then provided my comparable evidence. I then invited the executor if they would like to provide any evidence that i should consider, if they felt it was necessary.

Question 13

Knebworth – What informed your valuation advice?

Answer 13

What informed my valuation advice was based from my desk based review, inpection and post inspection research.

I considered the subject property condition, size, specification, land, hope value, planning permission

Question 14

Knebworth – What did you advise in terms of potential?

Answer 14

• based on the the fact that the property had 3.5 acres of land i was of the opinion there was hope value as advised the executor that a potential buyer would likely develop the proeprty to achieve a higher value.

Question 15

Kent - Tell be about this case?

Answer 15

• I valued a house for Capital Gains Tax purposes.
• The instruction was to value two semi detached houses as one as they were merged.
• I discussed the case with a senior surveyor
• converting the property back into two dwellings should not be too high
• I made a 15% deduction for the chance of not getting planning permission.
• I then advised HMRC that the returned value was too low, and what the approporiate value should be

Question 16

Kent – Why did you consider the cost of converting back to two
dwellings, when the instruction was to value as one?

Answer 16

Based on case law, we can consider Prudent Lotting which means a hypocritical seller would sell his property to achieve the highest price which would either be buy selling as a whole or breaking up the proeprty to acheieve the highest price

Question 17

Kent – Why did you make a deduction of 15%

Answer 17

I made the deduction for the chance that they don’t receive planning permission

Question 18

Kent – how did you value given the CGT purpose?

Answer 18

Market value

Question 19

Kent – How did you advise on the conversion costs?

Answer 19

I discussed with a senior surveyor and looked at BCIS

Question 20

Kent - what case law did you apply?

Answer 20

Fifield v Commissioners of Inland Revenue (1972) (EG vol. 227 p2057)

Question 21

Kent – How did you apply the Fifield case?

Answer 21

I applied this case as this case gave the 15% deduction for not having planning permission which applied to the subject.

Question 22

Kent – How did you advise on the returned value?

Answer 22

I advised that the property should not be valued as 1 house and should actually be valued as 2 semi detached houses as it will achieve a higher value

Question 23

Kent - Why did you consider the cost of converting back to two dwellings, when the instruction was to value as one?

Answer 23

• Based on the consideration that a hypothetical buyer would convert the property into two semi-detached houses to achieve a higher value

Question 24

Ealing – talk me through your desktop valuation.

Answer 24

• At the start I completed my conflict and interest checks and ensured I was competent to carryout the valuation
• I then started to look for comparables to determine the value of the property.
• Based on the comparables, I was of the opinion that the returned value was too high so I contacted the solicitor to arrange an inspection so I could gather my facts

Question 25

Ealing – What was your advice regarding prudent lotting?

Answer 25

• The Executor was considering prudent lotting by converting the entire property into a large single dwelling.
• However, I advised the executor that we can’t value the property as a single unit as the unit consists of 4 flats and the estate only includes 3 or the 4 flats.
• So, I have to value the 3 flats individually.
• I therefore, advised a lower value.

Question 26

Ealing – How did the condition of flat 3 impact your valuation?

Answer 26

• Flat 3 was in really poor condition, so adjustments had to me made to reflect the value and condition.
• I looked at comparable evidence to determine what value would be achieved for a property in reasonable condition then made the appropriate adjustments to reflect the condition.

Question 27

Ealing – how did you advise on the returned value and your valuation
advice?

Answer 27

• I advised the executor and my client that the returned value was too high and that the 3 flats have to be valued individually as prudent lotting can’t be considered.

Question 28

Ealing – How did you advise on the condition of the flats?

Answer 28

• I advised the executor based on the condition adjustments need to be made to reflect the condition so that it can be compared to comaprables in reasonable condition and get a value for what a purchaser would pay.

Question 29

Ealing – How did you advise on the comparable evidence?

Answer 29

• When looking at comparable evidence, I was looking for direct comparables of properties that were in similar condition, size, specification and close to the valuation date.
• Based on the comparables I provided my opinion of value including my comparables that I was relying on.

Question 30

Ealing – How did you advise on prudent lotting?

Answer 30

• The Executor was considering prudent lotting by converting the entire property into a large single dwelling.
• However, I advised the executor that we can’t value the property as a single unit as the unit consists of 4 flats and the estate only includes 3 or the 4 flats.
• So, I have to value the 3 flats individually.
• I therefore, advised a lower value.

Question 31

Ealing – What was your opinion on the conversion costs and how these should be considered in the valuation?

Answer 31

• The conversion costs were not applicable to my valuation as it wasn’t an option to convert the property into 1 house.

Question 32

Ealing – How did you check whether the fourth flat was within the estate?

Answer 32

• Following my inspection where I got a full understanding where the executor was coming from.
• I contacted HMRC to clarify whether the 4th property was part of the estate or not
• HMRC confirmed that the 4th property was not part of the estate

Question 33

Ealing – How did you advise on the condition of flat 3?

Answer 33

• as the flat was in really poor condition, adjustments had to be made to reflect the condition. I advised the executor and my client that a reduction in value for the flat has to be made to reflect the condition.

Question 34

Ealing – Why should the flats not have been valued as a single property?

Answer 34

• The estate didn’t include the 4th flat therefore prudent lotting couldn’t be considered

Question 35

Ealing – How did you value the flats individually?

Answer 35

• by looking at comparable evidences of flats in the locality

Question 36

Ealing – were the flats freehold or leaseholds?

Answer 36

The flats were freehold

Question 37

Ealing – when looking for comaprables what type of property were you looking for?

Answer 37

• i was looking for freehold flats and considered also long leaseholds

Question 38

Ealing – As they were freehold, did you adjust for it in your valuation?

Answer 38

• Based on research and speaking to senior surveyors it wouldn’t have a direct impact because it wouldn’t costs that much to create a new title by creating a long lease. therefore suggesting it would have costed around £10K for each flat.