Matt - Capital taxation - Level 3

Question 1

Tell me about the property in Uttoxeter you valued for IHT purposes?

Answer 1

The property is a retail shop of brick construction with a pitched tile roof. Access is gained by the high street and there is parking to the rear.

Question 2

Tell me how you approached your IHT valuation of the shop in Uttoxeter?

Answer 2

1. As the property is a shop, I knew I was going to value it by the investment method, but as to what technique was dependent on any potential rental details
2. Lease details were provided by the solicitor, which allowed me to determine the appropriate £/sqm ITZA for the subject and could compare this to the market at the IHT valuation date.
3. The rent for the subject was lower than the current market rent and therefore I decided to value the property by the term and reversion technique

Question 3

What is the term and reversion method?

Answer 3

It is a growth implicit method of valuation to value a property that is under rented.

Question 4

Tell me about your term and reversion valuation.

Answer 4

1. To calculate the term, I worked out how long was remaining on the lease before lease expiry at the IHT valuation date to determine the Years Purchase at an appropriate yield and then multiplied this by the rent passing until lease expiry.
2. To calculate the reversion, I used data sources such as CoStar and EIG to calculate a £/sqm ITZA which I applied to the subject property to establish a market rent which I capitalised with a Years Purchase in to perpetuity yield, whilst also deferring the reversion with present value of £1.
3. I then added up the Term and Reversion figures to reach the capital value figure for the property.

Question 5

What was the reasoned advice you gave as a result of your term and reversion valuation for your shop in Uttoxeter?

Answer 5

I advised a senior colleague that the returned value for the property was too low and it shouldn’t be accepted, and I also advised the parties to my valuation approach and why I believed the returned value was too low.

Question 6

What is a Years Purchase (or Present Value of £1 per annum)

Answer 6

It calculates the present value of the right to receive £1 at the end of each year for a certain numbers of years at a given rate of interest.

It produces the capital equivalent from income for a given number of years.

Question 7

What is Years Purchase in Perpetuity?

Answer 7

Years purchase in perpetuity is used where an income flow is fixed or perpetual.

It’s also used where the property is at market rent because we don’t project rents in traditional investment valuation.

Question 8

What is Present Value of £1?

Answer 8

To establish how much less in the future £1 is worth

Question 9

Why do you defer the reversion by present value of £1?

Answer 9

To bring the future values back to todays money as it won’t be received for a while

Question 10

What yield did you use for the term and reversion?

Answer 10

I used an all risks yield, such as a gross yield for the term at a level of 8% for the term, and then adjusted this figure to 9% for the reversion to reflect risk

Question 11

Why did you use a higher yield for the reversion?

Answer 11

To reflect risk because there a chance the Tenant may not pay the market rent figure and could default

Question 12

What was the current rent for the property in Uttoxeter?

Answer 12

£4,500 per annum which equated to £90/sqm ITZA

Question 13

What market rent figure did you use for the property in Uttoxeter?

Answer 13

After reviewing the rental evidence of comparable properties I decided on a figure of £190/sqm ITZA

Question 14

How did you calculate your yield for your term and reversion valuation?

Answer 14

Rent / Sale Price expressed as a percentage to calculate my gross yield

Question 15

Are you competent to practice in Staffordshire?

Answer 15

Yes, but I will always run my valuation by a local expert for completeness

Question 16

How might your valuation approach have been different if the properties had been under rented?

Answer 16

1. Hardcore and layer method where the reversion is close in time
2. Growth implicit DCF

Question 17

How did you deal with the Executor for your residential property in Stone?

Answer 17

I ensured that I was polite and clear with my purpose for needing an inspection. I ensured I wasn’t too technical as they weren’t from a surveying background.

Question 18

Tell me about the residential property in Stone?

Answer 18

The property is a 3-bedroom detached dwelling with a 1960s build age with brick and tile construction with a dormer style on the first floor with timber cladding. Around 130sqm in size.

Question 19

What was the returned value for the residential property in Stone?

Answer 19

£300,000

Question 20

How did you approach your valuation for the residential property in Stone?

Answer 20

I reviewed the returned value of the property on the estate by finding comparable evidence using sources such as Rightmove and the VOA’s Central Database.

Question 21

What information did you have to ascertain that the returned value was too low?

Answer 21

Comparable evidence of similar properties in the locality had transacted close to the valuation date for higher than the returned value.

In addition, the property had been put on the market for considerably higher at £400,000 and subsequently reduced to £380,000.

Question 22

How did the inspection change your opinion?

Answer 22

The inspection changed my opinion that the value of the property should be reduced slightly to reflect fit out and condition, but nevertheless the returned value was still too low

Question 23

What issues did you notice at the inspection?

Answer 23

The fit out within the property was very dated as it was previously occupied by someone elderly, and would require modernisation.

In addition there were some defects noted on the first floor such as damp by the presence of black mould which affected the condition of the property.

Question 24

What reasoned advice did you give as a result of your inspection?

Answer 24

Firstly I advised a senior colleague to my findings about the inspection, particularly about the condition and how this should be reflected in the valuation, and I amended my valuation accordingly.

Secondly, after deciding on a value, I then advised the Executor to my opinion of value and proposed my valuation which reflected the findings of my inspection.

Question 25

What impact did the valuation have on the tax implications?

Answer 25

My proposed value was still higher than the returned value, but I adjusted it to reflect condition and fit out. I proposed an amended valuation of £370,000 to the Executor, which they in turn accepted.

This increased their liability to inheritance tax as a result of my inspection, however the market value was more accurate than a desktop valuation as a result of my findings.

Question 26

Tell me a bit about the damp issue you noticed in the residential property

Answer 26

There was damp on the first floor as a result of excess moisture and poor ventilation. This appeared to be progressed further to lead to mould growth on the walls in the room.

Question 27

Why did you reject the returned value for your shop in Uttoxeter?

Answer 27

It was too low. It was based on capitalising the passing rent on the subject property in to perpetuity, but because this rent was lower than the market rent, this led to a capital value which was too low.

Question 28

How long was the term for your retail shop in Uttoxeter?

Answer 28

At the IHT valuation date, there was 1 year and 5 months left of the term before lease expiry.

Question 29

How did you know how long the term was going to be for your term and reversion?

Answer 29

I considered the lease details provided and crucially the IHT valuation date as this fixes the term.

Question 30

What was your yield for the term and reversion?

Answer 30

8% for the term

9% for the reversion

Question 31

Why did you adjust the yield between term and reversion?

Answer 31

To reflect risk, expectations and growth. The reversion is riskier, therefore a higher yield.