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APC 2022 > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the definition of Market Value (MV)?

A

The estimated amount for which an asset or liability would exchange on the date of valuation between a willing buyer and a willing seller at an arm’s length transaction after all proper marketing and where both parties acted prudently, knowledgeably and without compulsion.

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2
Q

What are the Basis of Value?

A
  • Market Value
  • Market Rent
  • Investment Value
  • Fair Value
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3
Q

What is the definition of Fair Value?

A

‘The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.’ (This definition derives from International Financial Reporting Standards IFRS 13.)

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4
Q

RICS Red Book - VPS 1-5

A

Valuation technical and performance standards

VPS 1 - Terms of Engagement
VPS 2 - Inspections, Investigations and records
VPS 3 - Valuation Reports
VPS 4 - Bases of value, assumptions and Special assumptions
VPS 5 - Valuation approaches and methods

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5
Q

RICS Red Book - PS

A

Professional Standards

PS 1 - Compliance with standards where a written valuation is provided
PS 2 - Ethics, competency, objectivity and disclosure

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6
Q

How to become a RICS registered valuer

A

There are 4 three key elements:

1 - Application Form, which sets out how you met the competency requirements for Valuer Registration
2 - A period of valuation based experience (maximum 100 days)
3 - A single case study submission using work-based evidence
4 - CPD record

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7
Q

Methods of Valuation

A

Comparable method

Investment method

Profits method

Residual method

Depreciated replacement cost (contractors method)

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8
Q

depreciated
replacement
cost (DRC)

A

The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

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9
Q

equitable value

A

The estimated price for the transfer of an asset or liability between
identified knowledgeable and willing parties that reflects the respective interests of those parties (see IVS 104 paragraph 50.1).

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10
Q

income
approach

A

An approach that provides an indication of value by converting future cash flows to a single current capital value.

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11
Q

Intangible asset

A

A non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and/or economic benefits to its owner.

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12
Q

Investment value

A

The value of an asset to the owner or a prospective owner for individual investment or operational objectives

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13
Q

Market Rent (MR)

A

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arms length transaction, after proper marketing an where the parties had each acted knowledgeably, prudently and without compulsion.

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14
Q

Marriage / Synergistic Value

A

An additional element of value created by the combination of two or more assets or interests where the combination value is more than the sum of the separate values

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15
Q

Special purchaser

A

A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market

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16
Q

Special value

A

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

17
Q

Valuation Terms of Engagement

A
  • Identification and status of the valuer
  • Identification of the client/s
  • Identification of any other intended users
  • Identification of the asset/s or liability/ies being valued
  • Valuation/financial currency
  • Purpose of valuation
  • Basis/s of value adopted
  • Valuation date
  • Nature and source/s of the valuer’s work - including investigations and any limitations thereon
  • All assumptions and special assumptions to be made
  • Format of the report
  • Restrictions on use, distribution and publication of the report
  • Confirmation that the report will be undertaken in accordance with the IVS
  • The basis on which the fee will be charged
  • Where the firm is registered for regulation by RICS, reference to the firms complaints handling procedure, with a copy available on request
  • A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
  • A statement setting out any limitations on liability that have been agreed
18
Q

RICS Red Book Valuation report contents

A
  • Identification and status of the valuer
  • identification of the cleint and any other intended users
  • Purpose of Valuation
  • Identification of the asset/s or liability/ies being valued
  • Basis/es of value adopted
  • Valuation Date
  • Extent of investigations
  • nature and source/s of the information relied upon
  • Assumptions and special assumptions
  • Restrictions on use, distribution and publication of the report
  • Confirmation that the valuation has been undertaken in accordance with the IVS
  • Valuation approach and reasoning
  • Amount of the valuation/s
  • Date of the valuation report
  • Commentary on the material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
  • A statement setting out nay limitations on liability that have been agreed
19
Q

when do VPS (Valuation technical and performance standards) 1-5 not apply

A

VPS 1-5 do not apply if the valuation is for:

  • Providing agency or brokerage services
  • acting or preparing to act as an expert witness
  • Performing statutory functions
  • Providing valuations to a client purely for internal purposes
  • Providing valuation advice expressly in preparation for, or during the course of, negotiations or litigation, including where the valuer is acting as advocate
20
Q

part 6 of the Red Book

A

Part 6 - International Valuation Standards

21
Q

The Inheritance Tax Act 1984 Market Value

A

Market value is defined under S.160 of the IHTA 1984:

‘the price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price shall not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time’

22
Q

What is the valuation date for an Inheritance Tax Valuation?

A

Date of death

23
Q

Inheritance Act 1984 Agricultural Value definition

A

Agricultural Value is defined under S.115 (3) of the IHTA 1984, and must be used when calculating the value of property for APR:

‘the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property’

24
Q

Reliefs available for Inheritance Tax

A
  • Agricultural Property Relief at 100% or 50%
  • Business Property Relief at 100% or 50%
  • 7-year tapered relief
  • £325k (which is transferable between spouses, max £650k)
  • Annual gift limit of £3k p.a but increases to £6k if noting gifted in the previous year
  • can gift £250 to as many people as you wish
  • Gifts for weddings/civil partnerships max £5k
25
Q

Gifts tapered relief - 7 year rule

A

Disposals may qualify for tapered relief at various decreasing rates depending on how long the person making the gift lives from the date of the gift.

The IHT rate is as follows depending on the following timing of death:
- 0 to 3 years at 40% (full rate)
- 3 to 4 years at 32%
- 4 to 5 years at 24%
- 5 to 6 years at 16%
- 6 to 7 years at 8%
- after 7 years its 0% (fully exempt)

26
Q

What is the date of Valuation for Capital Gains Tax

A

The date of disposal.

The gain is calculated based on the disposal price less the acquisition cost. Should the property have been acquired before the 31 March 1982, then the acquisition value will be the value of the asset as at 31 March 1982.

27
Q

Talk me through a residual Valuation

A

Residual Value = Gross Development Value - (Construction costs + Fees + Profit)

GDV is calculated based on comparable properties and a value attributed on a £/sq.ft basis (£2

Less Costs:
- Construction Costs (£130/sq.ft)
- Professional Fees (7.5% of the build cost)
- Agency (1-2% of the build cost)
- Finance Costs/charges (7% of the build cost)
- Contingency (5% of build costs)
- Developers Profit (based on a %of the GDV)

= Residual value of the property

28
Q

What constitutes a disposal under ‘Taxation of Chargeable Gains Act 1992’?

A

Disposal includes:

  • Selling
  • Gifting
  • Swapping it for something else
  • getting compensation for it (insurance payout)
29
Q

What are chargeable assets with regards to Capital Gains Tax

A

Capital Gains Tax is governed by the ‘Taxation of Chargeable Gains Act 1992’ and includes:

  • Most personal possessions worth over £6,000
  • Property that isn’t your main house
  • Your main house if it is let out, used for business or very large
  • Any shares that are not held within a ISA or PEP
  • Business Assets
30
Q

Capital Gains Tax allowances

A

CGT is governed by the ‘Taxation of Chargeable Gains act 1992’

Allowances include:
- Personal allowance (annual exempt amount) £12,300
- Trust annual allowance £6,150

31
Q

Capital Gains Tax Rates

A

As specified within the ‘Taxation of Chargeable gains Act 1992’…

Lower rate tax payers will pay 10% for chargeable assets and 18% for residential property

Higher rate tax payers will pay 20% for chargeable assets and 28% for residential property

32
Q

Capital Gains Tax reliefs

A
  • Business Asset Disposal Relief
  • Business Asset Rollover Relief
  • Incorporation Relief
  • Gift Hold-Over Relief
  • Private Residence Relief (grounds to be less than 5,000sq.m, which is just over an acre)
33
Q

Whats is a Discounted cash Flow?

A

A Discounted Cash Flow refers to a method of valuation that estimates the value of an investment using its expected future cash flows

34
Q

What is a yield?

A

A Yield is a percentage return achieved or targeted from an investment

35
Q

What is a Discount Rate?

A

A Discount rate is the interest rate used to convert future cash flows into their present value - it represents an investors appetite for risk and the underlying uncertainty the cash flow. A higher figure indicated a higher risk/more uncertainty

36
Q

What ‘basis of value’ is used for a Valuation for Secured Lending purposes

A

‘Market value’ is most commonly used for secured lending valuations.

VPGA 2 of the Red-Book provides more details

37
Q

What is the purpose of a Secured Lending Valuation?

A

A secured lending valuation report provides banks (and other lenders) with detail allowing them to make a more informed decision about whether a loan should be issued and on what terms

APC 2022 (5 decks)

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