ACCA ATX UK Syllabus A3. Inheritance Tax - Principles of valuation - Notes 1 / 3
Valuation rules
Principles
Generally assets are valued at their open market value, but there are other rules that often need to be applied.
Valuation rules for quoted shares and securities
Quoted shares and securities including investment trusts, open ended investment companies (OEICs), gilts, venture capital trusts (VCTs) and real estate investment trusts (REITs).
The market value at the time of the transfer is the lower of:
Method one – 1⁄4 up method
This method is used when there are a range of values given.
The lower quoted value plus one-quarter of the difference between the lower and the higher value.
Lower value + 1⁄4 (Higher value - Lower value)Method two – average method
This method is used when recorded bargain prices are given.
Take the higher and add it to the lower and take the average value by dividing by two.
Average Value = (Higher value + Lower value) / 2
Illustration
Harry died on 5 October 2024 he left his £1 ordinary shares in Peel plc to his two children.
Harry owned 100,000 £1 ordinary shares in Peel plc a quoted company with an issued share capital of 10,000,000 £1 ordinary shares.
On 5 October 2024 the price for these shares was quoted at 200–208 pence per share.
On 5 October 2024, the mid recorded bargains were 200p, 203p, 207p per share.
What value should be included in the death estate for the shares in Peel plc?
Solution
Lower of:
1/4 up method:
200 + 1⁄4 x (208-200) = 202pMid recorded bargain method:
200p+207p/2 = 203.5pTake the lower value of 202p.
Death estate value £2.02*100,000 = £202,000.
Foreign property valuation
Individuals who are UK domiciled must pay IHT on their UK and foreign assets.
The foreign property is valued using professional valuation and then converted into sterling.
The value of the property can be reduced by administration expenses limited to a maximum of 5% of the property's value.
Illustration
Jake owned a piece of land in Barbados and on his death it was valued at £45,000.
Administration expenses amounted to £5,000.
What amount will be included in his death estate?
Solution
Value of land £45,000
Less admin expenses (5%*£45,000) = £2,250
Value £42,750Note, even though the administration expenses amounted to £5,000, the maximum that could be deducted was (5%*£45,000) = £2,250.
Related property rules
Who is classified as a related party?
Property is “related” to the donor’s property if it is part of the same asset owned by:
1) The donor’s spouse (or civil partner).
2) An exempt body as a result of a gift from that person or the spouse.
An exempt body means a qualifying charity and qualifying political party.
Property held by the exempt body is deemed to be related:
1) For as long as the body owns the asset and
2) For five years after they have disposed of it.
When property is deemed to be related property, and it is being transferred, then a formula must be used to calculate the value of the transfer:
((Value of individual share/Value of individual+Value of related property share) * Total value of related parties combined share)
Illustration
Harriet owns three antique plates which are part of a set of six.
Harriet’s husband owns two plates and her son owns one plate.
The plates are currently valued as follows: £
1 plate £1,000
2 plates £2,200
3 plates £3,800
4 plates £6,000
5 plates £10,000
6 plates £20,000
If Harriet gives her son one plate on 1 January 2025 as a wedding present what is the value of the PET before deducting relevant IHT reliefs.
Solution
In order to calculate the value of the PET, the diminution in value principle must be used.
Before she makes the gift Harriet has 3 plates and afterwards she has 2 plates.
When determining the value before and after we must also include the plates owned by her husband a related party
The value of the PET is £3,333, calculated as follows:
Before transfer:
Harriet 3 plates
Related party (her husband) 2 plates
Total 5 plates
After transfer:
Harriet 2 plates
Related party (her husband) 2 plates
Total 4 platesValue of Harriet’s three plates before she makes the gift:
((Value of 3 plates/Value of 3 plates + Value of 2 plates)) * Value of 5 plates
((£3,800/£3,800+£2,200)*£10,000) = £6,333
Less:
Value of Harriet’s two plates after she makes the gift:((Value of 2 plates/Value of 2 plates + Value of 2 plates)) * Value of 4 plates
((£2,200/£2,200+£2,200)*£6,000) = £3,000
Therefore:
Value before £6,333
Less value after (£3,000)
Value of transfer £3,333
Related property rules for shares
In respect of shares, the valuation is determined by the number of shares the individual holds in relation to the total number of shares (inclusive of related property) multiplied by the combined valuation.
Remember the principle of value before less value after.
Illustration
On 15 June 2024 Joan gave 20,000 of her 40,000 ordinary shares in Rouen Ltd, an unquoted trading company to her son Michael.
Rouen Ltd has an issued share capital of 100,000 ordinary shares.
Joan’s husband also owns 40,000 ordinary shares in the company.
On 15 June 2024 the relevant values of Rouen Ltd shares were as follows:
100% £22.30
80% £17.10
60% £14.50
40% £9.20
20% £7.90
Joan purchased her 40,000 shares in Rouen Ltd during 1993 for £96,400.
What is the value of the PET for IHT of the gift made by Joan on 15 June 2024 before all IHT reliefs?
Solution
The market value of the lifetime gift (PET) is computed by determining the diminution in value of her estate.
Before
Joan 40,000
Husband 40,000
Total 80,000 shares at £17.10After
Joan 20,000
Husband 40,000
Total 60,000 at £14.50Value before
40,000 * 17.10 = £684,000
Value after
20,000 * £14.50 = (£290,00)
Value of PET £394,000
Unit Trusts Valuation
Unit trusts are valued at the lowest bid price.
Do not use the 1/4 up method for valuation.
Illustration
Jimmy owns 5,000 units in Growing Unit Trust. At the time of his death, they are quoted at 125p-133p.
What is the value of the unit trust for IHT purposes?
Solution
5,000 units * 125p = £6,250