Author: Wellers

When the recording artist Prince died without a Will in 2016, aged 57, controversy soon began surrounding the administration of his estate. Fast-forward almost five years and the storm is still raging as the IRS (Internal Revenue Service) has determined that the estate administrators’ original valuation of the estate was woefully low. In fact, the IRS has calculated that the estate was undervalued by approximately 50%.

This means that the federal tax bill on Prince’s estate could double and the IRS has also ordered an “accuracy-related penalty” to be levied due to a “substantial” undervaluation of assets.

Just not worth it

The figures in the probate dispute relating to the Prince estate are eye watering: the original estate valuation was $82.3 million, re-evaluated by the IRS as $163.2 million which will require a further $32.4 million in federal taxes to be paid alongside a penalty of $6.4 million. However, whatever the value of an estate, the story should serve as an unambiguous message that undervaluing an estate during the probate process is not a sensible thing to do.

Taxable estates in the UK run similar risk of penalties if not valued accurately and Her Majesty’s Revenue and Customs (HMRC) has the power to levy a fine of up to 100% of the additional Inheritance Tax (IHT) liable, as well as recovering the IHT at 40%. For example if a house is undervalued by £50,000, this could result in £20,000 additional tax liability and a possible fine of £20,000 on top.

Real estate is probably one of the easier types of asset to value; Royal Institution of Chartered Surveyors (RICS) registered valuers will carry out a “Red Book” valuation for probate purposes ( which may differ from an estate agent’s market value appraisal), but certain other assets are likely to be more challenging.

The problems with Prince’s estate stemmed from the difficulty in valuing his back catalogue and the associated music publishing and recording interests. For non-popstars, however, shares in private companies and similar investments can be problematic for valuation purposes. The value of shares for IHT purposes is calculated based upon the closing share price on the day of death.

Any valuation of such assets provided to the HMRC, should be as accurate as possible, as discrepancies are likely to be investigated by the Share Valuation Division.

Gifts and reliefs will also play a part

When calculating the tax payable on an estate, HMRC will also be concerned with any money or assets given away by the deceased in the seven years prior to death, and if any reliefs and exemptions from Inheritance Tax have been over-inflated this is also likely to be subject to scrutiny.

For instance, if a husband leaves his wife the entirety of his estate in his Will, when the wife dies checks must be made to ascertain the amount of inheritance tax nil rate band used on gifts/bequests made to non-exempt beneficiaries (such as their children), as this will affect the amount of transferable nil rate which can be claimed and, ultimately, the tax due on the estate.

Selling property at reduced value

If land or property is sold for less than the market value within four years of the death of the title holder to a person connected to the estate, HMRC can claim relief for the loss.

In the recent case of the Estate of Douglas Charles Thomas v HMRC [2020], an application was made by estate representatives to the  Upper Tribunal (Lands Chamber) for loss relief in respect of the sale of a piece of land to the deceased’s daughter and son-in-law.

The land had been sold for £500,000 which the HMRC claimed was significantly lower than the market value of £800,000. The Upper Tribunal considered the evidence and found that a reasonable valuation for the land at the time of sale would have been £645,000 – the claim for loss relief was therefore fixed at this amount.

This case highlights the need for correct valuations when selling property to connected persons and that any misevaluation is likely to be investigated. There is a legal obligation to accurately report the value of an estate and if a personal representative of an estate knowingly misleads the HMRC, there is a risk of criminal proceedings for fraud being brought against them.

What if property is overvalued during probate?

If land or property is valued for IHT purposes at the market value prevailing at the time of death and then it is sold for less within four years of the date of the owner’s death, the personal representatives can apply to the HMRC for a refund of any overpaid tax.

How to avoid an HMRC investigation

The HMRC carries out thousands of investigations annually into the valuations of estates for IHT purposes. While the Government obviously wishes to clamp down on tax dodgers, the vast majority of executors and personal representatives do not set out to defraud the HMRC and it is generally due to the complexity of the system that mistakes are made.

Many probate solicitors and tax specialists believe the current IHT system is overly convoluted, particularly in relation to time-limits on gifting, however, there no plans afoot to change the rules and the safest way to ensure that an estate is handled accurately and efficiently is to seek the advice of experienced probate lawyers and tax advisers.

Contact Wellers Law today.

Even apparently obvious or trifling clerical errors in a will or codicil may provide fertile ground for dispute and that is why it is so important to have such documents drafted by a professional. In a High Court case on point, a straightforward mathematical blunder came close to defeating a deceased scientist’s wishes.

By his will, the man divided his residuary estate – which was worth over £900,000 – into 52 equal parts. Six named individuals were each to receive six of those parts and the remaining 16 parts were to be distributed equally between eight charities.

By a subsequent codicil, however, he deleted the gifts of 12 parts to two individuals who had died before him. Four further parts were bequeathed to charity, but the end result was that only 44 of the overall 52 parts were allocated. The remaining eight parts were worth over £140,000 and the executor of his estate launched proceedings in order to resolve doubts as to what should become of them.

Ruling on the matter, the Court noted that the terms of the codicil created an evident mathematical inconsistency with the will. That had the potential to create a partial intestacy by removing the eight unallocated parts from the scope of his will. In that event, they would fall to be distributed to his next of kin. The Court, however, found that such an outcome would not reflect his true intentions.

The Court found it unlikely that, having taken the trouble to make a detailed will which, on the face of it, provided for the distribution of his entire estate, he would have intended the codicil to create a partial intestacy. The likelihood was that the mathematical mismatch arose from a simple clerical error.

That conclusion was supported by close analysis of other documents – including a previous will – that had been created during his lifetime. The Court exercised its powers under Section 20 of the Administration of Justice Act 1982 to rectify the will so as to delete the words ‘fifty-two parts’ and replace them with the words ‘forty-four parts’. That amendment, the Court found, resulted in the whole of his estate being distributed under the terms of his will and in accordance with his wishes.

The much-criticised practice of some landlords and their agents of excluding those in receipt of state benefits from obtaining private rented accommodation has been effectively outlawed by a judge’s ruling on the basis that it amounts to indirect disability discrimination.

The case concerned an energetic and determined young man who wished to provide for his large family but who suffered from physical and mental disabilities, including an emotionally unstable personality disorder. He and his wife received state benefits, including housing benefit, which totalled over £2,400 a month. Living with a relative in very cramped conditions, he was desperate to find a new home to rent and identified three suitable properties that he could easily afford.

After he telephoned a letting agency, however, he was informed that none of the properties would be let to people on benefits and that it was company policy ‘not to accept DSS’, an acronym which refers to the long-defunct Department for Social Security. With the backing of housing charity Shelter, he launched proceedings against the agency under the Equality Act 2010 on the basis that it had operated an unlawful and discriminatory policy, criterion or practice (PCP).

Upholding his claim, the judge accepted his account of what was said during the phone call and noted that one of the properties had been advertised using the words ‘no pets, no smokers, no DSS’. The agency would have been aware from the trade press of controversy surrounding ‘no DSS’ policies and that they disadvantaged disabled people disproportionately.

Although the relevant PCP was applied to all the agency’s prospective tenants, statistics put forward by Shelter starkly underlined its particular impact on disabled people, who are between three and five times more likely to claim housing benefit than non-disabled people. They are thus also three to five times more likely to be excluded by ‘no DSS’ policies from obtaining private tenancies.

The man had suffered considerable distress following the phone call. He felt written off and disrespected because he was in receipt of state benefits. He considered that a lesser value had been placed on him as a human being than on others who receive their income by way of salary, trust fund or parental support. The judge ordered the agency to pay him £6,000 in damages to reflect the injury to his feelings.

If you feel that your neighbours’ building plans will impact on your views or otherwise harm your enjoyment of your home, you should not hesitate to consult a solicitor. In one case, a couple who did just that succeeded in blocking construction of a strikingly modern house on land adjoining their garden.

The couple’s neighbours had obtained planning permission for the new house in the garden of their existing home. However, the title deeds of their property contained a restrictive covenant dating back to 1874. It dictated, amongst other things, that only one house could be built on their land. They applied to the Upper Tribunal (UT) to modify or discharge the covenant so that they could proceed with their project. The application was, however, resisted by the couple whose garden adjoined the proposed development site.

The neighbours said that the house had been designed by an architect to meet the needs of one of them who was in poor health. Built into a slope with a low-pitched roof, it would have a minimal visual impact on the existing neighbourhood. They pointed out that construction of modern homes in more traditional areas was becoming more prevalent.

The couple, however, said that it would overlook their garden, making it feel more enclosed, and impinge on their panoramic countryside views. Their peace would be considerably disturbed by the building works and by increased traffic movements thereafter. Having bought their home only recently, they had been reassured by the protection afforded by the covenant.

Dismissing the neighbours’ application, the UT rejected arguments that the covenant was obsolete. Despite its antiquity, the thrust of the restrictions it imposed were still very much alive in the 21st century. It continued to secure practical benefits that were of substantial value to the couple. The ruling meant that the neighbours’ building plans could not proceed.

Many rural homes obtain their supplies of fresh water from sources which lie beyond their boundaries and such arrangements can sadly prove fertile ground for dispute. A case in which a farmer and his niece were at odds over water rights showed the wisdom of seeking early legal advice so that such disagreements can be nipped in the bud.

The niece lived with her partner and young son in a converted agricultural building which had been bequeathed to her by her grandfather in his will. The property was served by a water pipe connected to a borehole on neighbouring land which was owned by her uncle.

A dispute developed after a tap was turned off, disconnecting the property from its water supply. The pipe was subsequently severed by the uncle’s workmen and not repaired. The niece and her family were as a result dependent on tanked and bottled water for about a year.

After the niece took action against her uncle, a judge found that the property was already connected to the borehole when it was conveyed into her grandfather’s sole name. He and any future owner of the property therefore had a right – or easement – to continue to draw water from the borehole. Turning off the tap and refusing to reconnect the water supply amounted both to a substantial interference with that right and a nuisance.

Given that probate in respect of her grandfather’s estate had yet to be granted, the niece did not own the property and her occupation of it was tenuous. The judge, however, noted that she had a reasonable expectation that she would become its legal owner in due course. Her occupation, which had been tacitly accepted by the executor of her grandfather’s will, was in any event sufficient to found her nuisance claim.

The judge made a formal declaration that the property is entitled to a water supply from the borehole and granted the niece an injunction to ensure that supply. Her uncle was also ordered to pay her £5,500 in damages to reflect the inconvenience she suffered whilst the property was deprived of piped water.

Home is where the heart is and the question of whether a property is your principal private residence for Capital Gains Tax (CGT) purposes depends, at least in part, on your intentions. An instructive case on point concerned a couple who made a house their home for only a few weeks before moving out again.

For a year after buying the house, the couple lived in rented accommodation whilst substantial renovation works were carried out. Whilst working in the property’s front garden, the man was approached by a stranger who offered to buy it. The couple turned him down more than once but, after he increased his offer, they eventually agreed to sell him the house at a handsome profit. The couple and their children lived in the property for only six to eight weeks.

The couple did not declare the gain generated by the sale on their tax returns. HM Revenue and Customs took the view that CGT was payable and raised demands against the couple totalling almost £24,000. They were also issued with penalties of more than £4,000 on the basis that the omission of the gain from their tax returns was carelessly inaccurate.

In upholding the couple’s appeal against those bills, the First-tier Tribunal found that that they were entitled to 100 per cent relief from CGT on the basis that the house was, albeit briefly, their principal private residence. They had intended that the property would be their family home, where they would live indefinitely, and they had only accepted the purchaser’s offer after moving in. The CGT assessments were reduced to nil and the penalties were cancelled.