Probate house valuation error means unnecessary CGT?

richyhill

Hi there,

Please help - I've been a complete idiot.

My grandfather passed away, leaving his house and his small bank balance entirely to my dad (with him as the executor of the will). My dad's easily confused by this stuff, is was struggling with his loss and money is tight, so I "helped" him fill in the application for probate.

We received two valuations on the house (with quite the range!) of 150k and 200k from two different estate agents. Either one of those valuations would have been absolutely fine for the probate form in terms of inheritance tax as that's essentially the whole inheritance (i.e. nowhere near the IHT threshold). But, as an ignorant idiot, I used the lower valuation on the probate form in some vague attempt to ensure no inheritance tax was paid.

The probate has been granted with the lower figure for the valuation. It is now six months after my grandfather died, a month after receiving the grant of probate, and he now has an offer on the house for 225k. I've just realised that this now means the estate will be making (on paper!) a "profit" of £75 which will be liable to a capital gains tax bill of around £14k!

Is there anything I can do to remedy this situation? Objectively, it's difficult to conclude that the house has actually gone up in value 75k in six months time. But that's what probate says and I'm terrified I've landed my father a £14k tax bill completely unnecessarily due to my own stupidity. Can I "fix" the probate form with a figure closer to the reality? Can I argue this with HMRC with regards to the CGT?

Has anyone done something similarly problematic and found a way out?

Yours, scared son.

poppystar

There is a means of having it reassessed but it can take months to be looked at  (according to the CGT people) and the CGT will have to be paid in the meantime.

Don't kick yourself too much. The range of valuations I had were £100k from lowest to highest so I thought I’d go down the middle but once prices started to rise like crazy I also ended up with a CGT liability as have many others over the last couple of years. It was a lesson learnt (not that I’ll ever be in a similar position again) but I paid up rather than take on a fight I couldn’t face at that stage. Think of the extra gained rather than the tax paid, you did what you thought was best and were helping your father.

theoretica

poppystar said:

 Think of the extra gained rather than the tax paid, you did what you thought was best and were helping your father.

Exactly - he will be getting about 210k, after tax, rather than the 150k that you were happy with as a probate value.  Try to focus on the £60k gain! 

BooJewels

I'm in a similar position too - used the lower valuation - purely because we felt it was actually the most realistic - we were over half a million inside the thresholds, so there was no IHT advantage. Then the Government did that thing with stamp duty thresholds and the housing market went bonkers and we sold for £20k more, so have a bit of CGT to pay.  I think many will find themselves in the same boat at the moment.

I suspect this is why it works as it does - it levels the playing field by removing the temptation to undervalue for probate, for those for whom it might be advantageous.

Thrugelmir

richyhill said:

 Can I argue this with HMRC with regards to the CGT?

To argue you should obtain substantive evidence first. A RICS surveyors valuation report for probate purposes for example. 

BooJewels

Indeed @theoretica and @poppystar - we don't mind paying the CGT (as long as I can get the right blasted form, that is), as we're still £19k+ up on where we expected to be!  I'd like to be paying lots more CGT, truth be told. 

He'd still be paying a couple of grand CGT just by the uplift in house prices of the 25k.

richyhill

Thanks for the replies so far. To be clear, I'm all for paying the appropriate taxes. But in this case, the 175k valuation six months ago was clearly wrong. Honestly, the lady who came round barely looked at the property. But I didn't think much of it because it was so far below the inheritance tax threshold it didn't seem to matter. But then I finally clocked on to capital gains tax (not something we've ever had to worry about before!) and I feel sick.

I'm not even sure my calculation above was correct. I believe the estate is taxed at a flat 28% which would make the CGT payable at nearly £20k compared to about £3k if I'd used the other valuation (£225k).

I wonder if I was to indeed get a RICS surveyors valuation report (as @Thrugelmir suggests), for the date my grandfather died whether this would be enough to appease HMRC (particularly as the valuation I used on the probate form was flimsy at best being from an estate agent - again, I'm an idiot, but I just didn't think it mattered) :-(

Thrugelmir

Did you ask the Estate Agents for probate values or a price to market the property at. Value is a subjective area.  Property values can be low but the redevelopment potential large. 

richyhill

Other valuation being £200, not £225 I mean.

If the "proper" RICS report was to agree with the estate agent's £150k then that's fair enough. But I'd obviously much rather pay the CGT based on the actual value increase rather than my half-hearted estate agent's valuation. Again, I take full responsibility for not taking this more seriously on the probate form. I just didn't think it mattered as there was no inheritance tax to pay at all.

The reason I'm stressed as this is life-changing money for my father and to think I've thrown £15k+ away completely unnecessarily has left me devastated.

richyhill

Thrugelmir said:

Did you ask the Estate Agents for probate values or a price to market the property at.

The estate agent wrote that they thought the current valuation was £150k and should be put on the market as "offers over £150k". Neither was explicit. I was aware that it's recommended to get a "proper" assessment I just thought it unnecessary when the property value was so far below the inheritance tax limit that it was irrelevant. We've never had to pay CGT on anything before so it's not something obvious to my family I'm afraid.

BooJewels

richyhill said:

I'm not even sure my calculation above was correct. I believe the estate is taxed at a flat 28% which would make the CGT payable at nearly £20k compared to about £3k if I'd used the other valuation (£225k).

If the uplift in the value is £75k - then the CGT payable would be around £16,156 by my back-of-an-envelope calculation - and assuming that I understand it correctly myself.

You take the increase in value - £75k - knock off any selling costs or alterations that increase the value, then you have an estate allowance of £12,300 and you pay 28% on the balance.  So if your only costs are the conveyancing costs, say for example £5k - it would be £75,000 - £5,000 - £12,300 = £57,700 x 0.28 = £16,156.

If you'd used the higher valuation of £200,000 - that would be an uplift in value of £25k - so £25,000 - £5,000 - £12,300 = £7,700 x 0.28 = £2,156.

It sounds like you did much the same as us, used a lower valuation in good faith and due to an uplift in house prices, or whatever in the intervening period, are now faced with a CGT bill.  I think you maybe have to take this on the chin as an honest mistake - or just a change in the market.  Our reaction at the initial valuations was "phwoar, that would be alright if we got that much, but we won't" and we got £20k more.  Had we gone with the higher valuation we wouldn't be paying any CGT now - but that didn't feel especially honest at the time, as we really didn't think the house was worth that much and we actually got grief from another family member who thought we were being greedy when using such big numbers in the first instance.

I too didn't truly understand the principles involved and had I grasped it fully at the time, would have used the higher valuation for Probate - but I didn't, so I have to suck it up and pay the bill.  But at the end of the day, we're still most of £20k better off anyway, so it feels churlish to complain about it.  Your Dad will still inherit around £200k, so that's still life changing and he's not having to split it with a dozen other beneficiaries.