A owns a property as TIC in equal shares with B. The property needed substantial renovation and B agreed to pay for this subject to the parties entering into a declaration of trust recording that the first £100k (the cost of the renovation works) is repayable to B and the balance then split 50/50. With the declaration completed, B enters into a contract for the work to be carried out. He pays £20k for the initial works with a balancing £80k due in stages later on. A has now died before the work is completed.
The estate will be liable to IHT. How would forum members consider valuing A’s share?
Brewer Harding & Rowe
I have a matter at the moment where a similar problem has arisen. Mum had entered into a building contract to have work done on daughter’s house, in the expectation that Mum would be going to live there. The building works included substantial improvements and it was expected to be a 6 month build. Mum died 4 weeks into the contract.
I believe the intended improvements would be included in Mum’s estate, being either a GWROB or a gift within 7 years of death. I have asked an agent to value the likely increase in the value of the property as a result of the improvements and then discounted that value by 10% to reflect the fact that the work had not been completed. I think this is the value of the gift as at the date of death. In your case, I think that A’s estate would include 50% of the expected increased value of the property, discounted by 10%, (further discounted for joint ownership) and then subject to the deduction of £50,000 (half £100,000) owed back to B.
I thought that the value of uncompleted building works should be subject to a discount similar to what you would get buying a property off plan, but the agent told me you don’t get much of a discount these days. I haven’t submitted the IHT400 as yet so I don’t know what HMRC’s view is. I have deducted the outstanding costs due to the builder as a liability against Mum’s estate. If anyone thinks I should be dealing with it differently, please let me know!
Amanda I can see why you have approached your case in the way you have. In my case the contract with the builder was not made by the deceased. My initial view was to take the payment already made off the whole value, divide by 50% and then a further 10%. This would not allow a deduction for the further work but this was not completed at death and strictly speaking not a liability of the deceased.
Any alternative views?
Brewer Harding & Rowe
I can understand your approach, as a snapshot as at the date of death. However, B has entered into a legally binding contract to spend £100k on the property and A’s estate presumably includes the benefit of that arrangement as well as the liability under it. When you say 50% of the whole value, do you mean the whole value as at the date of death, with the building works part completed, or the value prior to the works being started?
In my case, the cost of the works exceeds the increase in value to the daughter’s house (since many of the works were adaptations for a disabled person) so it suits me to treat the pluses and minuses as I have and that may not be the case for you. Also, of course, in my case the property being improved is not in the estate so it is different from your case. However, I don’t think you can ignore the future obligations of both parties.
Yes I was thinking 50% of the whole at date of death with the building works part completed.
Before the work was started the property was worth circa £400k and the expenditure of £100k would probably bring the value up to £550k.
The Declaration of Trust requires B to receive the first £100k on sale. This was done to reflect the monies he was putting in. Going forward its academic as B inherits A’s share.
Based on my method £400 - £20 = £380/2 = £190 - £19 = £181k for the half share.
I think the alternative of valuing with the benefit and burden of the contracted work is £550 - £100 = £450/2 = £225 - £22.5 = £202.50k for the half share.
Brewer Harding & Rowe
I must say I think the alternative with the benefit and burden of the works is the correct one. I don’t see that you can value the property at its pre-work value, and deduct the expenditure already made, without acknowledging the corollary of the contract, which is the likely increase in value, discounted because the works aren’t completed. So, start with £400 plus 90% of the expected increase, £135,000, ie £535. Less £100= £435/2 =£217.5 x90% = £195.75.