S.160 IHTA 1984 says, except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expectd to fetch if sold in the open market at that time’. The exceptions do not include quoted shares and securities. So S.160 applies to quoted shares and securities.
HMRC’s HMTM18091 says The general valuation rule is that you will apply the price shown in the relevant Stock Exchange list.
IHTM18093 usefully refers to the difference between the value for inheritance tax and that for CGT. Notably, the ‘traditional’ basis for IHT omits any reference to ‘special circumstances [which make the closing prices not a proper measure of market value]’ [see Regulation 2(2) SI 2015/616]. It says -
'The valuation methods for Inheritance Tax (IHT) were traditionally used for Estate Duty, principally the ‘quarter up’ price of shares. From 6 April 2015, the method of valuation for CGT was changed by The Market Value of Shares, Securities and Strips Regulations 2015 (SI 2015/616). The value used for most CGT purposes is the figure one-half of the way up from the lowest to the highest closing prices of the day.
However, these regulations do not apply to IHT so the value used is still the quarter up price at the date of the chargeable event. The quarter up price is the figure a quarter of the way up from the lowest to the highest closing prices of the day, as listed by the various market makers.’
There is in fact no statutory basis for the quarter-up approach.
In practice, surely the amount for which quoted shares may be sold at any time will be the lower of the prices quoted, not something approaching the price at which they may be bought.
Are forum always members complying with HMRC’s quarter up basis?
I have always used the quarter-up basis when valuing quoted shares for IHT purposes. A stockbroker for whom I do a lot of Probate work uses the same basis.
So have I, but on thinking about it, I can’t see the justification. The definition of open market value looks to the amount that may be realised on a sale. If the closing price of a share is 100-104 a sale would not realise 101 gross; it would be 100.
The quarter-up valuation principle has been in place since before I started work – so has existed for over 50 years.
I recall seeking an explanation and was informed that as the price of shares can vary considerably during a trading day, it is necessary to adopt a standard formula that could be applied to the estate of anyone dying on a specific day, rather than try and identify the price of the last deal struck before the death of any particular individual. The quarter-up was to iron out the variations.
I suspect Jack might comment upon the fact that this appears to be an Inland Revenue dictat without statutory authority. However, it does provide a useful degree of certainty and simplicity when looking to value for IHT.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Equal certainty and simplicity would apply to the lower closing price. There is no rationale for adopting the closing prices, either as the lower or the 'quarter-up, ‘as the price of shares can vary considerably during a trading’ - so either is equally defensible.
As a separate point, if it is known that the death occurred when the market was closed, perhaps early in the morning, there seems little logic in adopting the closing price(s) of that day, rather than those of the previous day, S.160 refers to ‘the value at any time’, not ‘on any day’.
IHMTM18093 explains that the quarter up rule is “traditional” based on estate duty practice and has no statutory basis as evidenced by the 2015 Regs which are made under powers provided by TCGA and ITTOIA. As a defence it has no juridical basis.
It is on the same level as “no one has ever complained before”. Even a judge should see through these arguments and Counsel (should be) embarrassed to run them.
What this is represents is advance notification of a notorious settled practice. I have little doubt that HMRC has authority to do this (ss5-7 and Sch1 CRCA 2005). Presumably HMRC is so confident of their position that they have not sought powers similar to those enabling the 2015 Regs or a statutory amendment. They probably figure that it favours the taxpayer for IHT compared to the CGT rule of midway. But it constitutes in essence their pragmatic view of what they will accept in context as “open market value” in s160 IHTA. If that is challenged in any particular case they can only defend their view on that basis. It is likely to prove contentious because, if overturned, potentially disruptive. So actual litigation is a racing certainty.
Is it not the case that the two quoted prices are not respectively a selling and a buying price but two different prices during a single day of trading at which a bargain was struck in the real world? Each is therefore apparently open market value. (But even that might not be entirely accurate as it may be a synthetic price based on an average of actual bargains). On the face of it the relevant time for IHT is immediately before death/the moment of execution of the lifetime transfer subject to s266 IHTA, not the end of the trading day on which the event takes place. What if the event takes place out of trading hours, as opposed to a day when the market is closed per IHTM18092? Evidence would have to be adduced of the price related to an actual bargain made at the exact time or extremely close to it. Given great volatility on a single day there might be a material difference. As there might be if some external event before or after the trading day was likely to affect the price and if there was an off market trading facility.
As always Jack identifies the essential answer to my suggestion. That is, HMRC will assert ‘settled practice’, and certainly will be reluctant to accept a change from ‘quarter-up’ basis. There could be thousands wanting a refund of IHT, reduced by a lesser extra CGT liability.
I don’t think the closing prices are as Jack suggests. If that phrase is adopted I can’t see why they shouldn’t be the actual closing prices at the time the exchange closes. But of course the death will rarely be at that moment. A better figure would be a weighted average of the prices realised on sales in the day when death occurs. But such a figure might not be available. And it doesn’t address the value where death is when the exchange is not open; before and after the working day or weekends ad public holidays.
Perhaps any challenge to the accepted practice should be made where it is clearly inappropriate, and of course where the tax at stake is significant.