Fair Market Value of Inherited Property

How to determine fair market value of inherited property?

Determining the fair market value of inherited property involves obtaining a professional valuation from a RICS surveyor, comparing appraisals from multiple estate agents, researching recent sales of comparable properties, and using online valuation tools as a supplementary resource.

What is Fair Market Value?

Fair market value (FMV) represents the price a property would sell for on the open market between a willing buyer and seller, both having reasonable knowledge of relevant facts and neither being under pressure to complete the transaction.

Key Characteristics

  • Based on the property’s condition and market conditions at the date of death
  • Represents an arm’s length transaction value
  • Considers the highest and best use of the property
  • Takes into account any factors that would influence market price

Importance for Inheritance Purposes

Accurate valuation of inherited property serves several important functions in the estate administration process.

Inheritance Tax Assessment

  • Inheritance Tax (IHT) is calculated based on the total value of the estate
  • Property often represents the largest single asset in many estates
  • Accurate valuation ensures correct tax is paid
  • HMRC may challenge valuations they consider unrealistic

Capital Gains Tax Implications

  • The value at date of death becomes the new acquisition cost (or “base cost”) for capital gains tax purposes
  • This is known as the “uplift” in basis
  • Future capital gains or losses are calculated from this new base
  • Accurate valuation is therefore crucial for future tax calculations

Distribution Among Beneficiaries

  • Fair valuation ensures equitable distribution when multiple beneficiaries inherit
  • Particularly important when some receive property while others receive cash
  • Can help prevent disputes between beneficiaries
  • Forms the basis for offsetting arrangements

Valuation Methods

Several approaches may be used to establish fair market value for different types of inherited property.

Residential Property

  • Comparative Market Analysis: Examining recent sales of similar properties in the same area
  • Professional Estate Agent Valuations: Multiple opinions from local agents familiar with the market
  • RICS Formal Valuation: A detailed report by a chartered surveyor
  • Online Valuation Tools: Can provide a preliminary estimate but not sufficient for tax purposes

Commercial Property

  • Income Approach: Based on the rental income the property generates
  • Replacement Cost Approach: Value based on cost to replace the building minus depreciation
  • Sales Comparison Approach: Similar to residential comparative analysis
  • Professional valuation by commercial property specialists is typically required

Land and Agricultural Property

  • Agricultural Land Values: Based on land classification, location, and potential uses
  • Development Potential: Additional value if planning permission exists or is likely
  • Business Relief Considerations: May affect valuation for tax purposes
  • Specialist agricultural valuers typically required

Special Collections and Valuables

  • Professional Appraisals: From auction houses or specialist dealers
  • Insurance Valuations: May provide a starting point but typically above market value
  • Recent Sales of Comparable Items: Particularly relevant for art, antiques, or collectibles
  • Specialist Knowledge: Essential for unusual or rare items

HMRC Requirements

HM Revenue & Customs has specific requirements for property valuations for inheritance tax purposes.

Official Guidelines

  • Valuation must represent the price the property might reasonably fetch if sold on the open market
  • Valuations should be carried out by qualified professionals
  • HMRC recommends obtaining a professional valuation for properties likely worth over £500,000
  • Valuation must reflect the property’s condition and circumstances at date of death

IHT Form Requirements

  • Form IHT405 for houses, buildings and land in the UK
  • Supporting documentation should be retained, including:
  • Professional valuation reports
  • Evidence of comparable sales
  • Details of any factors affecting value

HMRC Challenges

  • HMRC’s Valuation Office Agency (VOA) may check property valuations
  • Challenges typically occur when values appear artificially low
  • HMRC has up to 4 years after submission to challenge valuations (or 6 years if they suspect negligence)
  • Professional valuations provide stronger defense against challenges

Special Considerations

Various factors may affect the fair market value of inherited property.

Property Condition

  • Disrepair may significantly reduce value
  • Presence of issues like subsidence, dry rot, or outdated wiring
  • Environmental factors such as flood risk or contamination
  • Documentation of condition at date of death is important

Shared Ownership

  • Partial interests in property are typically discounted
  • Co-ownership may reduce the proportional value due to lack of full control
  • Different rules apply for joint tenants vs. tenants in common
  • Professional advice essential for complex ownership structures

Occupancy and Tenancies

  • Sitting tenants may reduce property value
  • Lease terms and rental income affect valuation
  • Rights of occupation by family members may impact marketability
  • Formal and informal arrangements should be documented

Development Potential

  • Existing planning permissions may increase value
  • Potential for future development should be considered
  • Restrictions on development (listed status, conservation areas) may decrease value
  • Local planning policies may affect development potential

Professional Help and Costs

Engaging professionals for accurate property valuation is typically a worthwhile investment.

Who to Approach

  • Chartered Surveyors (RICS qualified): For formal “Red Book” valuations
  • Estate Agents: For initial market appraisals
  • Specialist Valuers: For unusual properties or assets
  • Tax Advisors: For understanding tax implications of valuations

Typical Costs

  • Basic estate agent appraisals: Often free or minimal charge
  • RICS homebuyer reports with valuation: £400-£700
  • Full RICS building survey with valuation: £600-£1,500
  • Specialist valuations: Variable depending on property type and complexity

Cost vs. Benefit Analysis

  • Professional valuation fees are typically deductible from the estate for IHT purposes
  • Potential tax savings often significantly outweigh valuation costs
  • Accurate valuations reduce risk of penalties for incorrect IHT calculations
  • Professional reports provide evidence if beneficiaries later sell at different values

Practical Steps for Executors

Executors and administrators should follow a structured approach to property valuation.

Initial Assessment

  1. Document the property’s condition with photographs and notes
  2. Gather relevant property documents (deeds, leases, planning permissions)
  3. Research local market conditions at date of death
  4. Consider any unique factors affecting the specific property

Professional Valuations

  1. Obtain multiple valuations for significant properties
  2. Ensure valuers understand the purpose is for probate/inheritance tax
  3. Request written reports with supporting evidence
  4. Question any significant discrepancies between valuations

Record Keeping

  1. Maintain all valuation reports and correspondence
  2. Document reasons for accepting particular valuations
  3. Keep evidence of comparable properties and sales
  4. Retain records for at least 5 years after IHT settlement

Communication with Beneficiaries

  1. Keep beneficiaries informed about valuation processes
  2. Explain the distinction between probate value and potential sale price
  3. Manage expectations about timing if property will be sold
  4. Document agreements if some beneficiaries will receive property while others receive cash
Learn More About Inheritance Articles