RURAL REPORT

Valuations: Your questions answered

Alice Huxley, a member of Knight Frank’s Rural Valuations & Advisory team, kicks off her new column in The Rural Report by answering some of the common conundrums she and her colleagues are often asked about by clients
Written By:
Alice Keith, Knight Frank
7 minutes to read
Categories: Rural Report rural-property-markets

Do I really need a formal RICS ‘Red Book’ valuation for probate purposes?

Probate can be a very drawn out process and is often rather overwhelming during what is already a very difficult time. Professional advisers always stress the need to think about tax matters well in advance because effective planning requires a holistic approach with input from your accountant, solicitor and a RICS-registered valuer to ensure one can make the best use of the tax reliefs available.

Consideration should also be given to how the property is held and used in order to ensure it is eligible for such reliefs. Rural estates and farms are generally not straightforward,with multiple types of assets and uses. This is a where a professional valuation becomes a key part of the executor’s toolkit.

A valuation can help determine not only market value, but the apportionments of value required for claiming reliefs, such as agricultural value. Should HMRC query the application for probate, they instruct a District Valuer (DV) to assess the values. The presence of a professional valuation report within the application means that the DV is immediately able to understand the context of the valuation and process followed, which should either resolve the query or at least reduce the number of questions – thereby expediting a potentially lengthy process.

The professional valuation can therefore be used as part of the tax-planning process, and then updated to be included in the application for probate. The other benefit of planning ahead means that your estate is in order and your intentions are clear, thus avoiding any potential confusion or conflict. This will help your executors no end.

We are selling our large farmhouse with extensive gardens, stables and paddocks of about 25 acres. I have been told that I may need to pay Capital Gains Tax (CGT). Is this correct?

For many, the disposal of their principal private residence (PPR) will be free from CGT. The relief is available on the gains made on the disposal of the dwelling house and its gardens and grounds, which were used for the occupation and enjoyment of the dwelling house as a residence (‘permitted area’). The ‘permitted area’ accepted by HMRC is up to 0.5 of a hectare (about 1.23 acres).

Any land and property outside the ‘permitted area’ is subject to CGT. If it is used for agriculture or for business purposes, this generally precludes relief. However, a paddock or an orchard should not necessarily be excluded (unless there is significant business use) and there are instances that may justify a larger ‘permitted area’ if it can be demonstrated that additional land or buildings are ‘required for the reasonable enjoyment of the property’.

The Valuation Office Agency advises that ‘enjoyment’ simply means possession without contested claims from third parties, however the High Court and tribunals have interpreted this as ‘necessary’, rather than merely desirable. It is also important to note that as of 1 April 2020, HMRC requires UK resident individuals (as well as non-resident individuals and companies) to submit CGT returns, and pay any CGT due within 30 days of completion of the sale.

"As of 1 April 2020, HMRC requires you to submit Capital Gains Tax (CGT) returns, and pay any CGT due, within 30 days of completion of a sale"

_Alice Huxley, Associate, Rural Valuations and Advisory

This is a significant change. It is therefore prudent to obtain advice on the likely permitted area achievable and subsequent apportionment of value on which tax will be payable prior to any disposal in order to meet this timescale. Such advice can be updated once the sale price is known.

As a final point, details of the purchase price if post 31 March 1982 or a valuation of the property at 31 March 1982 if acquired prior to that date will also be required.

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We are looking at selling our property, a diversified farm with a number of converted buildings that were opted to tax. Is this going to impact on the saleability?

When carrying out new construction works many will often choose to elect to charge VAT, so that they can recover the VAT input tax incurred. The extent can be limited to the specific building, rather than the whole property. Be aware that following the initial six months – an option to tax can only be revoked after 20 years, except in limited circumstances, for example where the building is demolished. If the property is being sold as a business, then it should be treated as the transfer of a going concern and therefore VAT should be recoverable.

This changes if the property is in private ownership and is just being sold as an asset. If the property is being purchased by a company, that company can ultimately recover the VAT it has been charged. A private individual, however, cannot generally recover any VAT incurred on their costs. The VAT on costs incurred is not therefore a cashflow problem (as with a business waiting for its tax return), but a direct cost.

Depending on the size of the property, and the area that is opted to tax, it may restrict marketability of the property. It is key to ensure that if you have opted to tax, you are clear about the extent of property that is being opted and obtain an estimate of the apportioned value. This will help purchasers identify the potential VAT liability at the outset, which in turn will reduce complications and delays.

We have spent a lot of money on our equestrian property and now want to sell. But the valuation isn’t quite as high as we expected

This is the age-old problem of how to increase the value of one’s property without over-capitalising. It is a personal decision for any property owner as to what they spend on enhancement and other works, but costs do not necessarily create enhanced value.

This can be because the works are relatively specific to the owner’s personal needs – and therefore can affect the marketability – but usually it is because the cost of enhancement is over and above the increase in market value, particularly when using high-quality materials. Many owners will accept this position if it is their long-term main residence, and the use and enjoyment of new or high-quality facilities is more ‘valuable’ to them than a profit-making exercise.

However, if a sale is on the horizon then this is not the time to over- capitalise. Here are some options that can add value:

The Basic Fundamentals – These are the elements that can be taken for granted, but if they are not present they affect the functionality of the property. This may not necessarily deter purchasers but may encourage ‘negotiation’ room on price. For an equestrian property these would include having working field troughs in every paddock, ensuring careful stocking rates to avoid poaching, having safe secure fencing and ensuring good drainage to enable year-round turn out.

Versatility is Key – Try to make specialist facilities as versatile as possible. This can include the building height, layout and design, which may suit your needs, but could also easily be adapted for potential other uses.

Presentation – This is the easiest way to create a good impression. Even the basics of a tidy and organised yard with freshly mown lawns will be received  far more positively than a haphazard set up. Regular maintenance, such as a programme of redecoration to ensure the property is kept in good condition, will avoid a reduction in value to account for repairs.

Size Matters – The ratio between facilities and land available is very   important, particularly for equestrian properties. If the property is short on acreage then, if possible, consider acquisition of more land in order to widen the appeal. To purchase neighbouring land you may well pay a premium over market value, but such a premium may well help the overall sale with provision of an enlarged acreage.

Statutory Consents – Makes sure all necessary permissions for buildings and uses are in place or, if not, consider a timely application for a Certificate of Lawfulness. Additionally you could consider if a relatively inexpensive planning application for a new facility may add value.

If you would like to find out more about the matters discussed or any other valuation issues please contact Alice Huxley, alice.huxley@knightfrank.com