Lyon & Turnbull

Chinese Walls & Chinese Vases | John Sibbald | March 2014

The Valuation and Taxation of Personal Property 

“Be careful what you wish for.”
Old Chinese proverb

The past couple of years have seen a growing interest taken by HMRC in the assets of the wealthy including their chattels. As far back as 2004, the then Inland Revenue stated that it would be paying particularly close attention to the value of household and private items.  HMRC has become increasingly concerned that chattels have not been included in valuations or that they have been valued contrary to the statutory basis. HMRC has stated to ICAS and the Law Society of Scotland that they see wrong valuations as a major risk to the correct collection of IHT.

We have seen HMRC setting up various units focusing on the wealthy, such as The High NetWorth Unit founded in 2009 which has since brought in £500 million in extra tax. It is now intended that in addition to taxpayers with an annual income of more than £150,000 and wealth of between £2.5 million and £20 million, the unit will also cover those whose wealth is in the range of £1 million to £2.5 million.

While HMRC has  been inthe habit of doing spot checks on items valued at less than £500 in IHT accounts, the extraordinary powers of HMRC to delve deep into the individual lives of taxpayers is now enhanced by new computer software allowing HMRC to cross reference bank accounts, company ownership and property transactions.  In particular, it is now being used to analyse the 300,000 people a year who claim that their inheritance falls into the Nil Rate Band. While executors and beneficiaries are permitted to provide estimates of value themselves, the figures they submit must clearly now be more accurate than was acceptable in the past.   

The 1st of September saw new powers given to HMRC to allow access to debit and credit card companies records to analyse the number  and value of transactions by a particular UK business. Is it too  far-fetched to imagine these powers being extended to allow access to transactions by the individual?   Perhaps not so when you consider that HMRC is reported to be increasingly using Google Street View as a monitoring tool to spot major home improvements or expensive cars in the driveway suggesting someone is earning more than they state in their tax returns.  HMRC is also monitoring suspected tax evaders via social networking feeds, such as Twitter and Facebook. Not much evidence of Chinese walls in this scenario!

Furthermore, it is not just HMRC that takes an increasing interest in suspected cases of evasion. HMRC’s tax evasion tip-off hotline is currently receiving around 300 calls a day from concerned members of the public. These have amounted to 72,000 calls over the past twelve months. Although these calls do not appear to be recovering large amounts, inevitably someone will hit the jackpot one day!

Us of HMRC’s  formidable  new software may now be being put to good use to analyse  details submitted in IHT form 407 relating to household and personal goods and where there is a requirement for the inclusion, if they exist, of professional valuations of jewellery, antiques, etc. and, where any items are individually listed on a  deceased’s household insurance policy, for a copy of that policy and schedule.  Clearly one way of deflecting an investigation into a claim that the property falls within the Nil Rate Band would be to submit current professional valuations for property both real and personal. 

While in 2008/09, IHT raised £2.4 billion and a total of some 15,500 estates paid the tax, the freeze of the Nil Rate Band, since 2009, and now extended to 2018,  has contributed to a significant rise in the total of IHT revenue for HMRC with rising house prices, asset prices and inflation, pushing more estates into IHT. Figures currently show that the value of residential property assets on estates notified for probate (including those in the Nil Rate Band) increased by £31.3 billion to £33 billion between 2009-10 and 2010-11, a 6% increase and a significant source of additional revenue for HMRC. Grant Thornton forecasts the number of estates liable to inheritance tax will double from 21,000 in the last tax year to 42,000 in the  year 2016/17. The  effective level of IHT seems  only set to increase as time goes on, and this will increasingly have to be taken into consideration in estate planning exercises. 
 
The future is also likely to see a continuing fall in the number of people paying tax. It is currently, estimated that there are 2.5 million fewer people paying tax than a decade ago. There is consequently an increasing reliance on a narrowing pool of well-to-do taxpayers with assets at death one of the most sitting of targetable ducks. 

Driven by the perceived lack of trust in tax avoidance by business, the government’s increasingly strong focus on tax avoidance is now finding reflection in all sorts of unexpected places.  The CBI annual conference even saw the head of Sainsbury’s stating  “I disagree strongly with the argument of some that tax is not a moral issue."  Pity he didn’t get the message across to his successor Mike Coupe who has subsequently been revealed to be a member of a controversial tax avoidance scheme.  Personal taxation too has been targeted with prominent individuals being put in the public stocks and pelted with the screwed up copies of schemes devised by their professional advisers in a frenzy of parliamentary indignation.

Even the judiciary and tribunals appear not immune from the pressure of government and public opinion as borne out by Lord Walker’s comments in the Supreme Court in the Futter and Pitt appeals [2013] UKSC 26 where he refers to  “an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures.”

Commenting on the successful appeal by HMRC in Cotter v Commissioners for HMRC [2013] UKSC 69, the  Revenue stated  “HMRC is relentless in pursuing tax payers who participate in avoidance schemes”...   With The Disclosure of Tax Avoidance Schemes (DOTAS) and the General Anti Abuse Rule (GAAR) in their arsenal, HMRC appears to be in an increasingly strong position.  If success can be measured by the number of declared tax avoidance schemes then the sharp fall from 607 in 2005-06, to a mere 30 so far in the current fiscal year would appear to bear this out.

The Institute  of Directors has raised concerns as to the tenor of the government’s rhetoric on tax planning stating that “The Chancellor should …ensure that, despite the best efforts of politically motivated critics, tax compliance, tax planning, tax avoidance and tax abuse are no longer discussed as if they were a single concept.” The IoD has asked the Chancellor to “state clearly that authentic tax planning is perfectly acceptable and understandable for both businesses and individual taxpayers.”  Otherwise, it sees a danger that the government’s business-friendly agenda will be damaged and UK in bound-investment, economic growth and employment prospects will all be reduced. 
Meanwhile, in this moral maze, it becomes ever more important that the client and his advisors have the complete picture of all the assets under consideration to ensure adequate and acceptable long term protection where there may be a growing turn towards bespoke tax planning measures. In particular, this complete picture should include chattel assets, often not properly accounted for, and where these are likely to be of significant value  - with the obvious corollary of a current and up to date valuation reflecting any changes in market value. 

Experienced valuers are able to advise on the best way of presenting valuation information to meet HMRC requirements. HMRC’s Shares and Assets Valuation division, the unit which looks at IHT returns over which there may be a question, expects valuers to be able to identify noteworthy items. Although the usual practice is to supply less detail for IHT valuations than insurance valuations, SAV has suggested that it is often the case, that, if more information was provided initially, it would alleviate the need for SAV to raise questions at a later stage.

While it is now standard practice for insurance valuations to be fully illustrated, traditionally IHT valuations are not.  SAV has suggested that providing photographs of higher value items should also be considered. Although there is no threshold as such, SAV has suggested a guide value of £25,000, or over, or where commonsense may suggest that SAV might raise questions. Supplying supporting information and a photograph initially might satisfy any concerns and enable the value to be accepted without enquiry. 

The dangers arising from not monitoring the growing value of chattel assets were well illustrated in the Gaines-Cooper saga where the frequent reference to Gaines-Cooper’s accumulation of furniture, cars, wine, paintings and valuable guns ultimately contributed to the view that, despite spending fewer than 91 days a year in Britain, the “centre of gravity of his life and interests remained in the UK.” Ironically, under the new Statutory Residence Test (SRT) it may now be more difficult to relinquish UK residence

Such dangers were even more sharply illustrated a couple of  years ago when  a provincial auction caught the world’s news headlines by selling a Chinese vase for an eye watering £51 million. The vase had been used as a bookend on a dusty shelf in a three bed room semi in Pinner. But, even if,  as result of the original buyer reneging on his bid, the vase subsequently resold for about half the first auction price, its original valuation for probate purposes at £800 will have left the estate with some serious explaining to do.

While HMRC’s Shares and Asset Valuations division recognises that competent valuers may often differ as to what the value of a particular item might be, it would, nevertheless, expect the sale price of an item sold shortly after the valuation date to be an effective test of that valuation.  Even if the client may secretly wish for a Chinese vase experience, he will be in much stronger position, if a less exciting one, if he arms himself with an accurate and up-to-date valuation.  Able to take sound tax planning steps, he will earn the gratitude not only of his descendants, lawyers, accountants, insurers and valuers, but of HMRC too!

John Sibbald writes and speaks regularly on issues relating to valuation and taxation for Lyon & Turnbull for whom he also acts as a valuer specialising in Rare Books and Manuscripts. He is a member of HMRC’s Chattels Valuation Fiscal Forum.

 

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