We all know the value of taking timely professional advice – and particularly around valuations and tax. But life is busy, families have many priorities and it’s easy to put this off for another day. After all, surely this is a private matter for the family? Sadly, failing to act might mean that HMRC raises the conversation that you haven’t quite got round to.
Failing to Take Advice Can Risk the Family Legacy
A few years ago, I had a call from a lawyer updating their client’s will. The client was a talented individual in the creative industries and the family wanted to preserve their legacy – possibly via a Foundation that maintained the family collection, put on free events and funded the next generation of creators. One day a family friend had suggested over lunch that moving their collection to a company that the family controlled would be a tax-efficient way of keeping the assets together and preserving the legacy.
The family followed this incorrect suggestion and moved all their major assets into the newly created company. The sale each time was valued at £1, far below the market value. The lawyer was concerned this was too good to be true and advised their client to obtain formal tax advice. At the heart of this advice was the question of valuation.
The assets should have been sold to the company at market value. However, as none of them had ever reached the open market and they were somewhat unique, there was little data on what the value should be. In the meantime, HMRC – who have a significant in-house valuations team – would soon be receiving a voluntary disclosure where a central question was the one of market value. Without a clear answer from the clients, there was a danger of a lengthy dispute with HMRC and if the tax bill was higher than anticipated then several key family assets would have to be sold quickly and the family legacy broken up.
An experienced valuer found via a major auction house undertook a 6 month valuation exercise covering both tangible and intangible assets, including complex licensing and reproduction agreements. HMRC accepted the detailed valuation report, but the experience was extremely stressful and could have been avoided if the client had received valuations for insurance purposes more regularly. After all, if you know an asset is worth £300,000 then you probably also know that it’s too good to be true to try and transfer it for only £1 for tax purposes. Without that context the family could not have realised that they were being mislead by a well meaning friend giving advice for free – and nearly lost their family legacy.
The Importance of a Paper-Trail
More recently, I’ve seen HMRC question a patriarch’s large scale jewellery disposals. Tastes change, and jewellery acquired 60+ years ago was no longer attractive to the younger generation. The patriarch sold the pieces and re-invested the funds in environmental projects close to the younger generation’s hearts. HMRC questioned the capital gains tax disposals, and in particular the original acquisition value. However both the purchase receipts and early insurance records had been scrapped by the family office, meaning the client needed to engage a reputable London auction house to reconstruct what the pieces were likely worth in the early 1960s. It’s possible that the client will pay more tax than is strictly necessary, but it has still helped reduce HMRC’s initial estimates which were based on much more recent data and some rather sensationalist internet search results.
Don’t Assume That Personal Use Means There’s no Tax
Sticking with jewellery, I recently spoke with a couple who’d just celebrated a significant wedding anniversary by buying some jewellery whilst on holiday. The pieces were bought in a tax free concession and intended for private use. The couple were also lucky enough to get a flight home with a friend on a private jet and came home with some wonderful holiday memories and heirlooms to pass to their children.
However, they did not realise that even though the jewellery was intended for private use, and the customs declarations on a private jet looked different to those on a commercial flight, the value of the pieces were well over the tax-free limit (currently £390, or in fact £270 if you arrive by personal boat or plane.) With the comparatively hardline approach taken by HMRC on customs failures the couple were facing a potential criminal charge. However, a proactive conversation with HMRC led by a joint tax and legal team was able to explain the proper context and it was agreed that criminal penalties were not in point here.
What Can I Do?
- Take regular tax advice. It’s easy to think that if family circumstances haven’t changed for a couple of decades then neither has the tax. However legislation and caselaw constantly evolve and the courts show little sympathy for those whose tax advice is out of date.
- Obtain regular valuations. This has multiple uses, from ensuring your family’s assets aren’t undervalued, obtaining appropriate insurance cover, making future decisions based on accurate information and giving tax and legal advisors key data.
- A non-tax document from a reputable third party – e.g. a valuation from a specialist auction house – can be credible evidence during a tax enquiry. You don’t need to be thinking about tax in order to help get your tax right.
- You also don’t need to be thinking about valuations to get proper advice: a pre-nup or post-nup, preparation of a will, creating a philanthropic foundation or moving house can all be triggers for needing a valuation – and in turn, for updating your tax position. One life event but many chances to gain peace of mind.
