.png)
.png)
In general terms IHTA 1984, s 161 provides that, when valuing a share of property for inheritance tax where the spouse or civil partner also has an interest in the same property, the spouse's or civil partner's interest is taken into account.
The effect is broadly to reduce the level of discount that smaller, unaggregated shares of property can attract when valued.
The precise basis on which this is done was the subject of litigation during 2004 and resulted in the High Court decision Arkwright and another v CIR [2004] STC 1323.
The appeal had earlier been considered by the Special Commissioner who found that HMRC could not rely on s 161(4) in the case of incorporeal shares of land. Section 161(4) requires the aggregate value to be apportioned in accordance with the proportion the smaller number of shares are held to the total held by both spouses/civil partners.
The Special Commissioner found that while the measure could apply to property which had a distinct or individual existence as a unit, such as unit trusts or a set of furniture, it did not apply to fractions of units.
HMRC did not pursue this point when their appeal was heard by the High Court.
The High Court decided that the question of the open market valuation was, in the absence of agreement between HMRC and the personal representatives, a matter for the Lands Tribunal.
In the course of seeking to reach agreement, HMRC have received legal advice that s 161(4) may, in fact, apply to fractional shares of units.
Accordingly, HMRC will apply s 161(4) when valuing shares of land as related property in any inheritance tax case where the account is received by HMRC after 28 November 2007, and will consider litigation in appropriate cases.
It is now not possible to have further judicial consideration of the s 161(4) point in the context of the Arkwright decision.
Any existing cases in which s 161(4) is considered in point will therefore be dealt with on the basis of the Special Commissioner's decision in the Arkwright case as it relates to the interpretation of s 161(4).
HMRC will, when so requested, also reconsider any cases involving land valuations which were concluded after the Arkwright decision was handed down on 16 July 2004 and determined on the basis that s 161(4) applied.
If a valuation was concluded on this basis and the matter needs to be reconsidered, HMRC Inheritance Tax, Ferrers House, PO Box 38, Castle Meadow Road, Nottingham NG2 1BB should be notified stating the name of the deceased, transferor or settlement and quote the official reference.
Malcolm Gunn of Squire, Sanders and Dempsey explains that the Special Commissioner's decision in Arkwright upset much traditional thinking in relation to the valuation of one spouse's share in a property held jointly with the other spouse.
The decision partly concerned s 161 which contains related property rules designed to ensure that property held jointly with a spouse is valued at the appropriate fraction of the whole value.
Therefore, no discounts for part ownership should be applied.
As announced in the Brief, HMRC have now received legal advice that the Special Commissioner's conclusion on the scope of s 161(4) may not have been correct and have said that all existing cases will be dealt with in accordance with the Commissioner's decision, and upon request they will reconsider cases settled after that decision on the basis that s 161(4) applied.
However, for all cases where an inheritance tax account is received after 28 November 2007, HMRC will apply section 161(4) when valuing shares of land so that where the shares are held by husband and wife they will fall to be treated as related property for IHT.
'It will, of course, be open to taxpayers affected by this announcement to appeal on the same basis as the taxpayers in the Arkwright case', said Mr Gunn, 'but generally there will not be sufficient tax at stake to justify all the time and costs involved. For this reason it might have been preferable for HMRC to bring forward a statutory amendment to s 161(4) which would deal with the position once and for all rather than leaving it as an unsettled point of law'.
