Related property: How it affects IHT

Meg Saksida looks at the special inheritance tax valuation rules for ‘related property’ and its potential effects on married couples (and civil partners). 

The ‘related property’ rules are inheritance tax (IHT) anti-avoidance provisions that set out to stop taxpayers taking advantage of Aristotle’s old adage, “The whole is worth more than the sum of the parts”.  

Aristotle was, of course, correct. It is true that the synergy of a ‘set’ or a ‘group of like assets’ often means a collection is worth more than the stand-alone value of the assets added together. For example:  

• A complete set of an antique dining table and ten chairs is worth more than the individual stand-alone pieces combined.  

• A case of wine is often worth more than the value together of six individual bottles.  

• Four similarly themed paintings from the same artist are generally worth more together than the value of each of the four individually added together.  

The mischief being avoided by the rules is the separation of the set or collection by a taxpayer who originally owned all the like assets by gifting them to, say, their spouse or civil partner. By dividing the ownership of the assets, without the related property rules, their absolute value in the hands of more than one owner is likely to be lower. 

Example 1: Gift of painting from a set  

Jake owned two paintings and his wife, Milly, three paintings from an up-and-coming impressionist artist from Italy. Individually, the paintings were worth: 

But together, as a set of five, they were worth £800,000. Jake gave painting B to their son. The remaining set of four was worth £500,000. 

Jake has made a transfer for IHT purposes, but it is a PET, so not immediately chargeable. However, should Jake die within seven years, the transfer would need to be valued for IHT purposes at both the ‘loss to the donor’ and the ‘related property’ rules, as Milly owns similar property. Jake’s stand-alone value would not be appropriate if the related property value was higher. 

Likewise, in the death estate. If property is held jointly between husband and wife or civil partners, the value is not the stand-alone value, but the value of the deceased share of the whole. 

Example 2: Related property value of table and chairs 

Amanda and Rose were in a civil partnership. They had been left a number of antiques by a close friend who had died six years ago. One of the items was an antique Georgian dining table with 12 chairs. Amanda had been left the table and two chairs and Rose, ten chairs. The table was worth £2,500 on a stand-alone basis and the chairs £500 each. The set, however, was worth £12,000.  

Amanda passed away in 2022. 

The value of the table and two chairs in the death estate would not be £2,500 for the table and £1,000 for the two chairs (i.e., £3,500). It would be £3,500/£8,500 (the total value of the set on a stand-alone basis) multiplied by the total value of the set of £12,000, giving a total to be taxed to IHT as £4,941. 

Land and property 

This concept is applied to land and buildings in the same way. If a married couple owns a property jointly, the value to be included in a death estate is the related property value, not the stand-alone value.  

For example, if the family home is worth £800,000 and the couple owns it jointly, a value of 50% will result in £400,000 being in the first of the couple to die’s death estate. Normally, this will be largely academic as the property is generally left to the spouse, so the exempt transfer will mean a valuation is not required. However, if the half share of the property was left to the children or a non-UK domiciled surviving spouse where the £325,000 maximum transfer had been exceeded, this may be relevant.  

However, if the couple were not married, or if they were simply friends or colleagues, the valuation would be different. Related property valuations are only required for similar property owned by spouses and civil partners and assets that have been gifted to a charity, political party, national heritage body or housing association, as long as they were owned by the entity at the date of the transfer (or any time in the preceding five years before the transfer). Other joint owners can simply take the stand-alone absolute value of the asset. 

Example 3: Married couple vs business partners 

Derek and Joan were married. Ken and Jane were business partners. All four individuals were neighbours. Derek and Joan owned a buy-to-let flat equally worth £800,000. Ken and Jane owned student accommodation equally worth £800,000. Derek and Ken both died in a boating accident. 

In Derek’s death estate, the value of his share of the flat was £400,000. This was the related property value, i.e., his share (50%) of the total value (£800,000). 

In Ken’s death estate, however, the value of his share of the house was £340,000. This was the stand-alone value of the house. Half a house is worth less than 50% of a whole house since one cannot sell half a house very easily. HMRC allow a 10-20% discount as a ‘tenanted deduction’. Assuming a deduction of (say) 15%, the value is £400,000 x 85%, so £340,000. 

Post-mortem relief 

The other way related property valuation applies to IHT is by ‘post-mortem relief’. Post-mortem relief is generally associated with the personal representatives (PRs) disposing of a property during the administration period at lower than the probate value and thereafter being able to make an adjustment to the death estate with the resulting lower than probate value of the property. This usually leads to a refund in IHT. 

The post-mortem relief associated with related property valuations requires three conditions to exist; firstly, the asset sold by the PRs was valued with other assets for IHT purposes; secondly, the sale must have occurred within three years of the death and at arms-length; and thirdly, the gross proceeds of the sale were less than the probate value in the death estate from which IHT was originally charged.  

However, rather than calculate the loss and amend the estate value and subsequent IHT charge with any such loss (as with the other post-mortem reliefs), this relief allows the PRs to insert the ‘stand-alone’ value of the asset without the related party augmentation. This could lead to a greater loss than the actual loss realised and therefore more of an IHT refund. 

Practical tip 

Related property valuation requirements do not always lead to a worse IHT outcome for taxpayers. As the rules are only required for spouses, civil partners and charities, etc., to whom assets have been donated, other joint ownership combinations such as siblings, parent and child, friends and other relatives can enjoy a discount when valuing jointly held assets in a death estate, as a result of their joint holding. The post-mortem relief for related property may even lead to a larger IHT refund than the actual loss.