Valuating chattels (items of movable personal property) have the potential to be either a goldmine or a minefield, even for a seasoned professional valuator. An item that was sold for 40p at a car boot sale could go for £16,000 at a auction house, inversely a seemingly valuable item might go for significantly less than anticipated. The matter of valuation, in many cases comes down to personal judgement. There is also the matter of wholesale versus retail price.
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These factors are especially relevant to items sold as result of disposal after a person’s death. This is further complicated by the Capital Gains Tax & Inheritance Tax applicable to household goods and personal chattels. However, since the laws cover a wide array of items, with precise definitions and procedures, there could be potential to make significant tax savings on items below a certain value.
Probate in theory
The valuation of chattels is usually needed when a person dies and Inheritance Tax laws apply. The law for IHT states that, the value must be “the price which the property might reasonably be expected to fetch if sold on the open market at the time”.
If the Inheritance Tax is payable on the items, the executor or administrator of the estate must fill in the HMRC Form 400. For household goods specifically, the application must be supplemented with the Form 407, which is divided into four sections:
1. Jewellery under the value of £500, if an item is over that amount they have to be detailed separately
2. Vehicles, boats, aircraft
3. Antiques, works of art and collections
4. Other items not covered above
Section 4 contains a specific question of whether these ‘other’ items are individually listed under the household insurance policy. If so, then the the executor has to provide a copy of the insurance policy document containing the listed item. For sections 1 to 3, there is a note asking to enclose a copy of professional valuation where applicable.
In one of the guidance notes accompanying Form 400, the HMRC advises that: “a realistic price is likely to be the value the item might fetch if sold at auction or through the local paper.”
Probate in practice
It is always a good idea for the executor of the estate to obtain a s160 valuation from a qualified professional. The Inheritance Tax manual provided by the HMRC makes a clear indication that for probate and IHT purposes, the HMRC will query whether a valid s160 document was used.
It should be noted that the s160 valuation will be a wholesale as opposed to retail or insurance valuation. This means that the valuation will be what the item is expected to fetch at an open auction, where the majority of the buyers are going to be dealers. These dealers will expect to sell on the item at a profit, while also covering their overhead costs.
As a guideline, the difference in price can be anywhere between 20% – 100% of the auction price, but in some cases it could be a lot more. An example could be an item that is sold for £5,000 wholesale and then sold for £40,000 later on at a major auction or antiques fair.
It is a mistake to believe that if an item is bought at an auction, then it will be sold at a wholesale price. The under-bidder could be a private buyer. The Antiques Trade Gazette had this to say on the matter: “As usual, dealers had to take a back seat, targeting only specialist items, as private buyers were prepared to see off the trade with retail-price bids for the right pieces.”
An executor can also sometimes try to save costs by instructing their local antiques dealers to artificially produce the valuation that they want. The dealer, however may not know what is needed and produce a valuation that is actually closer to retail than auction valuation. The person responsible for the estate should make sure to check the deceased’s insurance valuation for any discrepancies, because the HMRC will certainly check whether the listed item is also on s160 document as well. If the HMRC detects any anomalies, they are likely to produce a fine or penalty.
If you are looking to maximise the value of the estate, it might not be in your best interests to sell immediately after death. Keep in mind that auction houses are in the business of selling after all. When selling, the HMRC will be looking to substitute the gross sale proceeds for the probate valuation. There are no tolerances allowed for IHT deductions when making the sale. This is following the Duke of Buccleuh case of 1967, where a decision was made that the estate duty was to be charged “on the gross amount payable by a purchaser without deduction of any notional expenses”.
The Inheritance Tax manual also contains a section that is titled “Type of asset: sales at Sotheby’s, Christie’s and Bonhams”. If the chattel listed in the sale catalogue as an item of a deceased person, the HMRC will be automatically notified of the hammer price. This is not limited to the top three auction houses either, the manual states that if there is suspicion of non-disclosure or undervaluation, the Research & Liaison team will have access to a national database which will list the details of all chattels sold auction.
When dealing with IHT, always remember that tax considerations need to be balanced against commercial or personal interests. Use valuations as rule of thumb rather than fixed imperatives, market values fluctuate based on supply and demand as such change all the time.