Chattel Be The Day
The Antiques Trade Gazette usually has a good array of reports of items that have sold for significantly more than their anticipated value – often called “sleepers”. A recent ATG issue highlighted a wooden shield from Papua New Guinea estimated at £50-£100 selling for £7,000 plus premium. The following week there was a report of three wine glasses bought for 40p each at a car boot sale being sold for£16,000 plus 15% premium. An Indian 18th century stone rectangular plaque was unsold in a previous sale by London auctioneers “so here the estimate was £300-£500”. The ATG went on to write- “At that here to sell figure the market certainly responded, but the auctioneers admitted they didn’t know precisely why the UK dealer who bought it was pushed to a bid of £16,000.”
As these examples show, the valuation and disposal of household goods and personal possessions can be a minefield for the professional adviser: but there are also opportunities to save significant tax payments. This is particularly so after death. Household goods and personal chattels has a precise and wide legal definition which will cover almost everything found in any home. This definition is contained in section 55(1)(x) of the Administration of Estates Act 1925. The difficulties arise because of the conflicting rules for inheritance tax (IHT) and capital gains tax (CGT) and the fact that chattel valuation is a matter of judgement, not fact, with two different bases – wholesale and retail.
Probate valuations – the theory
The most common need for a valuation of chattels is when IHT is payable, usually but not always after the death of the owner. Section 160 of the IHT Act 1984 provides that the value must be “the price which the property might reasonably be expected to fetch if sold in the open market at that time…”
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Where IHT is payable after death, the personal representatives of the deceased must complete HMRC’s form 400. Supplemental IHT form 407 is specifically for household goods. This form breaks down into four parts –
- Jewellery, with a request for individual items valued at £500 or more to be detailed separately.
- Vehicles, boats and aircraft.
- Antiques, works of art or collections.
- Everything else.
There is a specific question on the form as to whether any item in category 4 was individually listed on the deceased’s household insurance policy. If it was the personal representatives are asked to produce a copy of that insurance policy. With regard to items 1-3 the form requests “if you have a professional valuation enclose a copy.”
HMRC has many pages of notes to aid the completion of form 400 and its supplemental forms. The relevant part of these notes indicates “a realistic price is likely to be the value the item might fetch if sold at auction or through the local paper.”
Probate valuations –the practice
It is nearly always sensible for an adviser to ensure personal representatives obtain a s160 valuation from a qualified and experienced professional valuer. HMRC’s IHT manual at paragraph 21041 makes this clear. For example it directs that where a valuation is qualified as being made “for probate purposes” or for “IHT purposes” HMRC will query as to whether the correct s160 basis has been used.
Advisers should appreciate that a s160 valuation will be a wholesale and not a retail or insurance valuation. The s160 valuation is what the item is expected to fetch at auction where the majority of, if not all, the potential buyers will be dealers who expect to sell the item on at a profit after covering their own overheads. As a general rule that difference can be between 20% -100% of the auction price –but it can be a lot more. I remember seeing in 2004 at auction an early 19th century chest on chest selling for about £5,000 and then seeing it again for sale at over £40,000 at a major antiques fair. The distinguishing feature was the original brass handles which depicted Lord Nelson’s victory at Trafalgar.
It is fallacious to believe that if a chattel is purchased at auction, it will be bought at a wholesale price. The underbidder may be another private buyer. As the ATG recently recorded about Bonhams specialist oak sale at Chester-
“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.”
Personal representatives like to save costs and often will instruct a local antiques dealer to produce the valuation required. That dealer could be unaware of what is needed and produce valuations –particularly for jewellery – that are nearer a retail than an auction valuation. An adviser should remember also to check the deceased’s insurance valuation for any anomalies –if HMRC has a copy of the insurance valuation it will certainly check to ensure that items listed on the insurance policy are in the s160 valuation. If HMRC picks up mistakes it can look to the taxpayer to pay a penalty.
Probate valuations- subsequent sales
Auctioneers are in the business of selling. A sale immediately after death may not always be the best way to maximise the value in an estate. On a sale HMRC will seek to substitute the gross sale proceeds for the probate valuation. There is no deduction allowed for IHT purposes for the expenses of sale. This follows the decision in the Duke of Buccleuch case (1967) that what was then estate duty was charged “on the gross amount payable by a purchaser without deduction of any notional expenses”.
Paragraph 21027 of the IHT Manual is headed “Types of asset: sales at Sotheby’s, Christie’s and Bonhams”. Where property in a sale catalogue is described as the property of a deceased person, the HMRC official dealing with the estate is notified of the hammer price. This is probably not limited to just these three auction houses – the Manual says “Where you suspect the non-disclosure or undervaluation of an asset that might have been sold at auction the Risk, Research & Liaison Team has access to a database which contains details of chattels sold at auction”.
A hypothetical example of how the IHT position could work if these rules came into play is shown in Box 1. Tax considerations need to be balanced against commercial imperatives. Valuations are not fixed and will depend on demand, which will fluctuate. As the ATG recorded – “The story of the 21st century so far has, of course, been written in Chinese….The problem for all auctioneers – if lots selling at 20 times estimates and more can be called a problem – remains predicting the market response.”
After death sales – CGT
One of the requisitions often raised by HMRC during the administration of an estate from which IHT is payable is whether there is any intention to sell chattels; if the reply is yes, HMRC asks for the gross sale proceeds to be substituted for the probate valuation when the sale has taken place. Many possessions that have been with a family for a long time have emotional significance for that family. A hasty sale is often regretted. It may be sensible to defer disposal decisions until the estate’s administration is settled and the IHT is agreed and paid.
The s160 valuation becomes the new base value of the asset for CGT purposes. Where CGT arises sale expenses are deductible with an additional deduction of a proportion of the costs of extracting probate where personal representatives (but not beneficiaries) sell. This deduction is under s38(1)(b) Taxation of Chargeable Gains Act 1992 and the case of Re Richards’ Executors (1971). HMRC’s Statement of Practice 2/04 has an agreed scale: for example if the estate is valued at between £500k to £1m the deduction is 0.8% of the probate value. If VAT at the prevailing rate is added that is usually accepted. If the costs of establishing title by the personal representatives were above the norm, representations for a higher deduction can be made. The cost of a probate valuation can also be claimed as a CGT deduction.
Appropriations and deeds of variation
Before any sale of an asset is made, personal representatives and their advisers should consider the likely CGT outcome. A disposal for CGT takes place on unconditional exchange of contracts, not on completion of the sale. If an asset will belong to a beneficiary it is possible before disposal to appropriate to that/those beneficiaries so they -and not the personal representatives – sell the asset. Whether to do so will depend on the personal circumstances of the beneficiary and the confidence of the personal representatives that there is sufficient cash/assets to pay outstanding liabilities. For example the beneficiary may be non resident for CGT purposes.
If a beneficiary wishes to gift on all or part of the sale proceeds of an asset a deed of variation can often effect that redistribution and save tax. To be valid for IHT and CGT purposes the deed must be executed within two years of the death of the deceased and contain the appropriate IHT and CGT elections (sections 142 IHTA 1984 and 62 TCGA 1992). The execution of the deed then needs to be followed by a suitable appropriation. As well as introducing more individual sellers- and thus more annual CGT allowances- it is often possible for a proportion of the asset to remain owned by the personal representatives to use those PRs’ annual CGT allowance.
CGT on chattel sales
Section 262 TCGA 1992 provides that the disposal of a tangible moveable asset is entirely exempt from CGT provided the disposal is for a consideration of £6,000 or less. “Consideration” means gross sale proceeds. A lifetime gift of a chattel is a disposal for CGT purposes. If the disposal proceeds are over £6,000 the lower figure produced by the two calculations that need to be made is the chargeable gain (see Box 2). The annual CGT allowance will usually also be available.
Depending on who is the recipient, the disposal of a set of chattels by a taxpayer can be treated for CGT as the disposal of a single item i.e. with only one £6,000 allocated. The minutes of HMRC’s “Chattels Valuation Fiscal Forum” on 1st December 2010 contained a precis of a discussion on whether an archive could be a “set”. HMRC’s view is that a number of articles will be regarded as forming a set if they are essentially similar and complementary and their value taken together is greater than their total individual value. So a collector could create a potential set even when buying articles individually.
“Wasting assets” are also exempt from a CGT charge. In HMRC’s CG 76722 it states-
“All plant and machinery is always regarded as having a predictable life of less than 50 years. Such items will always be wasting assets. This rule applies no matter what the actual life of the item of plant or machinery proves to be.”
But special rules apply if the wasting asset is used in a business. HMRC accepts that an antique clock is machinery and thus a wasting asset.
A key point advisers must remember is that these rules will not apply to traders of assets – and in some circumstances a single sale could be a trading activity: for example buying the American silver spoon mentioned below and selling on fully catalogued at a higher price is probably a trading activity.
Selling chattels at auction.
Any valuer has two key duties. Firstly the item to be sold should be correctly identified and catalogued. This is particularly important with potential buyers using internet search engines and alerts to identify possible purchases. At a recent auction I viewed, a silver spoon was described as –
“A George 111 Celtic pattern basting spoon, initialled with bright cut decoration 39cm long single struck makers mark ”F*G” prick dated to the reverse of the stem 1802, 7.17ozs”
It was estimated at £200-£300 and sold at a hammer price of £290. “F*G” was “F&G” for Fletcher and Gardiner makers in Boston USA. There were two sets of initials, those of the original owner in the cartouche on the front and faintly on the back after the date (probably) of the journeyman who made the spoon in 1802. An early US Federal spoon over 15 inches long is a very unusual item: no US internet buyer is likely to have been aware it was for sale.
Secondly the valuer needs to price the item correctly. As a Bond Street dealer once said to me of auctioneers “they tend to start too low.” The rationale is that the market place will determine the price and buyers are tempted to bid by a low estimate and thus low reserve. At the sale mentioned above there was a silver spoon tray of 2.25ozs fully catalogued from 1717 estimated at £60-£80 which reached a hammer price of £720. Nevertheless a realistic reserve is sensible just in case there is only one bidder. Dealers who use auctions to pass on their unwanted items are well aware of this point and estimates for some articles can be noticeably high.
Other sale options
There are specialist valuers who will act for potential sellers. This includes some dealers. Good valuers will know their market well and will ensure that as high a price as possible is achieved. Items may be sold privately or to institutions or to dealers, either directly or to sell acting on a commission arrangement and some items may be sold at auction.
If the sale is at auction the valuer should oversee the accuracy of the cataloguing, negotiate commission discounts and auction reserves with the auctioneer and what will be the pre sale publicity exposure. One auctioneer is currently offering 110% of the hammer price for objects achieving over £100,000 i.e. no seller’s commission is charged and the seller also receives part of the commission the buyer pays. Some auction houses offer a private treaty sale service. It is very important for the adviser and thus client to use a valuer with integrity as well as expertise.
Even when using specialists, advisers need to be careful. A recent issue of the ATG had the headline “Murky case of the embroideries “worth millions.”” Here a major auction house had “removed items of value” and the US attorney acting arranged for a house clearer to clear the flat in Mayfair for a fixed fee of £5,000. Excluded from the agreement was the Henry Moore bronze thought hidden in the flat and later found “bricked up behind the fireplace as a precaution against theft.” The ATG wrote that the house clearer “found a number of items of significant value which he sold for tens of thousands of pounds as well as tens of thousands of Swiss francs in cash.” Additionally medieval embroideries were found “folded into a blanket in a bedside cabinet.” There were other strands to this case, including the reporting of severe criticism of the US attorney’s behaviour.
The Acceptance in Lieu(AIL) scheme
For 100 years it has been possible for taxpayers to transfer important heritage property into public ownership in payment of death tax (i.e. now IHT). This is an area of some complexity. Specialist valuers should be well aware of the details of the scheme. Important heritage property has a wide definition. Keen collectors often advised by specialist dealers could work with a local museum within the scheme in the hope of using the scheme on the collector’s death.
There are some pitfalls e.g. the offer of the heritage item must be made before the IHT is paid, although “paid” has a flexible definition. As what constitutes heritage property is so wide, this is an area where advisers can add value with lifetime planning. Many wills contain a specific gift of personal chattels to avoid the deemed distribution income tax rules. Generally the person making the offer of heritage property should be the person liable to pay the IHT: so it could be better to leave the heritage property in the residue of the estate.
The AIL scheme seeks details of the history or provenance of an object. This is easier to document when the owner is alive. Valuers can also reassure personal representatives that an item will not be sold “on the cheap” to the nation. The AIL panel which makes the decision on behalf of the nation has a duty to be fair. There can be detailed negotiations on value.
A mathematical example best illustrates the advantage of the AIL scheme to the taxpayer. If an object is agreed with a valuation of £100,000 the IHT payable is going to be £40,000. The incentive or “douceur” credited to the taxpayer is 25% of that IHT, in addition to the net £60,000. So the taxpayer receives a credit of £70,000, not £60,000 and with no CGT to pay, if CGT was a factor. With a transfer of land the douceur is 10% of the IHT payments on that land. There can be “hybid” offers producing both a tax credit and a cash payment.
Watch out advisers
Many clients have household possessions of value. Periodically clients will need specialist advice about the disposal of those possessions. Advisers can assist clients by discussing the options available – and pitfalls – or at least refer clients to specialist valuers who have the knowledge needed. To fail to do so may lead the adviser open to criticism, or worse.
|Deduct IHT @ 40%||£20,000|
The same chattels sold
|Commission on sale say||£20,000|
|VAT on commission||£4,000|
Note: commission on sale should be negotiable.
(Taken from HMRC’s CG 76577 and CG76612)
Where a chattel is disposed of for more than £6,000 you calculate the difference between the disposal consideration and £6,000 and multiply that difference by 5/3. The answer is the maximum chargeable gain. If the actual chargeable gain exceeds that amount, you exclude the excess and the smaller amount is assessed. If the chargeable gain is less than that amount, the actual gain is assessed.
An antique mirror is sold for £7,500. The chargeable gain after allowing expenses is £5,000. As the disposal consideration exceeds £6,000 the gain is not exempt but marginal relief is due. This restricts the gain to:
|Chargeable gain not to exceed 1500 x 5/3 =||£2,500|
|Gain before marginal relief =||£5,000|
|So chargeable gain is||£2,500|
NOTE: if disposal consideration is £15,000 or more, the maximum chargeable gain exceeds the actual chargeable gain and no marginal relief is due
© Peter Nellist 2011
Acknowledgement: With thanks to Money Management, an FT publication, and Trusts & Estates Tax and Law Journal where this article was first published.
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