Specialist valuations

On 1 July 2017, RICS Valuation – Global Standards 2017 took effect. See the separate page for a summary of the effects of this. The latest version of RICS Valuation – Global Standards takes effect from 31 January 2020. See the accompanying Red Book Global – Basis for conclusions document for changes. The Red Book guide is in the course of being updated in more detail with the changes arising from these editions.

Valuations for specific purposes that are likely to be most frequently encountered by UK valuers are those for:

• capital gains tax (CGT), inheritance tax (IHT) and stamp duty land tax (SDLT);
• charities;
• local authority financial statements; and
• home finance products (equity release products).

Valuations for CGT, IHT and SDLT basis of valuation

Valuations for capital gains tax (CGT), inheritance tax (IHT) and stamp duty land tax (SDLT) are dealt with in UKGN 3. They are all valuations based on a statutory definition of market value. This is not dissimilar to the Red Book definition but this has been interpreted by the Land Tribunal (now Upper Tribunal Lands Chamber) and higher courts in some high profile cases.

It is important to remember that it is incorrect to prepare a valuation using the Red Book definition of market value for these valuations as it will be an invitation to HM Revenue and Customs to challenge your figure. The differences between the 2 definitions are not always significant but UKGN 3 offers advice on the interpretation, as it is important to apply the statutory rules appropriately and to have a proper understanding of the basis of market value.

The definition of market value in this context has its derivation in various Acts of Parliament but broadly is defined as:

‘The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time.’

(Inheritance tax manual – Practice Note 1: Valuations for Revenue Purposes, paragraph 2.2)

Case law has established that the following assumptions have to be made in these specialist valuations:

• the sale is a hypothetical sale;
• the vendor is a hypothetical, prudent and willing party to the transaction;
• the purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser);
• for the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price;
• all preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date;
• the property is offered for sale on the open market by whichever method of sale will achieve the best price;
• there is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers; and
• the valuation should reflect the bid of any special purchaser in the market (provided that purchaser is willing and able to purchase).’

(UKGN 3 paragraph 3.3)

The Red Book recognises that there may be circumstances where the client wishes to challenge an aspect of the tax calculation, including the interpretation of the statutory basis or the method of valuation. A valuer who is instructed to give valuations on specified assumptions that differ from those given above, must follow the procedures in VPS 3 paragraph 7(I).

Interpretation of market value

UKGN 3 paragraph 4 gives an analysis of the definition of market value based on various cases.

The price is the gross sale price for the property without the deduction of sale costs. It is held to be the best possible price that would be obtainable in the open market if the property was sold in such a manner as might reasonably be calculated to obtain the best price for the property. It should not be assumed that the best price is the highest possible price. What is required is an estimate of the price that could be realised under the reasonably competitive conditions of an open market on a particular date.

The property has to be lotted in the most viable way to maximise the overall price, commonly known as prudent lotting. It also has to be valued as it existed even if a vendor would have been likely to have made some changes or improvements prior to putting it on the market.

The statutory definitions of market value are concerned with a hypothetical sale not an actual one. The property must be valued on the basis of a hypothetical sale between a hypothetical willing vendor and a hypothetical willing purchaser, which could include the actual owner. The statutory definitions refer to ‘the’ open market and not ‘an’ open market, which has been interpreted by the courts to mean a real market made up of real people.

As for timing, this is defined by statute for the purposes of the valuation exercise in question, which in the case of CGT could be 31 March 1982. In this case, the assumption has to be – similar to the Red Book definition of market value – that one must envisage a hypothetical sale in which all the preliminary arrangements have been made prior to the valuation date so that the sale can take place at the statutory point in time.

The courts have given further guidance on the interpretation of market value on aspects not included in the definition:

• a willing vendor or seller is one who is prepared to sell provided a fair price is obtained;
• not a vendor who is prepared to sell at any price on any terms;
• the hypothetical vendor is assumed to be a reasonable and prudent person;
• a willing purchaser presupposes that the open market includes everyone who has the will and money to buy and also a person of reasonable prudence; and
• a special purchaser is one who has a particular interest in acquiring a property.

Case law has established that where there is a known purchaser in the market who is willing to buy at a considerably higher price than anyone else, then the value of the asset for tax purposes is the higher price the special purchaser is willing to pay, but the existence of a special purchaser must be a question of fact and decided by evidence.

Valuations for charities

UKGN 7 deals with the acquisition and disposal of land on behalf of charities and in particular the reporting requirements. A number of statutory provisions apply to charities but 2 booklets published by the Charity Commission, CC33 Acquiring Land and CC28 Sales, leases, transfers or mortgages, are particularly helpful.

Acquisitions

Curiously, when trustees propose to acquire land there is no requirement to obtain professional advice from a qualified surveyor, although the Charity Commission strongly recommends that they do so. If the acquisition is one which requires Charity Commission consent, such as buying land from one of the trustees, the application for approval will be expected to include a surveyor’s report. A qualified surveyor is defined as a member of RICS.

Matters to be taken into account

Matters that have to be taken into account by trustees purchasing land include ensuring that:

• the property is suitable for its intended use and, in particular, is not subject to any legal or planning restrictions or conditions that might conflict with that use, or with which it may be difficult for the trustees to comply;
• any necessary planning permission is obtained;
• the price or rent is a fair one compared with similar properties on the market; and
• when acquiring a lease, they understand the obligations to which they will be subject under the lease and ensure that the terms of the lease are fair and reasonable.’    

(UKGN 7 paragraph 2.3)

No basis of valuation is specified as such, but clearly the presumption is that it will be market value or market rent as appropriate. If there are particular circumstances where a charity is in a position to justify paying more than market value, an assessment of worth will be necessary and should not be reflected in the valuation but in general advice to the trustees.

Matters to be included in a report

Matters to be referred to in a report include those matters in VPS 3 paragraph 1 (minimum contents of valuation reports) together with:

• a description of the land;
• details of any planning permission needed;
• a valuation of the land;
• advice on the price the trustees ought to offer to pay, or the maximum bid they ought to make at auction;
• a description of any repairs or alterations the trustees would need to make, and their estimated cost;
• a positive recommendation (with reasons) that it is in the interests of the charity to purchase the land; and
• anything else the surveyor thinks relevant, including a description of any restrictive or other covenants to which the land is subject.’

(UKGN 7 paragraph 2.5.1)

Disposals

The matters that need to be covered in the case of disposals became much more comprehensive with the Charities Act 2006 specifying that a report must be obtained from a ‘qualified surveyor’ – for these purposes a qualified surveyor is a member of RICS. The report must include a range of information, which is set out in detail in UKGN 7 paragraphs 3.3–3.12.

The Charities Act 2011 came into force on 14 March 2012, replacing the 1993 Act and most of the 2006 Act. There is just one change to the valuation reporting requirements in paragraph 3 of UKGN 7 in that you are now asked to refer to section 119 of the Charities Act 2011 in documents, reports, accounts or statements produced on or after 14 March 2012 (even if they relate to an earlier financial period).

Valuations for local authority financial statements

The financial statements of local authorities from 2010/11 onwards must be prepared in accordance with the CIPFA IFRS-based Code of Practice on local authority accounting. UK appendix 5 provides guidance to valuers on the application of the Code (the appendix was developed in conjunction with CIPFA) and confirms that the underlying general principles of the valuation of local authority assets are no different from those for other entities.

The majority of local authority assets, apart from infrastructure, community and assets under construction, will be valued to fair value and the valuer’s role is to provide assistance on the identification and classification of assets and to provide the fair value of those assets in accordance with the Code where such a value is required. Apart from any assumptions required by the Code, fair value is the same as market value.

Property assets are classified into one of the following 4 groups:

• property, plant and equipment;
• leases and lease type arrangements;
• investment property; or
• assets held for sale.

Property, plant and equipment

Infrastructure community assets and assets under construction are measured at historical cost; the option given in IAS 16 to measure at fair value is withdrawn. Examples of such properties are provided in UK appendix 5. Investment property is excluded if the fair value can be reliably estimated.

For land and buildings, fair value is to be interpreted as the amount that would be paid for the asset in its existing use. Existing use value will be used in the authority’s accounts and market value for asset management. The valuer’s role is to provide relevant valuations and discuss with the authority reasons for differences in value when they occur, to enable the authority to decide on the appropriate accounting treatment.

Council dwellings are to be valued using existing use value for social housing (EUV-SH). See UKVS 1.

Depreciated replacement cost (DRC) will frequently be used and valuers should ensure they understand the principles and methodology. UKGN 2 provides excellent guidance in this respect. UKVS 1.16.1 deals with DRC in the private sector; UKVS 1.16.2 in the public sector. See also reporting requirements in VPS 3 paragraph 7.

References above to UKVS 1.16 should now be to UKVS 1.15, since the revisions to Red Book 2014 to account for changes to UK GAAP in January 2015.

As for the frequency of valuations, the Code requires that where assets are revalued the entire class should be revalued. Valuations may be carried out on a rolling basis, typically over a 5-year cycle.

For the valuation of playing fields it is essential to establish their status before deciding on the basis of value. Until they have been declared ‘held for sale’ they remain part of the existing use. In considering the market value the valuer should take particular care to discuss alternative uses with the local planning authority.

Leases and lease type arrangements

This is quite a complex subject but essentially leasehold interests are divided into finance leases and operational leases.

The amounts to be recognised in the balance sheet for a finance lease are calculated in accordance with IAS 17, which states that lessees should recognise assets acquired under finance leases as assets and the associated obligation as liabilities. A valuer may be requested to provide the fair value of a leased property but this is not the value of the interest in the lease. Instead this is the underlying market value of the property and reflects the presumption of a finance lease that ‘transfers substantially all the risks and rewards incidental to ownership of an asset’.

The Code provides specific rules for the recognition of leases and distinguishes between those held as lessee and those held as lessor. These are set out in UK appendix 5.

Investment property

An investment property is one that is used solely to earn rent, for capital appreciation or for both, and is accounted for in accordance with IAS 40 at fair value.

Assets held for sale

The authority is required to identify, and separately account for, assets where they meet the strict criteria for classification of assets held for sale and should be valued at fair value less costs to sell. Where the valuer makes an adjustment for sale cost this should be made clear. The Code requires the valuer to provide the market value of the property.

Local authority disposal of land for less than best consideration

This is dealt with in UKGN 5 and applies only to local authorities in England and Wales who have wide land disposal powers under the Local Government Act 1972 and the Town and Country Planning Act 1990. However, local authorities do have to seek central government consent if they propose to dispose of land where the difference between the unrestricted value of the interest to be disposed of and the consideration accepted is £2 million or less.

A valuer may be required to provide a valuation so that a local authority can consider whether an application for consent is necessary or to support a submission for a specific consent. The valuer is required to provide the following figures:

• unrestricted value;
• restricted value; and
• the value of voluntary conditions.’

(UKGN 5 paragraph 2.1)

Details of the unrestricted value are contained in UKGN 5 paragraph 2.2. Essentially it is the market value of the property taking into account any additional amount payable by a purchaser with a special interest but ignoring any reduction in value caused by any voluntary condition imposed by the local authority. It should be the maximum amount that could be obtained for the property. The valuer should assume that the freehold disposal is made or the lease granted on terms that are intended to maximise the consideration. Any lease granted should only contain covenants that would be included by a prudent landlord.

The restricted value is set out in UKGN 5 paragraph 2.3, and is the market value having regard to the terms of the proposed transaction. It is the same as unrestricted value but takes into account the effect on value of any voluntary condition. If the property has been put out to tender the restricted value would normally be the amount offered by the local authorities preferred transferee or in other cases the proposed purchase price.

The next consideration is the value of voluntary conditions. These are any terms or conditions of the proposed transaction that the local authority chooses to impose. The value of these conditions is the total of the capital values of voluntary conditions imposed by the local authority as terms of the disposal, or under agreements linked to the disposal, that produce a direct or indirect benefit to the local authority which can be assessed in monetary terms. It is not the reduction in value (if any) caused by the imposition of voluntary conditions. Any adverse effect these may have on value must not be included in this figure.

The proposed disposal, or an agreement linked with it, may give rise to non-property benefits to the local authority such as operational savings or any income generated. The monetary value of these benefits to the local authority should be included in the value of voluntary conditions in the valuer’s report. Where the valuer is not qualified to assess the value of any benefits the report should make clear the extent to which the valuer accepts liability for the figures. Where the valuer does not accept responsibility, the report should make clear who was responsible.

The discount is defined in UKGN 5 paragraph 5.1 by the formula:

unrestricted value – (restricted value + value of conditions)

or where the value of the consideration for the disposal differs from the restricted value:

unrestricted value – (value of consideration + value of conditions)

Paragraph 5.2 states that the secretary of state must be aware of cases where the proposed consideration is more or less than the value of the interest to be disposed of, subject to the proposed voluntary conditions, so that this can be taken into account when reaching a decision. Accordingly, where the value of the consideration differs from the restricted value, both figures must be given.

Paragraph 6 requires that the report, as well as stating the purpose of the valuation, must include a summary of the proposed transaction noting the key terms. If it is proposed to grant a lease, a copy of the draft lease should be included (paragraph 8).

Paragraph 7 states that the valuer should make reasonable assumptions about the form of development including a note of the existing uses, current planning consents and uses likely to be permitted with regard to the development plan. Details of tenure (paragraph 8) must be included.

The valuations (paragraph 9) should be of the unrestricted and restricted value, together with the value of conditions. If nil this should be expressly stated. The date of valuation should not be more than 6 months before the application to the secretary of state.

The report (paragraph 10) must include a written description of the site and buildings, the location and surroundings and a plan sufficiently accurate to identify the land.

The effect on value of the existence of a purchaser with a special interest should be described (paragraph 11) and the report must be signed by a ‘qualified valuer’ (paragraph 12).

Valuations for home finance products (equity release products)

Valuations for home finance products shall be in accordance with the requirements of the FCA Mortgages and home finance: conduct of business sourcebook (MCOB) (UKVS 3.4).

There are 4 principal products. Lifetime mortgages and home reversion plans are the most common. The other 2 are sale and leaseback and home purchase plans. The schemes allow homeowners to secure a loan on their property in order to release equity while they remain living there.

Lifetime mortgages, as the name implies, defer repayment until the sale of the property. The main difference between a lifetime and a conventional mortgage is that the redemption date is not fixed but is the date of death of the mortgagor. No repayments of capital are made and the interest is rolled up and compounded over the length of the mortgage term.

Obviously the amount of debt to be redeemed on the death of the mortgagor will be much greater than with a conventional mortgage. Therefore valuation advice should include comments on sustainability, particularly in regard to design, condition and location.

Home reversion is where the occupant sells all or part of the home to a reversion company or an individual. The occupant no longer owns all or part of the home but continues to live there rent free for the remainder of their life. The regulations provide that valuation for home reversion products must be carried out by a competent valuer who is independent of the reversion provided.

A point to watch is the treatment of development potential, as the title to the property and thus the benefit of the potential passes to the company. The exploitation of any development potential would be deferred until the company realised the value of reversion on the death of the mortgagor or could only be released with his or her consent.

In those circumstances, where market value reflects development potential the lender should be advised that the significance for underwriting purposes can be assessed, which may lead to an instruction to value with a special assumption that no development would be permitted. Otherwise valuation for home reversion products should be provided in accordance with VPGA 2.

For sale and leaseback, the procedure is set out in UKVS 3.4 paragraphs 14 to 16. It confirms, among other things, that:

• the valuation must be commissioned jointly by the sale and leaseback firm and the customer;
• the valuer must be independent of the sale and leaseback firm;
• the valuer must owe a duty of care to the customer (the FCA has suggested wording for the letter of appointment, see paragraph 15(c)); and
• the basis of value is market value at the reporting date.

Home purchase plans are similar to a traditional mortgage but structured in such a way that makes them acceptable under Islamic Law.

In the absence of specific valuation instructions, valuations should be provided in accordance with UKVS 3.1.

See related FAQs on specialist valuations.