When valuing a property for Inheritance Tax (IHT) purposes, is it legitimate to take into account its potential for enlargement or improvement – so-called ‘hope value’? In a guideline ruling, the Upper Tribunal (UT) has answered that question in the affirmative.

The case concerned a maisonette in an attractive residential area. The property was in need of updating and had potential for extension. After its owner died, HM Revenue and Customs valued the deceased’s 88.4 per cent share in the freehold at £1,829,880. The son of the deceased appealed on the basis that the correct valuation was £1,113,840 and the matter was referred to the UT.

The UT noted that Section 160 of the Inheritance Tax Act 1984 required that the property be valued on the basis of what it might reasonably be expected to fetch if sold on the open market. If the market was prepared to pay a price which included the prospect of an enlarged floor space, then it was right to take that into account.

The property – which had in fact been sold amidst a galloping property market for more than £2.5 million less than two years after the deceased died – had been marketed as having great potential. It was clearly ripe for major reconfiguration and extension of the type that the purchasers subsequently carried out. After considering expert valuation evidence and other issues in the case, the UT found that the correct valuation for IHT purposes was £1,782,144.