Five HMRC rules you must follow when buying commercial property via a SIPP

The six red flags at a glance

1. Does a large gap between probate value and sale price trigger an HMRC audit?

Yes, a significant difference between the value declared for probate and the price a property later fetches on the open market is the single most common trigger for an HMRC challenge. HMRC's District Valuer Services routinely cross-references Land Registry sale data against declared probate values, and a sale price notably higher than the declared value, particularly within a year or two of death, prompts an automatic review.

This does not mean every property that sells above its probate value gets investigated, as market movement and estate-made improvements are both legitimate explanations. However, executors should keep evidence of the reasoning behind the original valuation to distinguish a genuine market rise from an undervaluation at the point of death.

2. Can an unusually low probate valuation get flagged automatically?

Yes. HMRC's District Valuer Services uses local comparable sales and regional benchmark data to sanity-check declared probate values, and a figure that sits well below what similar local properties have achieved is likely to be challenged, even without a later sale to compare it against. This is a particular risk where a valuation has been based on a quick estate agent estimate rather than a formal, evidenced report.

A defensible valuation needs more than a headline figure; it needs comparable evidence, an inspection, and a documented rationale, which is exactly what a RICS Red Book valuation provides and an informal estimate typically does not.

3. Why do round-number valuations invite scrutiny?

A probate valuation submitted as a suspiciously round figure, such as £500,000 rather than £487,500, for example, signals to HMRC that no detailed, evidenced methodology sits behind it, and this alone can prompt a request for supporting documentation. Round numbers are strongly associated with informal estimates rather than a proper valuation exercise.

This does not mean a property can never genuinely be worth a round number, but the valuation report itself should show the comparable evidence and reasoning that arrived at the figure, whatever it turns out to be, so HMRC can see the number was calculated rather than guessed.

4. What happens if development potential is left out of a probate valuation?

If a property or land plot has realistic development or "hope value" potential, it must be reflected in the probate valuation. Otherwise, HMRC can challenge the figure once that potential becomes apparent, and back-tax the estate on the omitted value. Land Registry records and local planning history are both used to check for this.

Hope value is one of the more technical areas of probate valuation, since it requires judgement about realistic future planning prospects rather than the property's current use. A RICS valuer experienced in this area will factor in genuine development potential at the point of death, rather than leaving it to be discovered and taxed later.

If HMRC identifies unreflected hope value after the event, typically once planning permission is granted, or a sale price reveals it, the estate can face additional Inheritance Tax on the difference, charged at the estate's marginal IHT rate (commonly 40 per cent on amounts above the nil-rate band), plus interest on the shortfall and a possible inaccuracy penalty on top.

5. Can using different values for Inheritance Tax and Capital Gains Tax cause problems?

Yes, HMRC can identify this discrepancy since both the estate's Inheritance Tax return and the eventual Capital Gains Tax calculation refer back to the same probate valuation, and using a lower figure for one and a higher figure for the other is a recognised pattern of under-declaration. Undervaluing for IHT purposes to reduce the estate's tax bill can inflate the capital gain when the property is later sold, and HMRC can investigate both sides of that mismatch.

The safest approach is a single, well-evidenced probate valuation used consistently across every tax purpose it touches, since this removes any inconsistency for HMRC to query in the first place.

6. Why does HMRC reject valuations that are not RICS-accredited?

A probate valuation prepared by someone without RICS accreditation, such as an informal estate agent estimate, does not meet the standard HMRC expects for a legally defensible Section 160 Inheritance Tax Act 1984 valuation, and this typically results in an automatic referral to the District Valuer for an independent re-valuation. This can delay the grant of probate and, if the DVS valuation comes in higher, increase the estate's tax bill.

RICS Red Book valuations carry professional accountability and follow a recognised, defensible methodology, which is precisely what gives them standing with HMRC that an informal estimate doesn't.

The main takeaways and next steps

All six of these red flags share the same underlying cause: a probate valuation that is not built on proper, evidenced, RICS-accredited methodology. None of them are especially hard to avoid when a formal Red Book valuation is carried out at the date of death, with clear comparable evidence and a documented view on any development potential.

Given that penalties for an inaccurate return can reach 100 per cent of the extra tax due in the most serious cases, on top of the tax itself and interest, the cost of a proper valuation upfront is modest by comparison. If you are an executor or adviser preparing a probate valuation, instructing a RICS-qualified probate valuer before submitting the IHT400 is the most reliable way to avoid triggering any of these six flags.

Our expert team has experience with probate valuations and can assist you when you contact us. Either call 0330 191 8358, email [email protected], or complete the form below to start the conversation.