Valuation of gifts
You must indicate the fair market value of the asset or property received as a gift when completing a gift tax return. Valuation of gifts is based on a number of different methods.
Gift tax base is the asset's fair market value
For purposes of gift tax, the taxable value of an asset is its fair market value at the time of donation. Fair market value means the probable selling price. This is the price that parties who are independent from one another (unassociated with one another) would agree to pay for the asset or property if it were offered for sale.
The Tax Administration's guidance (in Finnish; in Swedish) on "Valuation of assets and property in inheritance and gift taxation" — Varojen arvostaminen perintö- ja lahjaverotuksessa contains a full description of the methodology of valuation. Some key principles are presented below.
Read more about the valuation of gifts (in Finnish)
Arriving at the fair market value by comparing other transactions
Because 'fair market value' in a gift-tax context means the probable selling price, it is a primary method of valuation to look into any recent sales or purchases of the asset concerned. The recipient of the asset may sell it shortly afterwards, or it may have been bought by the donor not long ago before they gave it away as a gift.
The probable selling price can also be arrived at by analysing comparable transactions. When we look for comparable transactions in the case of real estate, buildings and apartments in housing companies, the location, characteristics and the date of the transaction must be similar to those of the gift.
The method focusing on sales and purchases of the same asset or comparable assets also requires that the buyers and sellers are un-associated, independent parties who close the deal in a free market environment. A further requirement is that no significant changes in the market environment have taken place.
Arriving at the fair market value by asking a specialist to give an appraisal statement
If no information is available on recent selling prices and comparisons are difficult to make, another method is to engage the services of a valuation expert — often a real estate agent. However, the Tax Administration does not require taxpayers to do so and any appraisal statements of real estate agents are not regarded as binding guidelines for the Tax Administration's assessment work. Nevertheless, an appraisal made by an independent specialist can be regarded as a good indicator of the fair market value of real property. The Tax Administration may ask the taxpayer to show an appraisal statement if necessary.
Arriving at the fair market value when no price information, comparable transactions, and appraisals are available
The Tax Administration's guidance (in Finnish; in Swedish) on "Valuation of assets and property in inheritance and gift taxation — Varojen arvostaminen perintö- ja lahjaverotuksessa" gives further instructions on the methodology of valuation in these circumstances.
The taxable value of a real estate unit is not its fair market value
For purposes of real estate tax, the Tax Administration sets out an officially confirmed value serving as the base of real estate tax. It must be noted that the rules of valuation for real estate tax purposes are arithmetical and they result in values that are lower than fair market value.
Example: The tax value of a house is €20,079 for purposes of real estate tax. Its fair market value is €160,000. If the house were given to someone as a gift, the ensuing gift tax would have to assessed on the fair market value of €160,000.
Housing-company loans reducing the apartment's value
When you determine the fair market value of an apartment, you must include any housing-company debt in your calculation. You must deduct the amount of the housing-company loan remaining unpaid at the date when the gift is made. However, if the owner of the apartment has taken a private home loan or improvement loan from a bank and it remains unpaid at the gift date, it is not regarded as a factor that would reduce the value of the gift.
Example: Antti gives his daughter Liisa an apartment. The housing company has allotted a loan balance of €20,000 to the apartment. This unpaid balance is transferred to Liisa's name. Based on a number of comparable transactions, we note that the apartment's fair market value is €150,000 excluding debt. We deduct the housing-company loan in order to arrive at an adjusted fair market value €130,000.
The donor may include a clause that withholds the right of possession to himself, and/or to someone else, or to several other people. Because the gift recipient's opportunities to use the gift are restricted when a right of possession is withheld to someone else, the tax assessment practice is to reduce the fair market value of the gift. This adjustment does not change the actual fair market value of the asset being the gift but it changes the base on which gift tax is assessed. The recipient must report the fair market value of the received gift and enter information as appropriate under section IV of the gift tax return, explaining that a right of possession, usufruct etc. is being withheld.