Capital transfer tax (inheritance tax) — Valuation of land — Death of landowner — Existence of farming tenancies — Partnership business — Value to be attributed to freehold interest in land — Whether freehold reversion and partnership share should be treated as one unit of property — Method of valuation — Finance Act 1975, section 38 — Appeal by executors allowed
Lady Fox owned the freehold interest in land known as the Croxton Park Estate, Cambridgeshire. She farmed the land with two partners and it was subject to certain tenancies which Lady Fox had granted to herself and her partners. After her death, a notice of determination was issued by the Commissioners of Inland Revenue determining the value to be attributed to the freehold interest in the land for capital transfer tax purposes. The notice purported to aggregate or lot together with her freehold interest in the land, her share of the partnership business “as a single unit of property” for the purposes of section 38 of the Finance Act 1975. The notice asserted “the relevant amount” (£5,565,000) which was alleged to be the value of the alleged single unit of property calculated by deducting £560,625 (for risk and profit and the shares in the partnership of Lady Fox’s partners) from the vacant possession value of £6,125,000 and rounded in the result. The relevant amount was then apportioned according to a mathematical formula set out in the notice and, finally, the value to be attributed to the freehold interest was stated to be £4,280,768.
The executors appealed to the Lands Tribunal. The notice of appeal stated that for the purposes of section 38, the value of the freehold interest specified in the notice was the price which it might reasonably have expected to fetch if sold on the open market at the date of the deceased’s death and that that value was £2,751,000. Further, the notice challenged the basis of valuation described in the notice as being contrary to section 38 in that the freehold interest and the partnership share did not fall to be aggregated as a single unit of property and that apportionment was neither permissible nor relevant.
Held The appeal was allowed.
1. Lady Fox’s share in the partnership was not itself an interest in land. The tenancies were assets of the partnership but it did not follow that a share in the partnership was anything other than personalty or a chose in action (a right enforceable by legal action). Accordingly, the freehold interest and the partnership share did not constitute a single unit of property for the purposes of section 38 and, as a matter of law, the commissioners had no power to lot the two together in the notice.
2. The freehold interest and the share did not constitute a natural unit of property within the meaning given by the House of Lords in Duke of Buccleuch v Commissioners of Inland Revenue [1967] 1 AC 506. The purpose of lotting the two items together was to endeavour to obtain a higher value than the sum of the values of the two separate parts. However, that aim did not convert the two into a natural unit of property. If it was permissible to lot the two together as a single unit, then section 38 required that it be valued as a single unit and apportionment was neither admissible nor appropriate.
3. Accordingly, the notice was based on false premises which vitiated the commissioners’ valuations and the value of the freehold interest was to be ascertained by reference to its investment value, ie the agreed value of £2,751,000.
4. If the tribunal’s conclusion was wrong, and on the assumption that in law the freehold reversion and the partnership share could be lotted together and sold as a single unit, the value of the freehold reversion was to be ascertained in the manner and amount contended for by the Crown, which paid a realistic regard to the circumstances actually prevailing and likely to have been within the knowledge of the hypothetical purchaser at the valuation date. While the general basis of value to be adopted was prescribed by statute as the open market value, there was no presumption of the method of valuation to be applied. If adjustment of the agreed value with vacant possession by deductions and/or apportionment was adopted, it fell to be considered on the criterion of whether it produced a realistic answer when judged against the prevailing factual circumstances.
Richard Bramwell QC and Alun James (instructed by Farrer & Co) appeared for the executors; and Mary Arden QC and Nicholas Warren (instructed by the Solicitor of Inland Revenue) appeared for the defendant.
