Capital transfer tax — Valuation — Agricultural land subject to tenancy held by partnership — Deceased freehold owner held 92.5% share of partnership — Whether freehold estate should be valued taking into account value of partnership share
Lady Fox, who
died on March 27 1981, was the freehold owner of the 3,000-acre Croxton Park
Estate, Cambridge. The land was let under an agricultural tenancy to a
partnership of which Lady Fox had a 92.5% share; the remaining 7.5% being held
by F and C. For the purposes of valuing Lady Fox’s estate for capital transfer
tax under the Finance Act 1975, the Commissioners of Inland Revenue contended
that a hypothetical vendor would have sold Lady Fox’s freehold interest
together with her partnership share. Upon the dissolution of the partnership at
the instance of the hypothetical purchaser, the remaining partners would have
been likely to sell their shares, thus enabling the purchaser to terminate the
tenancy and obtain vacant possession. As the estate with vacant possession was
agreed to be worth £6.125m, and £560,000 should be allowed as the cost of
acquiring the minority partners and deferment, the combined value of the
freehold and Lady Fox’s partnership share was £5.565m of which £4.28m should be
apportioned to the freehold interest. The revenue issued a notice determining
that the value of the freehold interest was an appropriate proportion of the
value of the freehold and the partnership share aggregated in a single unit of
valuation, namely £4.28m. The respondent executor’s case was that the freehold
must be valued as subject to an agricultural tenancy; it would then have an
agreed value of £2.751m. The Lands Tribunal accepted the executor’s contentions
that the freehold interest and Lady Fox’s partnership share should not be
aggregated because: (1) the notice of determination did not value any actual
item of property but proceeded by a notional lotting of a freehold interest
with the partnership share which never had a separate existence; (2) the
division of jurisdiction as to the valuation of land and other property meant
that for the purposes of the open market value rule in section 38 of the
Finance Act 1975 land could never be supposed to be sold in connection with
other property; and (3) the aggregated freehold and partnership share interest
were not a natural unit of property within the principle in Duke of
Buccleuch v Inland Revenue Commissioners [1967] 1 AC 506. The
revenue appealed.
determination confirmed. (1) The revenue’s notice of determination involved the
aggregation of two assets which each had a real existence at the relevant date.
Section 38 does not preclude such aggregation. The notice did not assume a
value for a single unit consisting of two interests. It did not quantify that
value because for the purpose of determining the value of the one item of
property within the tribunal’s jurisdiction, it was not necessary to do so. The
notice determined the method by which that interest should be valued. That
method necessarily involved the apportionment of the price which the composite
asset would fetch. The exercise performed by the notice was in accordance with
section 38. (2) Although the tribunal’s jurisdiction was limited to determining
disputes involving the value of land, that did not mean that for the purposes
of section 38 land could not be supposed to be saleable in conjunction with
some other form of property. The tribunal had jurisdiction because the entire
determination raised questions as to the value of land. (3) While the
partnership share was not a natural item of commerce, section 38 requires one
to suppose that it was sold. The question for the tribunal should have been
whether, on this assumption, it would have been more advantageous to sell it
with the land. In its decision the tribunal had accepted that selling the
freehold and the partnership share would have produced a greater combined
price: see [1992] 1 EGLR 211.
The following
cases are referred to in this report.
Attorney-General
of Ceylon v Mackie [1952] 2 All ER 775
Buccleuch
(Duke of) v Inland Revenue Commissioners [1967]
1 AC 506; [1967] 2 WLR 207; [1967] 2 WLR 207; [1967] 1 All ER 129, HL
Burdett-Coutts
v Inland Revenue Commissioners [1960] 1 WLR
1027; [1960] 3 All ER 153
Fox’s
(Lady) Exors v Commissioners of Inland Revenue [1992]
1 EGLR 211; [1992] 19 EG 173 and 20 EG 121
Inland
Revenue Commissioners v Crossman [1937] AC
26
This was an
appeal by the Commissioners of Inland Revenue by way of case stated from the
Lands Tribunal, which had determined the value of a freehold estate for the
purposes of section 38 of the Finance Act 1975. Robin Gray, the surviving
executor of the will of Myra Alice Lady Fox deceased, was the respondent.
Nicholas
Warren QC (instructed by the solicitor to the Inland Revenue) appeared for the
appellants; Richard Bramwell QC and Alun James (instructed by Farrer & Co)
represented the respondent.
Giving
judgment, HOFFMANN LJ said: This is an appeal by way of case stated from
the Lands Tribunal*. It concerns the valuation of agricultural land for the
purposes of what is now called inheritance tax, but was at the material time
called capital transfer tax on death. Lady Fox died on March 27 1981. She was
the freehold owner of the 3,000-acre Croxton Park Estate, Cambridgeshire, which
was let to a farming partnership in which she had a 92 1/2% interest. Shortly
stated, the question for the Lands Tribunal was whether the freehold estate
should be valued as if it had been let to strangers or whether the valuation
should take into account Lady Fox’s interest in the partnership which held the
tenancy.
*Editor’s
note: The Lands Tribunal decision is reported at [1992] 1 EGLR 211.
Statutory
hypothetical sale
Section 19(1)
of the Finance Act 1975 said that capital transfer tax should be charged on
‘the value transferred by a chargeable transfer’.
as if,
immediately before his death, he had made a transfer of value and the value
transferred by it had been equal to the value of his estate immediately before
his death.
Thus, Lady
Fox’s personal representatives were liable to capital transfer tax on the value
of her estate immediately before her death.
The estate
consisted of a number of different items of property and its value was the
aggregate of the values of all those items. ‘Property’ is defined in section
51(1) as ‘rights and interests of any description’. The valuation of each item
must be made in accordance with section 38, which says that ‘the value at any
time of any property shall for the purposes of capital transfer tax be the
price which the property might reasonably be expected to fetch if sold in the
open market at that time’. The section thus predicates a hypothetical sale
immediately before Lady Fox’s death of each item of property in her estate.
The only
express guidance which section 38 offers on the circumstances in which the
hypothetical sale must be supposed to have taken place is that it was ‘in the
open market’. But this deficiency has been amply remedied by the courts during
the century since the provision first made its appearance for the purposes of
estate duty in the Finance Act 1894. Certain things are necessarily entailed by
the statutory hypothesis. The property must be assumed to have been capable of
sale in the open market, even if in fact it was inherently unassignable or held
subject to restrictions on sale. The question is what a purchaser in the open
market would have paid to enjoy whatever rights attached to the property at the
relevant date: Inland Revenue Commissioners v Crossman [1937] AC
26. Furthermore, the hypothesis must be applied to the property as it actually
existed and not to some other property, even if in real life a vendor would
have been likely to make some changes or improvements before putting it on the
market: Duke of Buccleuch v Inland Revenue Commissioners [1967] 1
AC 506 at p525. To this extent, but only to this extent, the express terms of
the statute may introduce an element of artificiality into the hypothesis.
In all other
respects, the theme which runs through the authorities is that one assumes that
the hypothetical vendor and purchaser did whatever reasonable people buying and
selling such property would be likely to have done in real life. The
hypothetical vendor is an anonymous but reasonable vendor, who goes about the
sale as a prudent man of business, negotiating seriously without giving the
impression of being either over-anxious or unduly reluctant. The hypothetical
buyer is slightly less anonymous. He too is assumed to have behaved reasonably,
making proper inquiries about the property and not appearing too eager to buy.
But he also reflects reality in that he embodies whatever was actually the
demand for that property at the relevant time. It cannot be too strongly
emphasised that, although the sale is hypothetical, there is nothing
hypothetical about the open market in which it is supposed to have taken place.
The concept of the open market involves assuming that the whole world was free
to bid, and then forming a view about what in those circumstances would in real
life have been the best price reasonably obtainable.
The practical
nature of this exercise will usually mean that although in principle no one is
excluded from consideration, most of the world will usually play no part in the
calculation. The inquiry will often focus upon what a relatively small number
of people would be likely to have paid. It may have to arrive at a figure
within a range of prices which the evidence shows that various people would
have been likely to pay, reflecting, for example, the fact that one person had
a particular reason for paying a higher price than others, but taking into
account, if appropriate, the possibility that through accident or whim he might
not actually have bought. The valuation is thus a retrospective exercise in
probabilities, wholly derived from the real world, but rarely committed to the
proposition that a sale to a particular purchaser would definitely have
happened.
It is often
said that the hypothetical vendor and purchaser must be assumed to have been
‘willing’, but I doubt whether this adds anything to the assumption that they
must have behaved as one would reasonably expect of prudent parties who had in
fact agreed a sale on the relevant date. It certainly does not mean that,
having calculated the price which the property might reasonably have been
expected to fetch in the way I have described, one then asks whether the hypothetical
parties would have been pleased or disappointed with the result; for example,
by reference to what the property might have been worth at a different time or
in different circumstances. Such considerations are irrelevant.
Splitting
and joining
In Duke of
Buccleuch v Inland Revenue Commissioners [1967] 1 AC 506 the House
of Lords applied, what I might call, the reality principle to the question at
issue in this case, namely whether it should be assumed that items of property
in an estate were sold separately or together. The case concerned the valuation
of the Chatsworth Estate for the purposes of estate duty on the death of the
10th Duke of Devonshire. It comprised 119,000 acres. The revenue said that a
certain part of the Duke’s estate should be assumed to have been sold in 532
separate units. The taxpayer said it should be assumed to have been sold as a
whole, in which state it would have appealed only to speculators hoping to make
a profit by breaking it up.
The problem
and the principle according to which it should be solved were stated by Lord
Wilberforce as follows [at p546]:
When, as is
usually the case, the estate consists of an aggregate of items of property,
each item must be separately valued, and it is not difficult to see that
problems may arise as to the manner in which the separate units of valuation
are to be ascertained or in which the individual items are to be grouped into
units of valuation. These problems must necessarily be resolved, as they are in
practice, in a common sense way. The estate is to be taken as it is found: it
is not to be supposed, in order to obtain higher figures of valuation, that any
substantial expense is to be incurred or work done in organising the estate
into units: on the other hand, some practical grouping or classification, such
as can reasonably be carried out without undue expenditure of time and effort,
by a prudent man concerned to obtain the most favourable price, may be
supposed.
The House of
Lords was willing to infer from some cryptic remarks of the Lands Tribunal that
the division of the property into 532 units would not have involved undue
expenditure of time and effort. They were ‘natural units’ corresponding with
reality, such as farms, small holdings, houses, quarries, public houses and so
forth. Accordingly, the revenue’s valuation was affirmed. But the House refused
to accept the revenue’s more extreme proposition that the hypothetical vendor
must be supposed to have divided up the estate into whatever units would have
produced the best possible price. A further division of the ‘natural units’,
requiring substantial further work, would not have been a valuation of the
property as it actually was. Lord Reid drew the analogy of a wholesaler’s
stock, which might realise the best prices if divided up and sold retail. But
that is not a reasonable hypothesis upon which to value wholesale stock.
Buccleuch was a case about splitting up the estate and the remarks about
‘natural units’ as the basic particles of valuation, which cannot be further
split, must be read in that context. Attorney-General of Ceylon v Mackie
[1952] 2 All ER 775 was a case about putting things together. The deceased
was a shareholder in a company with an issued share capital of Rslm divided
into 19,800 Rs50 preference shares and 5,000 Rs2 management shares. The
articles gave the holders of 90% of the share capital the right compulsorily to
acquire the remaining shares. The deceased held all the management shares
(which constituted 1% of the share capital) and 9,201 preference shares. Lord
Reid said [at p777]:
It was
admitted for the appellant that no purchaser would have paid anything like
Rs250 per share for the management shares in face of the company’s articles
unless he could buy at the same time a large block of the preference shares and
so have a majority of votes. But the appellant contends that the respondent
must be supposed to have taken the course which would get the largest price for
the combined holding of management and preference shares and to have offered
for sale together with the management shares the whole or at least the greater
part of the preference shares owned by the deceased. In their Lordships’
judgment this contention is correct.
This shows
that whether one is taking apart or putting together, the principle is that the
vendor must be supposed to have ‘taken the course which would get the largest
price for the combined holding’, subject to the caveat in Buccleuch that
it does not entail ‘undue expenditure of time and effort’.
Revenue’s
case on aggregation
In the present
case the revenue’s view was that the prudent vendor would have sold the
freehold of the Croxton Park Estate together with Lady Fox’s interest in the
partnership. Tenanted farming land is worth a good deal less than the same land
with vacant possession. In the present case the parties agreed that the estate
would have been worth £2,751,000 tenanted, but £6,125,000 with vacant
possession. The Cambridge district valuer, Mr Michael Clegg [FRICS], thought
that Lady Fox’s interest in the partnership would in practice have enabled her
(or anyone else in her place) to obtain vacant possession for a relatively
modest additional payment to acquire the interests of the other partners. These
were a Major Fraser, a retired army officer aged 61, and Mr Edward Crees, a
partner in Strutt & Parker aged 57, who also farmed on his own account.
The
partnership deed provided that the death or retirement of any partner should
not determine the partnership as to the others, but that any partner could give
six months’ notice of dissolution to dissolve the partnership with regard to
himself. Major Fraser had a 2 1/2% interest in the profits, Mr Crees 5% and
Lady Fox the remaining 92 1/2%. The principal asset of the partnership was the
lease. This was unassignable, so that its value lay in what the freeholder
might be willing to pay for a surrender. In addition, the partnership owned the
usual paraphernalia of a farming business.
Mr Clegg’s
view was that upon a dissolution of the partnership at the instance of the
hypothetical purchaser who had succeeded to the share of Lady Fox, neither of
the other partners would in practice wish to succeed to the partnership
business. This would involve having to pay the hypothetical purchaser his 92
1/2% share of the value of the partnership assets, including the surrender
value of the tenancy. Since neither partner was particularly young and Mr Crees
had a farm and profession of his own, the overwhelming likelihood was that they
would prefer to sell their shares.
What would
they have to be paid? Mr Clegg estimated
that the surrender value of the tenancy was £1m, being about 45% of the
additional value created by adding it to the freehold. Mr Clegg valued the 7
1/2%, interest in this asset at £100,000. Thus a hypothetical purchaser who bought
the freehold and the partnership share could reasonably reckon on obtaining
vacant possession by laying out an additional £100,000. To allow for the
possibility that there might be delay or that Major Fraser and Mr Crees might
hold out for more or some other unexpected hitch occur, Mr Clegg deducted
another £460,000 or 7 1/2% of the vacant possession value. On this basis he
concluded that, as the estate with vacant possession was agreed to be worth
£6,125,000, a hypothetical purchaser would have been willing to pay £560,000
less for the tenanted freehold and Lady Fox’s interest in the partnership so
far as it was attributable to the tenancy. This produced a figure of
£5,565,000, of which Mr Clegg thought that £4,280,768 should be apportioned to
the freehold interest.
As £5,565,000
was a great deal more than could have been obtained by separate sales of the
freehold reversion (£2,751,000) and a share in a partnership holding an
unassignable tenancy, the revenue contended that a prudent hypothetical seller would
have sold the two interests together. The taxpayer thought otherwise. It was
clear that the dispute would have to be resolved in accordance with the
statutory appeal process.
Problem of
jurisdiction
At this point
a question of jurisdiction raised its head. By para 6 of Schedule 4 to the
Finance Act 1975 the Commissioners of Inland Revenue may by notice determine
the value of any property to which a transfer of value is wholly or partly
attributable, or (among other things) any other matter which appears to them to
be relevant for the purposes of a charge to capital transfer tax. Under para 7,
a person upon whom a notice of determination has been served may appeal. The
appeal is ordinarily to the Special Commissioners or, in some cases involving a
question of law, to the High Court. But by para 7(4) neither of these tribunals
may determine any question ‘as to the value of land in the United Kingdom’. On
any such question the appeal is to the Lands Tribunal.
A dispute over
the valuation of the freehold reversion was undoubtedly a matter for the Lands
Tribunal. But what of a dispute over a composite asset consisting of the
freehold and the partnership share? The
partnership assets included personalty. In fact, the taxpayer was contending
that the whole partnership interest was personalty. In order to avoid any
suggestion that the Lands Tribunal was being asked to value assets over which
it had no jurisdiction, the commissioners devised a complicated notice of
determination. Taking advantage of para 6(2) (f) of Schedule 4, which
says that the commissioners may determine any matter which appears to them
relevant for the purpose of capital transfer tax, they determined the following
matters:
(1) that the value of Lady Fox’s freehold
interest in the estate was an ‘appropriate proportion’ of the value of the
freehold and her interest in the farming partnership aggregated as a single
unit of valuation;
(2) that the ‘appropriate proportion’ should be
calculated by first determining what part of the value of the aggregated asset
was attributable to the freehold and her partnership interest in the tenancy,
and then apportioning that figure between the two interests:
(3) that the value attributable to the two
interests in the land was £5,565,000 and the value to be attributed to the
freehold was £4,280,768.
Issues
before the Lands Tribunal
The taxpayer
appealed to the Lands Tribunal. He contended that a process of valuation which
aggregated the freehold with an indirect interest in the tenancy and then
apportioned the result was not permissible. Even if it was, the Crown’s
methodology and resulting valuations were wrong. The parties agreed that the
following issues fell to be determined:
(1) Should the freehold reversion and the
partnership share be treated as one unit of property for the purposes of
section 38 of the Finance Act 1975?
2) If the freehold reversion and the partnership
share are to be so treated, should the value to be attributed to the freehold
reversion be ascertained in the manner and in the amount contended for by the
Crown or in some other, and if so, what manner and/or amount?
(3) In any event, is the value of (or to be
attributed to) the freehold reversion for the purposes of section 38 of the Act
of 1975 the sum of £4,280,768 or £2,751,000 or some other and if so what sum?
The case
stated to this court frames the questions rather differently, but the issues as
agreed at the hearing provided the framework for the Lands Tribunal’s findings
and helps one to interpret them.
First
issue: can the two interests be aggregated for the purposes of valuation?
Mr Richard
Bramwell QC, who appeared for the taxpayer, said that there were three separate
reasons why the commissioners were not entitled to aggregate the two interests.
The Lands Tribunal accepted all three. In his submissions to us, he rearranged
their order and I shall take them in that order.
(a) Attribution point
Section 38
requires one to consider what a particular item of property would have fetched
if sold on the open market. The Buccleuch principle may require one to
suppose that it was sold alone, split into parts or together with something
else. But Mr Bramwell says the process must be one of valuation, not the
attribution of part of the value of something else. In this case he says that
the notice of determination did not value any actual item of property. It
proceeded by a ‘notional lotting’ of the freehold interest with an item of
property which had never had a separate existence, namely Lady Fox’s interest
in the partnership’s tenancy to the exclusion of her interest in the other
partnership assets, and then attributed part of the value of this imaginary
asset to the freehold. Mr Bramwell says that this exercise is
seller postulated by Lord Wilberforce in Buccleuch. The tribunal agreed.
It said that [at p214M]:
if it were
permissible to lot the freehold interest and the share in the partnership
together as being a single unit of property then section 38 requires that that
single unit be valued as a single unit and that apportionment is neither
admissible nor appropriate.
I do not think
that this fairly reflects what the notice of determination was doing. The only
assumption it makes about how the hypothetical sale would have been conducted
is that the freehold and Lady Fox’s entire interest in the partnership would
have been sold together: para 3(1). I shall return in due course to whether such
an assumption could be justified under the Buccleuch principle, but
there is no doubt that it involves the aggregation of two assets which each had
a real existence at the relevant date. Since the two assets are supposed to
have been sold together because this would realise a greater price than selling
them separately, the value of each asset must necessarily be an apportioned
part of the price which would have been realised for both. In most cases the
commissioners would not be concerned to determine separate values. But there
are situations in which it is necessary: for example, when one aggregated asset
is part of the free estate and the other is settled property. Similarly, I
think that the commissioners were entitled to determine a separate value for the
freehold interest in this case in order to avoid jurisdictional problems.
In my
judgment, therefore, the notice does assume a value for a single unit
consisting of the two interests. It does not quantify that value because for
the purpose of determining the value of the one item of property undoubtedly
within the jurisdiction of the Lands Tribunal, namely the freehold interest, it
was not necessary to do so. The notice determines the method by which that
interest should be valued. That method must, as I have said, necessarily
involve apportionment of the price which the composite asset would fetch. And
there was no criticism of the formula which the revenue used for the purposes
of apportionment. In my judgment, therefore, the exercise performed by the notice
was in accordance with section 38.
(b) Jurisdiction point
Mr Bramwell’s
next point was that the division of jurisdiction as to the valuation of land
and property other than land meant that, for the purposes of section 38, land
could never be supposed to have been sold in conjunction with some other form
of property. The tribunal also accepted this argument, but I think it is wrong.
When section
38 first appeared as section 7(5) of the Finance Act 1894, there was a single
appeal to the High Court. The division between land and other property was
introduced by section 60(3) of the Finance (1909-1910) Act 1910, which said
that ‘where the question in dispute is the value of any real (including
leasehold) property’ the appeal was to be to a panel of referees. Section 1(3)(a)(ii)
of the Lands Tribunal Act 1949 substituted the tribunal for the referees. I do
not think that the procedural change introduced in 1910 was intended to change
the basis upon which duty was to be assessed.
One can easily
think of cases in which it would be artificial in the extreme to value land and
other property on the basis that they are sold separately from each other. In
the case of a successful business comprising premises, fixtures and fittings,
book debts, stock and goodwill, it would be remarkable if the hypothetical
vendor had to be supposed to have sold the premises and any fixtures forming
part of the realty as one unit and the remaining assets as another, as if on a
liquidation. The natural unit of valuation is the assets of the business as a
going concern.
There are
other provisions of the capital taxes legislation which expressly require the
aggregation of assets for the purposes of valuation. Para 7 of Schedule 10 says
that, where the value of any property in a person’s estate would be less than
the appropriate portion of the value of the aggregate of that and any ‘related
property’, it shall be taken to be that appropriate portion. ‘Related property’
includes the property of a spouse. So, for example, if the tenancy had been
vested in Lady Fox’s husband, the freehold reversion would have been valued at
the appropriate portion of the value of the estate with vacant possession. In
such a case, of course, both interests are land. But what if the husband had
held the entire issued share capital in a company which held the tenancy? Para 7 of Schedule 10 would still have
required aggregation and it would have been no answer that the tribunal had no
jurisdiction over part of the combined assets. Why then should the
jurisdictional divide be an obstacle to aggregation in cases in which the
courts have held that it is required by the terms of section 38?
In my
judgment, therefore, jurisdiction was no objection to an aggregation required
by the principle stated in Buccleuch. I need not decide which tribunal
would have had jurisdiction if the commissioners had simply determined the
total value of the composite asset, except to say that the statute cannot be
construed to produce the result that the commissioners can make a determination
in accordance with section 38, but against which no one has jurisdiction to
hear an appeal. In this case, the tribunal, in my judgment, had jurisdiction
because the entire determination raised questions ‘as to the value of land’. So
far as the tribunal had to consider the value of assets which were not land,
this was only part of the process of reasoning by which it arrived at an answer
to the substantial question in the determination, namely the value of the
freehold interest.
For this
purpose I do not think it matters whether Lady Fox’s partnership interest
included an interest in the tenancy which was itself ‘land’. The tribunal
rejected the Crown’s argument that it was land and that accordingly there was
no jurisdictional barrier to valuing it together with the freehold. For my
part, I think that the Crown was right. As between themselves, partners are not
entitled individually to exercise proprietary rights over any of the
partnership assets. This is because they have subjected their proprietary
interests to the terms of the partnership deed which provides that the assets
shall be employed in the partnership business, and on dissolution realised for
the purposes of paying debts and distributing any surplus. As regards the
outside world, however, the partnership deed is irrelevant. The partners are
collectively entitled to each and every asset of the partnership, in which each
of them therefore has an undivided share. It is this outside view which
identifies the nature of the property falling to be valued for the purpose of
capital transfer tax, although in accordance with the Crossman principle
the restrictions imposed by the partnership deed must be taken into account in
assessing its value: see Burdett-Coutts v Inland Revenue
Commissioners [1960] 1 WLR 1027. In my judgment, therefore, Lady Fox had
for the purposes of section 38 a 92 1/2% interest in the tenancy which the
tribunal had jurisdiction to value as an interest in land.
(c) ‘Natural unit’ point
Mr Bramwell’s
third submission was that, even if the Lands Tribunal had jurisdiction to value
both interests, the aggregate did not fall within the principle in Buccleuch
because it was not a ‘natural unit’. This, as we have seen, is a term
derived from the speech of Lord Reid, where it is used in the context of a
landed estate to mean parts having at the relevant date a separate commercial
identity. It was a helpful way of describing the basic unit of valuation in
that particular case. But I think it would be dangerous to elevate the term
‘natural unit’ to a universal touchstone for the application of the Buccleuch
principle. The principle is that the hypothetical vendor must be supposed to
have ‘taken the course which would get the largest price’ provided that this
does not entail ‘undue expenditure of time and effort’. In some cases this may
involve the sale of an aggregate which could not reasonably be described as a
‘natural unit’. Suppose, for example, there is evidence that at the relevant
time a prudent seller would have discovered that a higher price could be
obtained by the combined sale of two items which might otherwise have been
thought entirely unrelated to each other. Such circumstances might arise from
the peculiar demands of a small number of potential buyers or even
those of a single one. In my view, the hypothetical seller would in those
circumstances have been, subject to the caveat I have mentioned, willing
to sell the items together. The fact that no one would have described them as a
‘natural unit’ is irrelevant.
In dealing
with this point, the tribunal said that the fact that one might obtain a higher
value by lotting the items together ‘does not convert the two parts into a
natural unit of property’. In deciding that the aggregate was not a natural
unit, it relied upon the evidence of the taxpayer’s valuer, Mr Donald Hugh
Reeves [MA FRICS], who said that the two items together ‘would not appeal to
any known sector of the market’. He had never heard of land being sold together
with a share in a partnership holding a tenancy in such land. Indeed, he had
never heard of a sale of a share in a farming partnership at all.
In my
judgment, the tribunal here misdirected itself as to the true principle which
it had to apply. The share in the farming partnership, with or without other
property, was plainly not a ‘natural’ item of commerce. Few people would want
to buy the right to farm in partnership with strangers. Nevertheless, section
38 requires one to suppose that it was sold. The question for the tribunal was
whether, on this assumption, it would have been more advantageous to sell it
with the land. The answer which the tribunal would have given to this question
appears clearly enough from the answer which it gave to the second issue,
namely whether, assuming that aggregation was permissible, the method of
valuation adopted by Mr Clegg (which I have described above) was correct. Mr
Reeve had said that purchasers would not give any more for the land because of
also being able to ‘step into the shoes of Lady Fox’ and exercise her rights as
a partner. ‘In reality’ he said, ‘this reversion was no different from that of
any other let farm and purchasers in the market would bid accordingly’.
On this point,
however, the tribunal preferred the approach of Mr Clegg. It said [at p216G]:
On the
assumption that in law the respondent may lot or sell together the freehold
reversion and the 92.5% share in the farming partnership as a single unit of
property, we are persuaded that the approach to valuation adopted by Mr Clegg
pays a realistic regard to the circumstances actually prevailing and likely to
have been within the knowledge of the hypothetical purchaser at the relevant
date. While the general basis of value to be adopted is prescribed by statute
as open market value there is no prescription of the method of valuation to be
applied. If adjustment of the agreed value with vacant possession by deductions
and/or apportionment is adopted, it falls to be considered on the criterion of
whether it produces a realistic answer when judged against the prevailing
factual circumstances. On the evidence before us the most likely prospect in
March 1981 was that the minority shareholders would negotiate a surrender of
the tenancies; as indeed they in fact did during the years 1982-84.
This passage,
in my judgment, shows that the tribunal were persuaded that in real life,
selling the freehold and the partnership share would have produced a greater
combined price than selling them separately. There was no evidence that this
would have required undue effort or expense. Accordingly, I think that if the
tribunal had not considered it necessary to find that the aggregate was a
‘natural unit’, they would have decided this point in favour of the Crown. As
the tribunal were also, in my view, wrong in rejecting aggregation on the basis
of the attribution and jurisdiction points, I think that the Crown should have
succeeded on the first issue as a whole.
Second
issue: Mr Clegg’s method of valuation
I have already
quoted the views of the tribunal on this point. They are findings of fact which
on the evidence the tribunal was entitled to make.
Case
stated
The tribunal
stated the case in the following terms:
The questions
upon which the decision of the Honourable Court is desired are:
1. (1) Whether as a matter of law a unit of
‘property’ for the purposes of valuation under section 38 Finance Act 1975 can
comprise two or more component parts where at least one of those parts is
‘land’ (within the meaning of Paragraph 7 Schedule 4 Finance Act 1975) and at
least one of those parts is not ‘land’.
(2) If the answer to question 1(1) is ‘No’,
whether, as a matter of law, Lady Fox’s partnership share (‘the Share’)
includes ‘land’ for this purpose.
2. If the
answer to either of Questions 1(1) and 1(2) is ‘Yes’, what as a matter of law
is the correct test for determining whether Lady Fox’s reversion (‘the
Reversion’) and the Share should be valued as one unit of property for the
purposes of section 38 Finance Act 1975.
3. Whether
the Lands Tribunal could, as a matter of law and on the facts found, have
reached the conclusion that the Reversion and the Share did not form a unit of
property for the purposes of valuation under section 38 Finance Act 1975.
4. Whether,
on the footing that the Reversion and the Share did form a unit of property for
the purposes of valuation under section 38 Finance Act 1975, it is permissible
to apportion the value of that unit between the Reversion and the Share for any
of the purposes of the Finance Act 1975.
As will appear
from what I have said so far, I would answer these questions as follows:
1. (1)
‘Yes’.
1. (2)
Does not arise, but in my view ‘Yes’.
2. The principle in Buccleuch as
explained above.
3. ‘No’.
4. ‘Yes’.
Conclusion
Where do these
answers leave the commissioners’ notice of determination? In my judgment, intact. The Lands Tribunal,
although it found under the second issue that Mr Clegg had adopted the correct
method of valuation, expressed some doubt as to whether his deduction of
£100,000 for the shares of the other partners and his allowance of about
£460,000 for risk and profit was in all the circumstances enough. But on this
point they had no evidence to weigh against that of Mr Clegg. The taxpayer’s
valuer, Mr Reeve, took his stand on the proposition that Mr Clegg’s method was
wrong in principle because, quite apart from the technical objections, a
purchaser of the freehold would not have paid any more because he was also
getting the partnership share. In fact Mr Reeve thought he would have paid
rather less. It followed that Mr Reeve saw no point in supposing a sale of the
combined items and offered no formal valuation or other evidence of what they
might have fetched. This was a high-risk strategy because it seems clear that
if Mr Reeve had contended in the alternative for a combined valuation lower
than that of Mr Clegg, the tribunal would have been sympathetic. In the event,
however, Mr Bramwell submitted to the tribunal (in my view, correctly) that
they were faced with an all or nothing choice. If they accepted Mr Clegg’s
methodology, they had also to accept his valuation. Before this court, both
sides have adhered to this position and neither has asked for the case to be
remitted to the tribunal to hear further evidence. I would therefore simply
allow the appeal and confirm the commissioners’ notice of determination.
WAITE and NEILL LJJ agreed and did not add anything.
