Housing — ‘Right to buy’ — Capital transfer tax (now inheritance tax) — Valuation for tax purposes of long leasehold interest acquired by deceased secure tenant under the right to buy provisions of the Housing Act 1980 (now contained in the Housing Act 1985) — Interest acquired subject to a charge to secure repayment of discount or a percentage thereof on early disposal of the interest — Deceased died within a year of acquisition — Problems of valuation of interest for tax purposes having regard to the provision for repayment — Appeal by Inland Revenue from decision of Lands Tribunal
in this case arose from the death of a person who had acquired a long leasehold
interest in a Barbican flat under the ‘right to buy’ provisions applicable to
secure tenants in the Housing Act 1980 (the Act then in force) — The deceased
had died before the end of the first full year after acquisition — The right to
buy provisions included an obligation to repay a percentage of the substantial
discount allowed on the purchase price if there was a disposal within five
years of the grant, the amount repayable reducing for each complete year
elapsing before the disposal — The difficulties in the case arose from finding
the right way to place a value on the repayment liability — The essential
question, as formulated by the Court of Appeal, was whether the value of the
leasehold interest was to be taken to be the value which it would have if
transferred, on the basis that the transferee would have to pay the relevant
amount of repayable discount, or whether the leasehold was to be valued as in
the hands of the deceased immediately before her death when nothing had
happened to cause any percentage of the discount to be repayable — A surprising
amount of analysis went into the solution of this question, including a ruling
by a special commissioner which appears to have been overtaken by the decision
of the Court of Appeal
litigation history really begins with a determination by the Board of Inland
Revenue of the value of the deceased’s interest in the sum of £52,000 — Her
executor, who was also her son, appealed to the Lands Tribunal, as a question
about the value of land was involved — The tribunal determined the open market
value of the deceased’s interest immediately before her death, ie the market
price of the flat without regard to the liability in respect of the repayment
of discount, at £63,000 — The tribunal, however, decided that they had no
jurisdiction to decide the possible charge, on the ground that it was not a
matter which affected the open market value of the deceased’s interest — The
board then requested the tribunal to state a case for the Court of Appeal — The
board contended that the tribunal was wrong to decline jurisdiction to
determine the amount by which the market value of the lease was to be reduced
by reason of the liability to repay the discount on disposal
Appeal accepted the contention of the board that the tribunal had exclusive
jurisdiction to decide the matter, as the property to be valued consisted of
one item, namely land, being the leasehold interest subject to the incumbrance
of the charge securing repayment of the discount (this implied that the special
commissioner had no jurisdiction in the matter) — The valuation of the
leasehold interest, taking into account the obligation to repay the discount,
should be carried out by applying the principles stated in Inland Revenue
Commissioners v Crossman — Upon a transfer of value of the leasehold interest by
the deceased the amount by which the estate would be reduced would be the
amount of the value of that leasehold interest in the hands of the deceased —
In her hands no obligation had arisen, but it would arise if at some point she
chose to sell or make a gift of the leasehold interest — Her property in the
leasehold interest, subject to the charge securing the obligation to repay,
must be valued at what it might reasonably be expected to fetch if sold in the
open market at the date of death — The hypothetical buyer must be treated as
paying the open market price for an interest which in his hands would be
subject to the charge (but on the footing that his own hypothetical acquisition
did not itself give rise to a disposal) — He would pay such a price (a price
below that which he would pay if the leasehold interest did not contain that
charge) as he might be shown by evidence to have been reasonably expected to
pay
the principles on which the determination of value was to be made, it was not
for the Court of Appeal to go further — They remitted the case to the tribunal,
whose jurisdiction had been established, for another hearing and for
determination in accordance with the opinion of the court — Appeal allowed
The following cases are referred to in
this report.
Buccleuch (Duke of) v Inland Revenue
Commissioners [1967] 1 AC 506; [1967] 2 WLR 207; [1967] 1 All ER 129, HL
Inland Revenue Commissioners v Crossman [1937] AC
26
Lynall v Inland Revenue Commissioners
[1972] AC 680; [1971] 3 WLR 759; [1971] 3 All ER 914, HL
Sutherland deed, In re [1963] AC 235; [1961] 3 WLR
1062; [1961] 3 All ER 855, HL
This was an appeal by the Inland Revenue
Commissioners, by way of case stated, from the decision of the Lands Tribunal,
dated April 11 1989, whereby the tribunal had determined the market value of a
leasehold interest in a flat at 44 Speed House, Barbican, London EC2, following
the death of Mrs D E Alexander, but had declined, on the ground of lack of
jurisdiction, to determine the amount by which the market value of the premises
was to be reduced by reference to the liability to repay on disposal the amount
of the discount on the purchase price.
Nicholas Warren (instructed by the
Solicitor of Inland Revenue) appeared on behalf of the appellants; the
respondent, Andrew Maxwell Kilgour Alexander, appeared in person.
Giving judgment, RALPH GIBSON LJ
said: This is an appeal by the Commissioners of Inland Revenue pursuant to
section 3(4) of the Lands Tribunal Act 1949 by way of case stated under Ord 61,
r 1 of the Rules of the Supreme Court. The appeal raises questions as to the
determination of the value for the purposes of capital transfer tax, now
inheritance tax, of an interest in land which had been acquired by the deceased
under the ‘right to buy’ provisions in the Housing Act 1980 and was at the date
of death subject to a charge to secure repayment of the relevant percentage of
discount upon early disposal. The right to buy provisions are now contained in
Part V of the Housing Act 1985.
The facts which led to the decision of
the Lands Tribunal and the history of this dispute can be summarised as
follows.
Mrs Alexander, the deceased, who died on
January 17 1984, acquired on March 4 1983 a long leasehold interest in a flat,
44 Speed House, Barbican. The landlords are the City of London. The lease was
granted for a consideration of £35,400 pursuant to the right to buy provisions
of the Housing Act 1980 at a discount of £24,600 under section 7 of that Act.
The lease contained covenants by the
tenant to pay to the landlords the relevant percentage of the discount if,
within five years of the grant of the lease, there should be a disposal falling
within the terms of the covenant, which included an assignment of the lease or
the grant of a sublease for more than 21 years otherwise than at a rack rent.
The covenant was required by section 8(3) of the Housing Act 1980. The
liability to pay was to be a charge upon the leasehold premises. The amount so
payable was provided to be reduced by 20% of the discount for each complete
year which elapsed after the grant of the lease on March 4 1983. The deceased
died before the end of the first full year. Details of the reducing sums
repayable upon early disposal were set out in Mr Alexander’s submissions to the
Lands Tribunal: before March 3 1984, £24,600; between March 4 1984 and March 3
1985, £18,680*; between March 4 1985 and March 3 1986, £14,760; between March 4
1986 and March 3 1987, £9,840; between March 4 1987 and March 3 1988 £4,920;
and after March 4 1988, nothing.
*Judge’s note: Since judgment was
delivered my attention has been drawn by the Inland Revenue to their contention
that the figure of £18,680, although correctly recited from the document,
should in fact have been £19,680.
The respondent to this appeal is Andrew
Alexander, the son of the deceased and the executor of her estate. There has
been, in fact, no disposal of the lease such as would give rise to the
obligation to repay any part of the discount sum. The vesting in the executor
on death and the subsequent vesting in a beneficiary, if any, are not disposals
within the provisions of section 8(3) of the 1980 Act and of the covenant in
the lease.
By section 22(1) of the Finance Act 1975:
On the death of any person . . . tax
shall be charged 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 . . .
The value of the property to which the
deceased was beneficially entitled (section 23(1) of the 1975 Act) is to be
determined by reference to section 38 of the Act. That section provides:
38. — (1)
Except as otherwise provided by this Part of this Act, 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; but that price shall not be assumed to be reduced on
the ground that the whole property is to be placed on the market at one and the
same time.
(2)
Schedule 10 to this Act shall have effect with respect to the valuation
of property for the purposes of capital transfer tax and the determination of
the value transferred by a transfer of value.
The essential question may be described
thus: is the value of the lease to be taken as the value which the lease would
have, if transferred, on the basis that the transferee must pay the relevant
percentage of repayable premium, or is the lease to be valued as in the hands
of the deceased immediately before her death when nothing had happened to cause
any proportion of premium to be repayable?
On February 18 1986 the Board of Inland
Revenue gave notice to the respondent that they had determined the value of the
leasehold interest held by the deceased on January 17 1984 in the sum of
£52,000. The respondent appealed against that determination by written notice
under para 7(1) of Schedule 4 to the 1975 Act.
The right of appeal is described thus in
para 7:
(1)
A person on whom a notice under paragraph 6 above has been served may .
. . appeal against any determination specified in it . . . to the Board . . .
(2)
Subject to the following provisions of this paragraph the appeal shall
be to the Special Commissioners.
(3)
. . .
(4)
Neither the Special Commissioners nor the High Court shall determine any
question as to the value of land in the United Kingdom on any appeal under this
paragraph, but on any such question the appeal shall be to the Lands Tribunal .
. .
By his appeal the respondent invited the
Lands Tribunal to determine two issues: first, the value of the leasehold
interest at January 17 1984 free from incumbrances and, second, the amount of
the deduction to be made from that value in respect of the liability of the
deceased to repay the relevant percentage of the discount. His case was that
the worth of the flat to the executor on January 17 1984 was £60,000, the
market value, less the amount repayable to the landlords upon a sale on that
date, namely £24,600, showing a net worth of £35,400.
The district valuer, Mr J S Prisk
[FRICS], contended that the market value of the individual flat, apart from the
charge for repayment of discount, was £63,000 and that any reduction in value
by reason of liability to repay discount did not exceed £13,000. That was his
estimate of the deduction upon which a willing buyer, wanting to place himself
in the same position as the deceased, would settle and he added that a
deduction of that amount represented a halfway point between ‘best’ and ‘worst’
positions and that would commend it between willing buyer and willing seller.
The Lands Tribunal, Mr C R Mallett and Mr
T Hoyes, both Fellows of the Royal Institution of Chartered Surveyors,
determined the open market value of the interest of the deceased in the
leasehold premises immediately before her death as £63,000, that is to say the
market price of the flat as assessed by Mr Prisk but without regard to the
charge in respect of repayment of discount.
The Lands Tribunal found difficulty in
deciding the appropriate deduction to be made from the market value to allow
for the liability to repay discount and it was the tribunal itself which raised
the question as to its jurisdiction to decide the matter. They concluded that
the tribunal had no jurisdiction to decide the question, which they described
as being:
. . . the extent of any liability between
the hypothetical statutory vendor and a third party which liability may well be
a charge against the estate of the deceased but it is not a matter which
affects the open market value of the premises.
Their decision, therefore, did no more
than fix the open market value of the lease without regard to the covenant for
repayment.
The board asked the Lands Tribunal to
state a case for this court. The Lands Tribunal in stating the case annexed to
it their decision of April 11 1989 pursuant to the practice direction of July
27 1956: see [1956] 1 WLR 1112. The case stated is dated June 4 1990. The
question for the decision of the court is:
Whether the Tribunal was correct in law
in deciding that it had no jurisdiction to decide liabilities between the
vendor and the third party which may well be a charge against the deceased’s
estate but which do not affect the open market value of the premises at the
prescribed date.
By letter of August 25 1989 the board had
applied to the special commissioners. After stating the events which had
occurred and the decision of the Lands Tribunal, and after reference to section
28 of and Schedule 10 and Schedule 4 to the 1975 Act, the question was posed
thus:
The question is whether the proper
subject of valuation is the incumbered leasehold (either on general principles
or by virtue of paragraph 2 of Schedule 10 to the 1975 Act) in which case . . .
the appeal as a whole falls within the jurisdiction of the Lands Tribunal under
paragraph 7(4) of Schedule 4; or whether the statute requires the parties first
to value the notionally unincumbered leasehold (a matter for the Lands
Tribunal); second to value the liability or charge (prima facie a matter for
your Commissioners) and finally to establish the value transferring (again, if
there is any dispute, prima facie a matter for your Commissioners).
The board inquired whether the
commissioners would be willing to assume jurisdiction in the appeal.
Mr Widdows, special commissioner, heard
the further appeal by Mr Alexander and on December 28 1989 issued his written
decision. On May 7 1990 he stated his conclusions in the form of a special case
(to which his written decision was annexed) for the opinion of the High Court.
He held that the issue as to the amount of the deduction from the open market
value to reflect the liability of the deceased to refund the proportion of the
discount on disposal of the premises was a question of law only and not one of
land valuation and, therefore, within the jurisdiction of the special
commissioners under para 7 of
liability to repay the relevant proportion of discount should be taken into
account in determining the value of the deceased’s estate as a current
liability at the date of death under para 1(1) of Schedule 10 and not as a
liability falling to be discharged at a future date under para 1(4) of that
schedule. No evidence was required. He accordingly held that the market value
of £63,000 as determined by the Lands Tribunal must be reduced by £24,600, the
amount of discount repayable on disposal at the date of death, and that the
value of the leasehold interest was therefore reduced to £38,400.
The appeal to this court
The appeal before us is only that upon
the case stated by the Lands Tribunal. The case stated by the special
commissioner will be heard in the first place by a judge of the High Court from
which decision an appeal might come to this court. The board’s case on this
appeal is that the Lands Tribunal was wrong in law to decline jurisdiction to
determine the amount by which the market value of the premises was to be
reduced by reference to the liability to repay the discount on disposal; that
the case should be remitted to the Lands Tribunal to determine the question;
and that this court should decide the principles in accordance with which that
determination is to be made. In effect, therefore, this court is asked to
decide principles which will be decisive of the questions raised by the
decision of the special commissioner. Application was made for leave to amend
the case stated by adding the following additional questions for the opinion of
the court, namely whether the entity to be valued is the lease taking into
account the obligations of the tenant and her successors in title to make
repayments to the landlords under the provisions of the Housing Act 1980; and,
if so, whether the principles exemplified in Inland Revenue Commissioners
v Crossman [1937] AC 26 are applicable.
Mr Alexander did not resist the making of
the amendment and leave was granted.
Mr Alexander, who has appeared in person
before this court, as he did below, in effect adopted the reasoning of the
Lands Tribunal and of Mr Widdows and invited this court to uphold their
decisions. The reasoning of the Lands Tribunal can, I think, be summarised as
follows:
(i)
the board’s contention, based on paras 1 and 2 of the 10th Schedule, was
that the liability to repay a proportion of the discount is an incumbrance
which is deemed to reduce the value of the property and therefore falls within
the jurisdiction of the Lands Tribunal;
(ii)
‘Incumbrance’ in para 2 of the 10th Schedule is not defined but any
charge on the premises must be an incumbrance;
(iii)
in so far as an incumbrance affects the open market value of premises,
that is taken into account in ascertaining value under section 38;
(iv)
para 2 of the 10th Schedule is confined to those incumbrances which have
no effect on the open market value of the premises but which do affect the
value of the transferor’s estate. Further, that para is concerned with the
process of ascertaining the tax liability of a transferor’s estate and not the
open market value of the land;
(v)
the open market value of £63,000 covers any effect upon price of the
liability of the vendor to pay discount;
(vi)
section 22 of the 1975 Act deems that the deceased made a transfer of
value immediately before her death. If that had happened, she would have been
under an obligation under section 8 of the Housing Act 1980 to repay the whole
of the discount;
(vii)
the figure of £63,000, the open market value of the flat immediately
before the death, is derived from open market transactions of similar premises
where the vendor was also under a liability to repay a discount to the council.
Therefore, in so far as that liability had any effect upon the open market
value, it is already reflected in the figure of £63,000;
(viii)
once the Lands Tribunal had ascertained the open market value of the
property as between vendor and purchaser, the Lands Tribunal had no
jurisdiction to decide the liabilities between the vendor and a third party,
which liability may well be a charge against the deceased’s estate but does not
affect the open market value of the premises.
Next, although no appeal from the
decision of Mr Widdows is before this court, Mr Alexander submitted that his
decision was correct and supports the conclusion of the Lands Tribunal. I will,
therefore, set out in summary the careful reasoning of Mr Widdows, which I
found to be of the greatest assistance in understanding the problems raised in
the application of the provisions of the 1975 Act to the facts of this
particular case. As Mr Widdows observed:
It may be that an obligation of this
nature (the obligation to repay discount) was in no one’s contemplation when
the 1975 Act was drafted.
Mr Widdows proceeded by the following
steps:
(i)
Since the Lands Tribunal had declined, after determining the open market
value of £63,000, to decide the further question as to the amount of any
deduction to be made to reflect the deceased’s liability to refund on disposal
of the premises the relevant percentage of discount, the questions for decision
by him were whether determination of the amount of that deduction fell within
the jurisdiction of the commissioners under para 7(2) of Schedule 4 and, if it
did, what the amount of the deduction should be.
(ii)
The question of the amount of deduction was one of law and not one of
land valuation and was accordingly within the jurisdiction of the special
commissioners under para 7(2). As a matter of law the liability to repay the relevant
percentage of discount must be taken into account in determining the value of
the deceased’s estate as a current liability at the date of death under para 1
of Schedule 10 and not as a liability falling to be discharged at a future date
under para 1(4) of that Schedule.
(iii)
After reference to the submissions made for the board (based upon the
principles stated in Inland Revenue Commissioners v Crossman
[1937] AC 26 and Duke of Buccleuch v Inland Revenue Commissioners
[1967] 1 AC 506), Mr Widdows held that the leasehold interest of the deceased
could not have been put on the market subject to a continuing obligation to
repay a proportion of the discount on a future sale because the completion of
the first sale would trigger the covenant for repayment and the obligation
would then be discharged.
(iv)
The proper treatment of the liability to repay the relevant proportion
of discount was not by valuation of it as a future contingent liability under
para 1(4) of Schedule 10 because the better view was that it was a current
liability necessarily falling to be discharged on a disposal, in order to
release the land charge, like a mortgage debt. The approach contended for by
the board would lead to an overstatement of the value of the estate in terms of
realisable value at the valuation date. Section 22 of the 1975 Act applies to
the case of transfer on death the general principle of the Act, namely that the
tax is charged upon the person who makes a gratuitous transfer by reference to
the price which could have been obtained in the open market for the property
transferred. Under para 1(1) of Schedule 10 the deceased’s ‘liability’ under
the covenant to repay the relevant percentage of discount was to be taken
account of as at the date of death, ie in the sum of £24,600. The value of the
leasehold interest was therefore £38,400.
Mr Warren’s submissions for the
Commissioners of Inland Revenue were, in substance, as follows:
(i)
The Lands Tribunal under para 7(4) of Schedule 4 to the 1975 Act (the
current provision is in section 222(4) of the Inheritance Tax Act 1984) had
exclusive jurisdiction (and thus the special commissioner had no jurisdiction),
first, because the property to be valued is one item, namely land, being the
lease subject to the incumbrance of the charge securing repayment of discount.
(ii)
If the primary contention be rejected, then the obligation of the
deceased to make a repayment to the landlord was a contingent liability which
would arise if, but only if, there should be a disposal within section 8(3) of
the 1980 Act; and that contingent liability falls within para 2 of Schedule 10
to the 1975 Act:
A liability which is an incumbrance on
any property shall, so far as possible, be taken to reduce the value of that
property.
It must, therefore, be taken to reduce
the value of the lease. The reduced value is the value of the lease for the
purposes of capital transfer tax and is a question of valuation of land for the
Lands Tribunal whether the Lands Tribunal proceeds by fixing the open market value
of the lease without regard to the obligation and then deducts the appropriate
sum in respect of the liability, or whether the Lands Tribunal values the
property which the deceased had taking account of that liability.
(iii)
If the primary contentions be right, the valuation of the lease, taking
into account the obligations of the deceased to repay discount, should be
carried out by applying the principles stated in Inland Revenue
Commissioners v Crossman [1937] AC 26.
(iv)
Upon that basis, the market value of the lease for these purposes should
be taken as the amount which a person would be
repayment to the landlords in the event of a disposal within section 8(3), but
on the footing that his own acquisition did not give rise to such a disposal.
There could be no further reduction under para 1 of Schedule 10 to the 1975 Act
in respect of that obligation because full account would have been taken of it
in the valuation of the lease.
Conclusion
For my part, I accept the primary
submission made for the appellants by Mr Warren. I have reached that conclusion
for the following reasons.
The basis of charge is stated by section
19 of the 1975 Act:
A tax, to be known as capital transfer
tax, shall be charged on the value transferred by a chargeable transfer.
The administration and collection of the
tax is to be governed by Schedule 4. A ‘chargeable transfer’ is defined in
section 20, which proceeds by explaining what is a ‘transfer of value’ and by
then providing that a chargeable transfer is any transfer of value made by an
individual after March 26 1974, excluding exempt transfers. By section 20(2),
subject to subsections (3) and (4), a transfer of value is any disposition made
by a transferor as a result of which the value of his estate immediately after
the disposition is less than it would be but for the disposition; and the
amount by which it is less is the value transferred by the transfer.
Emphasis has been added to the concluding words: they show that the value of
what is transferred is fixed by the amount by which the value of the
transferor’s estate is reduced, and that means the value of the property in his
hands.
A disposition, of course, is not a
transfer of value if it is shown that it was not intended, and was not made in
a transaction intended, to confer a gratuitous benefit on any person. For
example, provided a sale is made in a transaction at arm’s length between
persons not connected with each other, capital transfer tax was not provided to
be levied upon an improvident sale which reduces the value of a vendor’s estate
by much more than the price received.
Capital transfer tax, chargeable on
transfers of value as described, was applied to transfers on death by section
22(1) (subject to certain following provisions, which are not relevant to this
case):
On the death of any person after the
passing of this Act tax shall be charged 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 . . .
Again I have emphasised the concluding
words: the value of the estate, and therefore of each item of property of which
it is made up, which is deemed to have been transferred, is taken to be the
value immediately before the death and again, as I understand, that means the
value of the property in his hands.
The provisions on valuation contained in
section 38 have been set out above.
The property of which the value is in
question in this case is the leasehold interest in the flat held by the
deceased. The obligation to repay the relevant percentage of discount was a
charge upon the property as well as an obligation contained in a covenant in
the lease. Para 1 of Schedule 10 directs that, in determining the value of the
transferor’s estate at any time, his liabilities at that time (ie the date of
death) shall be taken into account; para 2 directs that a liability that is an
incumbrance on any property shall, so far as possible, be taken to reduce the
value of that property.
The liability to repay the discount being
charged upon the leasehold premises was, in my judgment, an incumbrance on the
property and should be taken into account in ascertaining the value of that
property. I therefore agree that, upon the appeal being made to the Lands
Tribunal by Mr Alexander from the determination by the board of the value of
the flat, the question as to the value of the flat, taking into account the
liability to repay discount, was a question as to the value of land for the
Lands Tribunal under para 7(4) of Schedule 4. I would so answer the substance
of the question raised in the case although the issue as to the value of the
property of the deceased in the flat was not correctly described by the Lands
Tribunal as a question of ‘deciding liabilities between the vendor and a third
party’. It was, in my judgment, a question of the value of the property in the
hands of the deceased.
That seems to me to be the effect of the
concluding words of section 22(1) as set out above. Although, in the case of
the deemed transfer on death, there can remain no part of the estate which
would be reduced by the amount transferred, the concluding words of section
20(2) seem to me to be consistent with my view that, in determining the value
of a particular item of property, the relevant value is that which it had when
held in the hands of the deceased.
As to the question added to the case by
amendment, namely whether the entity to be valued is the lease taking into
account the obligations of the deceased and her successors in title to make
repayment to the landlord under the provisions of the Housing Act 1980, it
follows from what I have said that, in my judgment, it is.
The third question is whether the
principles stated in Inland Revenue Commissioners v Crossman are
applicable, ie to be applied to the valuation of the lease taking into account
the obligations of the tenant to repay discount.
It is first necessary to examine what
those principles are. In Crossman, a testator at the time of his death
owned a number of shares in a company the articles of association of which
imposed rigid restrictions upon the alienation and transfer of the shares. It
was contended for the personal representatives of the testator that the value
of the shares for the purposes of the Finance Act 1894 was limited to the
restricted price fixed by the articles to be paid by any existing shareholder
exercising his right of pre-emption under the articles. Two of the provisions
in the 1894 Act must be noted; the first is section 1:
In the case of every person dying after
the commencement of this part of the Act, there shall . . . be levied and paid
upon the principal value ascertained as hereinafter provided of all property
real or personal . . . which passes on the death of such person a duty, called
estate duty . . .
Next, by section 7(5):
The principal value of any property shall
be estimated to be the price which, in the opinion of the Commissioners, such
property would fetch if sold in the open market at the time of the death of the
deceased.
The contention of the personal
representatives was rejected by the majority decision of the House. Viscount
Hailsham LC at p 41 said:
It seems to me that this construction
(contended for by the personal representatives) involves treating the
provisions of section 7(5) as if their true effect were to make the existence
of an open market a condition of liability instead of merely to prescribe the
open market price as the measure of value.
Later on p 42 he said:
The purpose of section 7(5) is not to
define the property in respect of which estate duty is to be levied but merely
to afford a method of ascertaining its value.
Lord Roche, to the like effect at p 74,
said:
Section 7(5) . . . is simply a provision
for estimating by means of an hypothesis the value of property which has passed
otherwise than by an actual sale and transfer and may be incapable of so
passing.
In Re Sutherland, deceased [1963]
AC 235 Lord Guest at p 262 said:
The purpose of section 7(5) . . . is to
value the property. ‘It does not,’ as Lord Evershed MR said ‘require you to
assume that the sale . . . has occurred.’
It simply prescribes, as the criterion for value, price in the open
market as between a willing seller and a willing buyer, which is a familiar
basis for valuation.
In Lynall v Inland Revenue
Commissioners [1972] AC 680 the correctness of the decision of the majority
in Crossman was challenged but approved by the House of Lords.
I have no doubt that the principles
stated in Crossman’s case are applicable to section 38 of the 1975 Act,
which in substance is the same as section 7(5) with words added to give
statutory recognition to the decision of the House of Lords in the Duke of
Buccleuch’s case. It follows that, in valuing that which passed from the
deceased upon the deceased’s transfer of value immediately before her death
under section 22, in order to determine the amount by which the value of the
estate is less by the transfer, the Lands Tribunal is required to determine the
amount which, on a hypothetical sale, a person would be willing to pay to
acquire the lease held by the deceased subject to the obligation which would
fall on the hypothetical purchaser to make a repayment to the landlord in the
event of a disposal within section 8(3) of the 1980 Act but on the footing that
his own hypothetical acquisition did not itself give rise to such a disposal.
There is, of course, a distinction
between section 38, which, like section 7(5) in the 1894 Act, is to be taken as
providing the machinery for estimating value by means of a hypothesis, on the
one hand, and section 22(1) of the 1975 Act, on the other hand, which is a
deeming provision:
On the death of any person . . . tax
shall be charged as if, immediately before his death, he had made a transfer of
value . . .
I do not know, in common with Mr Widdows,
whether the impact of those words upon the provisions of section 8(3) of the
Housing Act 1980 was intended and understood at the time that the 1980 Act was
passed. The effect, in my judgment, is that, for the purposes of charging
capital transfer tax on death, the transfer of value is deemed to have been
made. A transfer of value includes, of course, a transfer by way of gift inter
vivos. Such a gift would be a disposal within section 8(3) of the 1980 Act,
which includes an assignment of a lease, irrespective of whether it is a
gratuitous assignment by way of gift or of assignment for full market value. It
is necessary for the purposes of the charging of this tax to assume that there
has been a disposal which would cause the relevant percentage of discount to be
repayable, although in fact no such disposal has incurred. Under section 8(3)
the vesting in a person taking under a will or on intestacy is not a disposal
falling within the subsection. The principles stated in Crossman’s case,
which were concerned with the construction of the predecessor of section 38,
which deals with valuation, cannot, of course, cause there to be no deemed
transfer of value under section 22, but that does not affect the conclusion as
to how the lease is to be valued. The same conclusion would be reached in the
case of an actual gift inter vivos. The principles in Crossman’s
case are applicable, in my judgment, to the process of establishing the value
of the estate immediately before the death by the application of section 38.
The deemed transfer under section 22 at
first caused me to see much force in the arguments which were accepted by the
Lands Tribunal and by Mr Widdows. The open market value of the flat had been
determined by the Lands Tribunal and the question of repayment by itself need
raise no question of land valuation if it could be resolved by application of
the presumption of a transfer triggering the obligation to pay and of the
effect at the date of death of the terms of the covenant in the lease. I have,
however, reached the conclusion that the primary submission of Mr Warren is
nevertheless correct. Upon a transfer of value of the leasehold interest by the
deceased, the amount by which the estate would be reduced is the amount of the
value of that leasehold interest in the hands of the deceased. In her hands, no
obligation had arisen but it would arise if at some point she chose to sell or
to make a gift of the leasehold interest. Her property in the leasehold
interest, subject to the charge securing the obligation to repay, must be
valued by applying the rules contained in section 38: it must be taken to be
worth what it might reasonably be expected to fetch if sold in the open market
at the date of death. As explained in Crossman, the hypothetical buyer
must be treated as paying the open market price for an interest which in his
hands would be subject to the charge. He would pay such a price, below the
price which he would pay if the leasehold interest did not contain that charge,
as he may be shown by evidence to have been reasonably expected to pay.
I would, therefore, remit this matter to
the Lands Tribunal for further hearing and for determination in accordance with
the opinion of this court. I would add that, as proposed by the appellants
without opposition from Mr Alexander, each side should be at liberty to call
further evidence before the Lands Tribunal upon the resumed hearing.
Agreeing, NICHOLLS LJ said: At
first sight Mr Alexander’s case is attractive: it cannot be right that, for
capital transfer tax purposes, the lease should be valued in a sum greater than
could have been obtained had the lease been sold at the time of the death. Had
the lease been sold, the relevant repayment of discount would have become due
and payable. Tax ought not to be payable on a greater amount than the net sum
which, in the event of such a sale, would have been received by Mrs Alexander’s
estate. Neither she nor her executor could have obtained more than the net sum.
Unfortunately for Mr Alexander, this
simple proposition does not accord with the basic scheme of this tax, now known
as inheritance tax. For present purposes the scheme can be sufficiently
summarised as follows:
(1)
Stated in its broadest and simplest form, the underlying scheme of the
legislation is that inheritance tax is payable when property is given away. The
tax is payable, not (a) in respect of the value of what is given, but (b) in
respect of the amount by which the donor’s estate is diminished by reason of
the gift. In most cases these two different measures will produce the same
result, but not always. One example is where a donor holds a controlling
interest in a company and he gives away part of his shareholding, with the
result that thereafter neither he nor the donee has a controlling interest. In
such a case (a) the value of the shares given may well be substantially less
than (b) the extent to which the value of the donor’s estate was diminished by
the gift. But tax is payable in respect of (b), not (a). This is the effect of
section 20 of the Finance Act 1975. The ‘disposition’ which the gift
constitutes is a ‘transfer of value’ and as such a ‘chargeable transfer’. The
‘value transferred by the transfer’ is the amount by which ‘the value of [the
transferor’s] estate immediately after the disposition is less than it would be
but for the disposition’ (section 20(2)). Thus the legislation focuses
attention on what the transferor possessed pre-gift; the tax is payable by
reference to what he lost.
(2)
A like principle is applied in the case of death. There is then a deemed
transfer of value immediately before the death. In short, the deceased is
deemed to have made a transfer of value of the whole of his estate. Tax is
chargeable ‘as if’ he had made a transfer of value equal to ‘the value of his
estate immediately before his death’. That is the basic provision in section
22(1). So, here also, it is necessary to value what the deceased possessed. In
the case of death, tax is chargeable in respect of the whole of that value.
(3)
Thus, the legislation makes it necessary to identify the ‘value’ of an
estate at a particular time. In short, value means market value: ‘the price
which the property might reasonably be expected to fetch if sold in the open
market at that time’ (section 38(1)). This mode of valuation involves a
notional sale of the property in question at the relevant time. But, in
prescribing a notional sale, the section is doing no more than prescribe the
basis on which the valuation shall be made. The notional sale does not change
the subject-matter of the valuation. What is being valued is property belonging
to the transferor, and it is being valued as at a time when he still owned it.
The notional sale is designed merely to identify the sum which a purchaser in
the open market might reasonably be expected to pay to be placed, in respect of
that property, in the same position as the transferor. This interpretation of
section 38 accords with the decision of the House of Lords in Inland Revenue
Commissioners v Crossman [1937] AC 26 regarding the comparable
valuation provisions in the estate duty legislation (Finance Act 1894, section
7(5)). As Viscount Hailsham LC said (at p 42), the notional sale is ‘merely a
statutory direction as to the method by which the value is to be ascertained’.
These principles have now been reproduced
in corresponding provisions in sections 2, 3, 4 and 160 of the Inheritance Tax
Act 1984. In my view, application of these principles leads inevitably to the
primary conclusion for which the Crown contended on this appeal. Immediately
before her death on January 17 1984 Mrs Alexander owned a long lease of 44
Speed House. The lease was assignable and transmissible in the usual way. The
only unusual feature was that, in accordance with the right to buy legislation,
a sum diminishing in amount year after year would be payable by her under the
lease and was charged on the lease if, in short, she sold or otherwise disposed
of the flat before March 4 1988. This was the asset she possessed when she
died. This is the asset which has to be valued: what would a hypothetical
purchaser in the open market reasonably be expected to pay to acquire that
asset?
The lease was a lease of land and thus
this valuation exercise concerns ‘the value of land’. As such, an appeal on
this question lies exclusively to the Lands Tribunal, under para 7(4) of
Schedule 4 to the 1975 Act.
Clearly, in carrying out this valuation
exercise it may well be convenient and sensible for the Lands Tribunal to consider,
first, how much the lease would be likely to have fetched if sold in the market
on January 17 1984 but disregarding the subsisting discount repayment liability
and, second, the amount by which this price would be likely to be reduced if
the notional purchaser who acquired the lease did so subject to an obligation
to make repayments as provided in the lease if thereafter there were to be a
disposal of the lease as defined in the Housing Act 1980 and reproduced in
clause 3 of the lease. But the exercise remains exclusively ‘a question as to
the value of land’ even if the route followed in making the valuation involves
two steps such as these.
For these reasons I agree that an order
should be made as proposed by Ralph Gibson LJ.
SIR DENYS BUCKLEY agreed with both judgments
delivered and did not add anything.
The appeal was allowed. No order for
costs in the Court of Appeal. Order for costs below set aside and the costs of
the first hearing and of the subsequent hearing to be in the discretion of the
Lands Tribunal.