Taxation – Leasehold interest – Valuation – First respondent transferring care homes to second and third respondent companies – Leasehold interests being valued under RICS guidance – Appellant commissioners challenging valuation of goodwill as part of open market value – Upper Tribunal attributing agreed capital values to transferable goodwill as opposed to value of leasehold interests – Appellants appealing – Whether tribunal erring in law – Appeal allowed
The first respondent owned Manor Place Nursing Home and Maple House Nursing Home in Aldershot. She operated both care homes as a sole trader. In 2011, the first respondent entered into three agreements with the second and third respondent companies (incorporated for the purpose) to transfer one care home to each company.
The agreements provided for the sale and purchase of the businesses as going concerns in consideration for “the appropriate book amounts” and including “the goodwill of the vendor in connection with the business”. The agreements also provided that the first respondent would grant leases over the properties from which the businesses were operated for a term of five years at an annual rent (without review) of £225,000 and £175,000 respectively. No premium was payable and the first respondent retained the freehold interest in both homes.
The valuation of the leasehold interests for the purposes of section 272 of the Taxation of Chargeable Gains Act 1992 for capital gains tax and stamp duty land tax purposes was carried out in accordance with the guidance given by the Royal Institution of Chartered Surveyors in VPGA 4.
The appellant commissioners challenged the figures for goodwill and asserted that part of the consideration for goodwill was, in reality, part of the open market value of the leases. Therefore, the appellants raised SDLT discover assessments on the basis that the capital value of the goodwill of the leasehold interest was inherent in the property so that goodwill was inseparable from the value of the leases.
The first respondent challenged those assessments. The Upper Tribunal found the value of the leasehold interest calculated under the RICS guidance only represented goodwill and not any additional premium on the lease and determined that the value of the leasehold interest as nil: [2021] UKUT 76 (LC). The appellants appealed.
Held: The appeal was allowed.
(1) VPGA 4 was clear that (like other methods of valuation) what it was aiming at was a valuation of property (ie, a freehold or leasehold interest). The profits method of valuation was guidance on how to value property of a particular type. What was valued was the property; how to value it was on the basis of trading potential. The value of the property and the potential returns were intrinsically linked. Therefore, it had to be impermissible to separate them.
What was being valued was the property asset, how to value it was by the profits method, and the inclusion of trading potential as part of that property valuation reflected value that was inherent in the property asset itself. Trading potential referred to future profits, rather than actual profits. That potential was available to any reasonably efficient operator who acquired the property. On the basis that goodwill was what brought in custom, it would be reflected in the turnover and the profit of the actual business.
Yet it was common ground that the valuation by the profits method was based on the market’s perception of fair maintainable trade and fair maintainable operating profit; and that that method of valuation applied both to freehold and leasehold property. Even if no business was being conducted on the property, the profits method was still the appropriate way to value it.
(2) Goodwill was easy to describe but difficult to define. It was the benefit and advantage of the good name, reputation, and connection of a business. It was the attractive force which brought in custom. The goodwill of a business emanated from a particular centre or source. However widely extended or diffused its influence might be, goodwill was worth nothing unless it had power of attraction sufficient to bring customers home to the source from which it emanated. Goodwill was composed of a variety of elements. It differed in its composition in different trades and in different businesses in the same trade.
Accordingly, goodwill attached to an actual business and, in that sense, goodwill had to be distinguished from trading potential which was part of the value of the property itself. Where one was dealing with goodwill attaching to an actual business, it was now generally accepted that the subdivision of goodwill was unhelpful; although it might be necessary to do so for certain purposes: IRC v Muller’s Margarine Ltd [1901] AC 217 and Whiteman Smith Motor Co Ltd v Chaplin [1934] 2 KB 35 considered.
(3) VPGA 4 did not recognise the concept of “transferable goodwill” as an asset separate from the property interest. However, it did recognise “personal goodwill”. Apart from that personal goodwill, VPGA 4 does not refer to goodwill at all.
Moreover, in a very broad sense goodwill attached to an actual business could include the gravitational pull exerted by the location of the property which was an intrinsic feature of the property itself. The location and physical features of the property, whether or not they exerted gravitational pull, were part of the value of the property itself: Muller considered. Balloon Promotions Ltd v Wilson [2006] STC (SCD) 167 distinguished.
(4) The error of law which the UT made was to disaggregate property value on the one hand, and “transferable goodwill” on the other. VPGA 4 was aimed at the valuation of property interests. That they were valued by reference to trading potential did not mean that two separate assets were being valued. The profits method of valuation did not produce a separate property value distinct from the value of the business use which was conducted from the property. The two were inextricably linked. The error that the UT made was in attempting to extricate the value of the business use from the property value: Mohammed v Newcastle City Council [2016] UKUT 415 (LC) considered.
In so far as there was a concept of transferable goodwill of a hypothetical business, it was simply part of the inherent qualities of the property itself and its trading potential. There was only one asset, namely the property, and the profits method of valuation was, as its description implied, no more than a method of arriving at the value of the property.
John Brinsmead-Stockham (instructed by the Solicitor’s Office and Legal Services) appeared for the appellant; Michael Firth (instructed by Morrisons Solicitors LLP) appeared for the respondents
Eileen O’Grady, barrister
Click here to read a transcript of Denning and others v Commissioners of HM Revenue and Customs
