Section 7: revenue basis of market value - general principles
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
Introduction
This Section gives guidance on the general principles of open market valuation as it relates to Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax. For Income and Corporation Tax there may be other statutory assumptions which have to be made (see para 7.3 below).
Statutory basis of Valuation
S.160 IHTA 1984 defines market value for IHT as follows:-
“…. the value at any time of any property shall for the purposes of this Act 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.”
S.272(1) and (2) TCGA 1992 defines market value for CGT purposes as follows:-
“…. the price which [the] Assets might reasonably be expected to fetch on a sale in the open market. In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.”
S118 FA 2003 states market value for the purposes of SDLT:
“….shall be determined as for the purposes of the Taxation of Chargeable Gains Act 1992…”
The statutory definitions of market value are essentially similar. There is only one absolute qualification contained in the statutory provisions namely, that the price is not to be reduced on account of the market being flooded by reason of the assets to be valued being marketed at the same time. The short and simple direction contained in the statutory definition, that the value of the property is to be the price it would fetch if sold in the open market, has been illuminated by case law and certain basic principles have been established. These are discussed below and in Practice Note 1.
Differences exist between the basis of open market value used for normal Revenue purposes and the basis of valuation applied to Schedule E (except under s.154 ICTA 1988, where the normal Revenue basis applies). This is dealt with more fully in CGT Manual Section 1 Part 5.
Where it is necessary to provide an estimate of the market value of a property at a particular time for Revenue purposes, the principles set out in Practice Note 1 should be borne in mind when arriving at the value. The following paragraphs provide additional information which may be of assistance.
Prudent lotting
The principle of prudent lotting (see Practice Note 1: paras 3.1 - 3.4) applies where an estate consists of items of property which properly may be treated as separate units in order that the best price can be obtained. Lotting is essentially a matter of judgement. Artificial and unnatural lots should generally be avoided, however, reference should be made to the judgement of Hoffman LJ in the case of IRC v Gray (Executor of Lady Fox deceased (1994) (see Practice Note 1 Appendix F) with regard to the natural unit. There may well be circumstances where a sale of the whole estate, as a single lot, would achieve a better price than if it were sold as separate units.
It should be noted that the statutory definitions contain the qualification that the price must not be assumed to be reduced on the grounds that all the property is placed on the market at the same time.
It should be noted that the principle of prudent lotting can only be applied to whatever property falls to be valued. In IHT death cases it is necessary to value the whole of the deceased’s estate but in CGT cases the only assets that are to be valued are those included in the particular disposal in question.
Special purchaser
Land may have a special value to a particular purchaser by reason of its position or the type of building thereon. This special value may be reflected in the valuation provided that:
- The special purchaser can reasonably be shown to have been both able and willing to purchase at the date of valuation.
- Existence of a special purchaser can reasonably be supposed to have been known to the ‘market’ at large.
For example, where the freehold interest in a tenanted house is being valued, the possibility of a sale to the tenant should be reflected, provided that the tenant, as special purchaser, can be shown to have been: (i) in the market; and (ii) willing and able to purchase at the valuation date.
In Wight and Moss v CIR (1983) 264 EG 937, the Lands Tribunal Member stated that he was inclined to the view that the special purchaser (the co-owner) was, like the vendor, a hypothetical person because otherwise the value of the property (the half share) would vary according to the personal circumstances and whims of the co-owner.
This view was subsequently challenged in the Court of Appeal in the case of J.H.Walton (Jun) (as executor of J.H.Walton deceased) (1995). In this case the Revenue appealed an earlier decision of the Lands Tribunal arguing that the evidence given by a relative of the deceased was self-serving and requested the Court to determine:
“Whether in the circumstances of the hypothetical sale….the freeholder of the Farm (i.e. the special purchaser) should be deemed to have all the personal inclinations and characteristics of the actual freeholder or whether he should be assumed to be a hypothetical person?”
Peter Gibson L.J, who gave the leading judgement said:
“The fact that such evidence may be self-interested is not in my judgement sufficient reason to justify the implication…the actual landlord is to be treated as stripped of his actual intentions and desires but clothed with hypothetical aspirations. The insuperable difficulty in (the Revenue’s) path is that there is nothing in the statute to support (this) contention. The open market hypothesis does not require as a necessary incident of it that the landlord should be hypothetical”.
Therefore, following on from “Walton”, where a party is arguing that there would have been a special purchaser in the market for an interest at the date of valuation, this purchaser needs to be identified and such facts as can be elicited about their likely attitude to such a purchase need to be presented. Caseworkers should also ensure that, where this purchaser is either a relative of the taxpayer, or otherwise closely connected, they should look very closely at such evidence to ensure that it is not self-serving.
See Practice Note 1: paras 8.1 - 8.6 and 9.4.
An interest in land may have special value to the owner of a superior or subordinate interest who may be able to realise marriage value. It should be remembered that since the bargain would be struck between willing parties, it is unreasonable to assume that the purchaser would pay over the whole of the marriage value. The marriage value will be shared between the parties according to their respective bargaining strengths.
The quantum of the special purchaser’s bid will depend on the facts of the case and in particular who is known to be in the market and able and willing to purchase at the relevant date. In this respect it is not possible to apply definite rules; much will depend on the obtainable factual evidence. See Practice Note 1 para 9.4.
It is often argued that the special purchaser’s bid should be “one bid over”, what other potential purchasers would be prepared to pay. Indeed in the Court of Appeal case of Greenbank v Pickles (2001) (a case concerned with the correct approach to be adopted in valuing a partner’s share in an agricultural tenancy on the dissolution of the partnership), Peter Gibson LJ was asked to consider the circumstances of a hypothetical sale to a known special purchaser and concluded as follows:
“This can be demonstrated by imagining the archetypal open market, an auction at which all interested parties are present to make their bids. Those parties are the ordinary purchaser prepared to pay the current market use (sic) value, who let us say, would be prepared to go up to £20,000, the actual tenant who was prepared to pay up to, say, £25,000 and the actual landlord who wanted the merger of the tenancy in the freehold so as to be able to sell with vacant possession and who was prepared to pay up to half the VPP of, say £120,000, viz. £60,000. The ordinary purchaser would drop out of the bidding at £20,000, the tenant at £25,000 and the landlord would obtain the property at the bid above that figure, which would not be anything like £60,000. Because a sale is assumed to occur, it is not open to the hypothetical vendor to refuse to sell on the basis that he considers the true value to be higher.”
Advice has been received to the effect that this analysis does not truly reflect the circumstances of the hypothetical sale; the sale does not have to be assumed to be by auction and this analysis fails to take account of the fact that the vendor must be “willing”.
Instead the analysis of Lord Romer in the 1939 Privy Council decision in the compensation case of Raj Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizgapatam (otherwise known as “The Indian case”) is to be preferred. He had this to say with regard to ascertaining market value:
“It has been suggested that in order to ascertain it, the arbitrator is to hold an imaginary auction. But with all respect to those who have made the suggestion, their Lordships are unable to see how this is going to help the arbitrator.”
He then went on to expound at some length as to why he considered an imaginary auction to be of no assistance. He considered that the special purchaser could not be driven up to a “fantastic price” by the competition because he was “a willing purchaser and not one who is by circumstances forced to buy.” Similarly, he concluded that the bidding could not be imagined to stop at the first advance over what other purchasers would be prepared to pay because “the vendor is a willing vendor and not compelled by circumstances to sell his potentiality for anything he can get.”
In other words, in the hypothetical sale, neither the vendor nor the purchaser is under any compulsion to either buy or sell; however, it must be assumed that they are both “willing” and that a deal will be done. Where a special purchaser is in the market, the vendor normally knows full well what the property is worth to them and would not normally be prepared to release it at only one bid above what could be obtained from other purchasers (how much above will depend very much upon the parties’ respective bargaining strengths).
Annual agricultural tenancies
Reference should be made to Practice Note 5 for matters to be considered in the valuation of Annual Agricultural Tenancies (AATs). For CGT purposes, valuations of AATs can be required following sale and leaseback transactions, which are regarded as part disposals. Special considerations apply in these cases and particular reference should be made to Practice Note 5: paras 9.1 - 9.3.
Undivided shares*
The valuation of an undivided share in property will require consideration of the bid of the other joint owner or owners.
See Section 18 and Practice Note 2 for guidance on the valuation of undivided shares.
Restrictions on actual sale
Where a property is held subject to a restriction on sale, it is nevertheless to be envisaged that a hypothetical sale takes place. However, the purchaser should be deemed to purchase the property subject to all the terms and restrictions including the bar on sale. The “Crossman” case was concerned with the valuation of shares and it is often argued that the principle involved is of no relevance to the valuation of real property. Such a conclusion is clearly illogical and the principle has now been confirmed in respect of real property, by the Court of Appeal, in Alexander v CIR (1991) (see Section 17 para 17.22 and Practice Note 1 Appendix E) and also in IRC v Gray (see Practice Note 1 Appendix F):
“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.” (Hoffman LJ). . The “Crossman” principle is discussed in general terms in Practice Note 1 and its particular application to the valuation of agricultural tenancies is discussed in detail in Practice Note 5.
Valuation date
When requesting a valuation from the VOA, the Instructing Branch should always state the date at which that valuation is required. Occasionally the exact date may not be known and a valuation may be requested to value as at a particular month or year. If such a request causes difficulty, the Instructing Branch should be advised accordingly and further instructions should be awaited.
Condition of property
In general, the value of a property for Revenue purposes should reflect all encumbrances and the physical condition existing at the valuation date.
An exception to the general rule arises in certain cases involving the valuation of development sites or where building work is incomplete.
f) In death cases and in all Shares Valuation references where company shares are being valued. Where the deceased or the company had entered into a contract for the development, or improvement work to be carried out which was still binding at the date of valuation, HMRC(IHT) will require the VOA to value the property at the relevant date as if the work had been completed. HMRC(IHT) will then deduct the cost of completion as a charge payable against the deceased’s estate or, in SV cases, as a liability of the company.
N.B. In death cases, where the works involve the remedying of structural defects or damage and a right of claim under an insurance policy (or a right of action against another person) exists in respect of that damage, reference should be made to para 7.35 for valuation approach and procedure. If difficulties occur in this respect the case should be referred to CEO (DVS) for advice.
Where the building work, the subject of the binding contract is being carried out with the aid of an improvement, repair or similar grant under Housing Grants, Construction and Regeneration Act (1996), and that work is incomplete, the valuation of the property should be approached on the above basis (i.e. notionally complete) but should have regard to the fact, that the price paid by a hypothetical purchaser, would reflect that the property must be held for a certain length of time before a sale can take place without liability to repay all or part of the grant to the Local Authority. See Section 17.
g) In lifetime transfers and references requiring the market value on the occasion of a disposal between connected parties. The general rule of valuing the property in its actual state at the valuation date should be adhered to. This may, on occasions, cause difficulty unless the state and condition of the property can be agreed with the taxpayer (or agent) or an inspection of the property has taken place at or close to the valuation date. In many cases, it will not be known what stage the building works had reached at the relevant date and in these circumstances, the stage of completion will have to be estimated.
The basis of valuation in these circumstances should not be a straight deduction of the value of the building contract from the notionally complete value but should be on the following basis:
** i)** Notional value when completed Less (ii) Estimated cost of completion, and (iii) Allowance for deferment, risk and foregone interest Equals (iv) Value at relevant date.
A hypothetical purchaser would consider the cost of finishing the building works, the time it would take and expect some measure of profit for being prepared to take on and finish the property. In this situation a pragmatic approach to the valuation should be adopted.
In cases where the building works (or part of the building works) are being carried out with the benefit of an improvement, repair or similar grant under Housing Grants, Construction and Regeneration Act (1996), this would be a faHMRC(IHT)r which would need to be taken into account under (ii) above. The approach to valuation should also have regard to the potential liability of repaying the grant should a sale take place within a certain length of time (see Section 17).
An exception to the above is where the transferor has assigned the benefit of a building contract or has agreed to bear the cost of the development or improvement without reimbursement from the transferee; in these circumstances, it is appropriate to value the property as notionally complete less some allowance for deferment and for the risk of a third party defaulting on the contract. ◦ For the position in relation to CGT cases see CGT Manual paras 7.4-7.5.
Other considerations
No addition to or deduction from the open market value may be made to reflect the cost of realising that value.
The UT(LC) decision in Chifley Holdings Limited (BVI) v HMRC [2024] considered the use of hindsight. The Tribunal Judge distinguished between ‘events’ which affect market conditions and the use of post-date transactions as comparable evidence, and concluded:
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Events after the valuation date, which would not have been known to either the valuer or the hypothetical buyer and seller, should not be taken into account.
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In conjunction with pre-date transactions, comparable transactions some months after the valuation date, especially in the case of a transaction on the subject property, or very similar properties in close proximity, can help inform the valuer as to the state of the market in the months around the valuation date.
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The further one moves away from the valuation date the less weight should be applied to a post valuation date transaction.
The use of hindsight should be treated with caution.
The hypothetical transaction is undertaken by reference to the statutory valuation date and the parties to that hypothetical transaction must be assumed to have acted only on the information that would have been available to the market at that date. Subsequent events which might affect market conditions are to be disregarded. Such events may include legislative or regulatory changes, a change in government, or an economic crisis.
Post-valuation date evidence can be relied upon. In doing so, adjustments must be made to reflect any changes in market values between the date of valuation and the comparable transaction. The impact of any subsequent events which may affect the reliability of the comparable must be considered. Comparables will have less evidential weight the further they are in time from the valuation date.
If it is intended to have regard to a subsequent sale price agreed in relation to the subject property caseworkers should ensure the sale was at arm’s length. Issues to consider include the
- method of marketing - was the property appropriately exposed for sale or was it a private sale
- marketing period - was this appropriate for the asset being sold
- number and level of other unsuccessful bids
Any necessary adjustments should be made, for example to reflect changes in the physical condition of the property or its planning status between the valuation date and the date of transaction. Caseworkers should consider whether the actual sale price fits in with any available comparable evidence. The Lands Tribunal case of Wilcon Homes Ltd v Commissioners of Inland Revenue [1983] considered the subsequent transaction on the subject land to be primary evidence, but noted this primacy could be displaced by comparable evidence.
Matrimonial and Civil Partnership Homes
The Family Law Act 1996 (FLA 1996) consolidated previous legislation, mainly contained in the Matrimonial Homes Act 1983 and the Matrimonial Causes Act 1973, governing the occupation of matrimonial homes in England and Wales.
This Act has subsequently been amended, notably by the Civil Partnership Act 2004, which came into force on 5th December 2005 and brought couples within registered civil partnerships within the scope of the FLA 1996.
The rights conferred on the co-habiting spouse or civil partner, under FLA 1996, are known as “home rights”
Section 30 et seq of the FLA 1996 provides that a spouse, or civil partner, who does not have a legal interest in a jointly occupied dwelling-house (but may have an equitable interest) enjoys a statutory right of occupation of the dwelling to which the other spouse has title or legal interest. This “home right” is registerable as a Class F land charge (Land Charges Act 1972) or in the case of registered land by means of a notice of caution.
The “home rights” consist of a right to remain in possession of the whole or in part of the home or, if not in occupation, a right by leave of the Court to enter and occupy the home.
Such rights will not affect a vacant possession valuation, as the rights end on termination of the marriage or civil partnership (by death etc), unless a Court has made an order to the contrary.
If the parties contend that the spouse’s, or civil partner’s, home rights affect the interest to be valued, or the basis of valuation to be adopted, clarification should be sought from the Instructing Department unless the original request for advice deals adequately with the issue raised.
It is for the Instructing Department to decide on the interest in the property to be valued and of any legal or equitable matters to be taken into account in the valuation.
If any difficulties occur in this respect the case should be referred to CEO (DVS) for advice.
Section 33 of the FLA 1996 has conferred wide discretionary powers on the Courts for dividing or transferring the respective legal or equitable interests in the matrimonial, or civil partnership, home. Section 33(5) gives the Court the power to extend the rights beyond the death of the other spouse or civil partner; or the termination (other than by death) of the marriage or civil partnership.
Either spouse or civil partner may apply to the Court to declare, enforce, restrict or terminate the home rights of the other. The Court may exclude one spouse or civil partner totally from certain parts of the home.
S.17 of the Married Womens Property Act 1882 (MWPA 1882) enables the Court to recognise an existing equitable interest of a spouse in the home. Such an equitable interest may exist whether or not the Court has formally recognised it, e.g. its existence may be recognised by agreement between the parties. S.17 MWPA 1882 (which now also applies to civil partnerships) is procedural and does not allow the Court to vary property rights as is the case under the FLA 1996.
Where the legal estate is vested in one spouse, or civil partner, but both have a beneficial interest e.g. they have contributed directly or indirectly towards the provision of the home, an equitable joint tenancy or tenancy in common will be created behind a trust of land. Therefore, if a purchaser takes a legal estate from one spouse, or civil partner, alone, the question arises as to whether the purchaser takes it free from the other spouse’s, or civil partner’s, interest or subject to it.
In the case of Registered land, a spouse in actual occupation of the matrimonial home, has been held by the Courts to hold an “overriding” interest in the property under s.70(1)(g) of the Land Registration Act 1925 (LRA 1925). (See Williams and Glyn’s Bank v Boland (1980) 20 RVR 204 where the spouse’s right of occupation had priority over the mortgagees, who had granted a mortgage whilst the spouse was in occupation and without her knowledge). The LRA 1925 has now been amended by the Land Registration Act 2002 (LRA 2002); however, the interests of spouses and civil partner’s in occupation of the home are still protected, by schedule 3 of this Act, providing they have not failed to disclose their occupational rights when they could have been reasonably expected to have done so.
Therefore, a spouse, or civil partner, registered as the legal owner of a property, may or may not be the sole beneficial owner, because if the other spouse, or civil partner, has contributed directly or indirectly in money or money’s worth towards the initial cost or mortgage instalments, he or she may have acquired, in equity, an interest in the matrimonial, or civil partnership, home in proportion to those contributions. A similar situation would arise if the persons interested in the house were not married to, or in a civil partnership with, each other.
If the land is unregistered, the position is more complex; as payment to a single spouse, or civil partner, will not over reach the other spouse’s, or civil partner’s, equitable interest and anyone dealing with the land will only be protected by the general equitable doctrine that a bona fide purchaser of a legal estate for value, takes it free of any equitable interest of which he or she does not have actual or constructive notice.
Difficulties may arise in valuing a former matrimonial, or civil partnership, home where one spouse, or civil partner, remains in possession following the breakdown of the marriage, or civil partnership. Questions may arise not only as to whether or not the property should be valued with vacant possession but also whether the whole or a share falls to be valued. In these circumstances, the interest, which the taxpayer could dispose of, in the event of a sale, could not exceed the taxpayer’s own interest in the property at that time, unless the taxpayers liability to the spouse, or civil partner, in occupation had been discharged. Therefore, vacant possession would not be available and a purchaser in the market would bid to acquire the property subject to the spouse’s, or civil partner’s rights of occupation and of receiving part of the proceeds of sale. The Instructing Branch will normally advise on the interest to be valued but in cases of doubt or where it is claimed that a spouse has registered a notice of caution or holds an overriding interest under Schedule 3 of the LRA 2002, in relation to Registered Land, or a Class F Land Charge in respect of unregistered land, the case must be referred back for clarification. If difficulties occur in this respect the case should be referred to CEO (DVS) for advice.
In CGT references featuring a disposal by separated spouses, or civil partners, the Inspector of Taxes may request valuations:
a) on a vacant possession basis; and/or
b) reflecting the spouse’s, or civil partner’s, rights of occupation (note: this is effectively an investment basis valuation).
In circumstances involving inter-spouse, or inter-civil partner, transfers, where valuation advice on an alternative basis has not been sought, the Instructing Branch should be asked whether or not a vacant possession approach should be adopted.
It should be noted that transfers of assets between husbands and wives, or civil partners, are not normally regarded as “chargeable occasions” for capital gains tax purposes. The asset is deemed to have passed from one spouse to the other at a value, which gives no gain or loss. However, CGT may be payable on transfers between separated spouses, or civil partners, since the no gain/no loss provision does not apply.
Transfers between spouses, or civil partners, are normally exempt from IHT and although separation makes no difference, the terms “spouse” and “civil partner” do not include a party to a marriage, or civil partnership, which has been dissolved by death or divorce.
Tenure
Where the transferor/deceased/taxpayer was in occupation of the property at the date of valuation, the presence in the property of relatives or housekeepers should not prevent the property from being valued on a vacant possession basis provided that such persons did not occupy self contained accommodation. However, it is recognised that instances will occur where the parties maintain that vacant possession would not be available. In such circumstances reference should be made to Practice Note 3 which provides guidance on the identification of the various types of tenancy and how they may be distinguished from licences.
In IHT cases, where the parties dispute the basis of valuation, instructions should be sought from HMRC(IHT), (see Section 27 para 27.23.)
In CGT, Income Tax and Corporation Tax cases, where the dispute cannot be resolved, in accordance with CGT Manual: Section 6 and Section 1, a report should be submitted to CEO (DVS).
In all cases, attempts should be made to agree alternative values with the parties. If alternative values can be agreed the sole issue for determination by the Instructing Branch will be whether the property should be valued with vacant possession. Where agreement on alternative values is not possible or has been ruled out by the parties, the matter should be referred to the Instructing Branch for advice without further delay.
If any particular problems arise in relation to points of law, a report should be submitted to CEO (DVS) setting out the parties’ contentions together with the facts and circumstances of the case.
Where a person has contributed towards the acquisition of a property by the taxpayer, that person is a beneficiary behind a presumed resulting trust and entitled to occupy the property or alternatively to a corresponding share in the proceeds of sale. Reference should be made to Practice Note 3. The following procedures should be adopted where the parties maintain the existence of such a right:
(i) In IHT references, if the parties identification of the interest to be valued differs from HMRC(IHT)’s, instructions should be sought from HMRC(IHT), (see Section 27 para 27.23).
(ii) In CGT references, a brief report of the circumstances should be sent to CEO (DVS), stating whether or not the title to the interest to be valued is registered or unregistered and whether the person claiming the equitable interest was in occupation at the valuation date.
However it is considered that where a person has advanced monies in the form of an unsecured loan to the taxpayer, in order for the latter to purchase a property, then providing the loan has been treated as such by the parties, the person making the loan will not have acquired an actual or equitable interest in the property.
Where the parties claim that a tenancy or a licence was in existence at the valuation date, caseworkers should ask to see written evidence of the terms. Frequently, such contracts are not committed to writing and as such may not be enforceable. However, where a tenancy is for not longer than 3 years and takes effect in possession, there is no need for a deed or any form of writing, if the rent is the best that can be obtained without taking a fine (see s.54 Law of Property Act 1925). Moreover, where the statutory formal requirements for the creation of a lease are not complied with, it does not follow that a licence is created, for the law frequently treats a purported lease that does not fulfil the formal requirements, as an agreement for a lease, which being specifically enforceable is therefore a lease in equity. Thus, there are circumstances in which a term of years absolute can be created both orally and in writing without need for deed and weekly tenancies are often granted orally. If the agreement is oral its term will, in the event of dispute have to be proved as a question of fact. In these circumstances evidence of actual payment of rent (e.g. a rent book, exchange of letters featuring some corroboration on receipt of rent, company accounts or a tax return showing receipt of rent) may be sufficient to prove the existence of a periodic tenancy. It will depend on the construction of the terms, once they are ascertained, whether the rights of the occupiers are those of a tenant or a licensee. In this respect, regard should be had to Practice Note 3 and the following:-
i. The intention of the parties
ii. Whether the occupation is to the exclusion of the Landlord
iii. The terms of the Agreement
iv. Mode of creation
v. Duration.
Whilst it has been held that a tenancy means exclusive possession, for a term, at a rent (see Lord Templeman’s judgement in Street v Mountford (1985) 274 EG 821), the omission of rent would not necessarily prevent a tenancy from coming into existence (see s.205(1)(xxvii) Law of Property Act 1925 which defines a ‘term of years absolute’ (viz a lease) as a term of years taking effect either in possession or in a reversion ‘whether or not at a rent’).
However, separate occupation by a relative even if rates have been paid and repairs carried out over a long period, is not sufficient to establish a tenancy without firm evidence of the intention to create one, such as the existence of rent quantifiable in monetary terms (see para 7.25 above and Practice Note 3).
For identification of the different types of licence and degrees of enforceability against (a) licensors, (b) third parties, refer to para 7.26 above and Practice Note 3. If parties allege the existence of a licence arising by way of proprietary estoppel, where the licensee may acquire an equitable interest by expending a substantial sum on the property (other than on normal items of annual repair) in reliance of expectation of continued occupation, details should be sent to CEO (DVS).
Occupation by employees may fall into one of three categories: a licence, a service occupancy (a particular type of licence where the employee’s occupation is merely as a representative of the landlord), or a tenancy. As an aid to the identification of these categories see Practice Note 3. If the occupier’s status is a tenant, the provisions of Class 8 Part I Sch 15 Rent Act 1977 or Ground 16 Part II Sch 2 Housing Act 1988 apply and the landlord may recover possession on termination of employment; the prospect of obtaining vacant possession will therefore depend on a number of factors; the nature of the employment, the difficulties involved in terminating a contract of employment (bearing in mind the Employment Rights Act 1996), the age of the employee, and the availability of alternative housing or employment. Agricultural cottages are subject to special provisions (see Section 9: para 9.18). Special provisions also apply in respect of Income Tax and Corporation Tax (see CGT Manual: Section 1).
HMRC(IHT) may request advice in a situation where property has been transferred with the reservation in favour of the transferor of a lease for life or one terminable on death, or is subject to a condition that the transferee grants such a lease to the transferor. For the avoidance of doubt, the interest created under such an arrangement is not a “lease for life”. Leases for life comprise settled property and are more fully described in Section 8 para 8.15 et seq.
The advice that HMRC(IHT) is likely to require will depend on whether the valuation date is the date of gift (i.e. the date that the leasehold interest was granted) or the date of death:
i) Date of gift
Here HMRC(IHT) will normally require valuations in order to calculate the loss to the estate (see Section 4 para 4.16). It should be noted that, if HMRC(IHT) requires a valuation of a retained lease (in order to provide an “after value”) which contains a termination clause and the transferor’s estimated life expectancy is less than the term of years granted, then regard should be had to the former rather than the latter when carrying out the valuation.
Occasionally, a rent will be reserved under the lease and the parties may argue that there was no intention to confer any gratuitous benefit (see Section 6 para 6.9). In such circumstances, HMRC(IHT) is likely to require advice as to whether the rent reserved represents the full open market rent at the date of transfer.
ii) Date of death
Here the situation is complicated by the fact that Section 4(1) IHTA requires the valuation to be carried out at the moment before death (see Section 4 para 4.61) and at that time the deceased will not have died and the termination clause will not have been triggered. However, in such instances, HMRC(IHT) is of the view that Section 171 IHTA operates (see Section 4 para 4.65) and, accordingly, the valuation should be carried out on the basis that the termination clause is immediately operable. In practice this means that the lease will have little if any value.
Indeed, if the property is in need of repair and if, under repairing covenants contained in the lease, these repairs are the responsibility of the deceased, the parties may well argue that the lease has a negative value. In these circumstances, caseworkers should ensure that the works which the parties claim are required are genuine works of repair and do not constitute improvements.
Special procedures exist for cases involving the valuation for IHT purposes of leasehold property situated in sheltered housing and similar schemes where the lease contains an occupation clause which is personal to the deceased. In practice such clauses mean that all rights of occupation cease on the deceased’s death and the personal representatives will normally be faced with one of the following situations:
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The site operator serves a notice on the personal representatives calling for the surrender of the lease. The operator will then use their best endeavours to sell the lease (or grant a new lease).
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The personal representatives serve a notice of surrender on the site operator. The operator will then proceed as in a) above.
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The personal representatives attempt to sell the lease to a qualifying purchaser on the open market.
In all these scenarios the site operator is likely to be entitled to a share of the sale proceeds and this share will be calculated by using a formula in the lease.
Where HMRC(IHT) becomes aware that a deceased held property under such an agreement, the papers will be forwarded to the VOA with a covering memorandum setting out details of the valuation required in the circumstances of the particular case in question.
Where HMRC(IHT) only becomes aware that sheltered housing is involved after the papers have been issued to the VOA, they will either send out amended valuation instructions, or call for the return of the papers, in which case the papers should be returned to HMRC(IHT) and the case should be cancelled.
If, following receipt of case papers, a caseworker becomes aware of the fact that a property is subject to such a lease and no mention has been made of this, HMRC(IHT) should be advised of the circumstances and further instructions awaited.
Special considerations apply when valuing leasehold property for IHT purposes, as at the date of death, where the deceased had the right to serve a notice of enfranchisement under the Leasehold Reform Act 1967 (LRA 1967) but no such notice had been served.
The procedure to be adopted in IHT cases will depend on whether the valuation date is before, or on or after, 26 July 2002, the date when section 142 of the Commonhold and Leasehold Reform Act 2002, came into force.
Valuation dates prior to 26 July 2002
When valuing for IHT purposes one is required to value at the moment before death (see Section 4 para 4.61) and, theoretically, at the moment before death, the tenant would still have been in a position to serve a notice under section 8 of the LRA 1967. However, an individual tenant’s right to serve such a notice died with them and any subsequent purchaser of that interest would have to meet the residence requirements under section 1(b) LRA 1967 before they would be in a position to serve their own notice. Consequently, it is HMRC(IHT)’s view that the provisions of Section 171 IHTA should apply in such situations (see Section 4 para 4.65). In other words, the loss of the right to enfranchise should be taken into account as if it had occurred before the deceased’s death and, accordingly, their right to serve a notice should not be reflected in the valuation.
There are two important exceptions to the above, namely:
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Cases where it is ascertained that some connection existed between the deceased leaseholder and the freeholder. In such instances, HMRC(IHT) should be advised of the circumstances and further instructions awaited.
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Cases where the interest to be valued comprised an undivided share, or there is related property, or it is ascertained that other family members or occupiers also had the right to serve a notice to enfranchise. In such circumstances, the case should be referred to CEO (DVS) for advice.
Valuation dates on or after 26 July 2002
The position of personal representatives was altered by section 142 of the Commonhold and Leasehold Reform Act (CLRA) 2002. This section inserted a new section (section 6A) into the LRA 1967, which provides that a deceased leaseholder’s rights under that Act no longer die with them but can now be exercised by their personal representatives, whilst the tenancy is vested in them. These rights are limited to a period of two years after the grant of probate, or letters of administration. Consequently a deceased leaseholder’s rights, under the LRA 1967, can be taken into account when valuing for IHT purposes.
Partnerships
HMRC(IHT) will decide when a property in the occupation of a partnership is to be regarded as a partnership asset and will advise accordingly. HMRC(IHT) will also will also provide a copy of the partnership deed (if any), and details of all the partners’ beneficial interests in the assets, or, if these are not known, will state the number of partners and the way in which the profits are divisible between them.
Reference should be made to Section 19 for the basis of valuation and the approach to be adopted.
For the position in relation to CGT cases see CGT Manual para 7.25.
Package valuations
It must be emphasised that this Section refers only to references in respect of Inheritance Tax.
Package valuations are basically an extension of prudent lotting (see para 7.4 above) and most commonly arise where the deceased/transferor owned both an interest in freehold property and a controlling shareholding in a company holding a tenancy of all or part of the same property. In these circumstances it will be necessary to bring into charge not only the value of the freehold interest and the shareholding (which will reflect the value of the tenancy) but also any marriage value between them. This is because a hypothetical purchaser would have the opportunity to purchase both assets at the same time and would when bidding for them, reflect the possibility of merging the freehold and leasehold interests. HMRC(IHT) will normally advise when the “package valuation” approach is being adopted.
The concept of package valuations was referred to in the judgement of Hoffman LJ in the Court of Appeal case of IRC v Gray (Executor of Lady Fox deceased (1994) (see Practice Note 1 Appendix F) where the Revenue’s approach was upheld.
It is in the agricultural context that package valuations are most frequently required (see Section 9: para 9.16 for valuation approach and procedure in such cases) however the concept may also be applied in other areas e.g. structurally damaged properties with the right to claim under an insurance policy (see para 7.36 below).
In cases where it is felt that the value of an item would be enhanced by adding other property and HMRC(IHT) has not indicated that a package valuation approach is required, no further action should be taken without first consulting HMRC(IHT).
Para 7.12 above sets out the general valuation rule regarding the condition of property at the valuation date whilst an exception to this general rule is set out in para 7.13.
Where a property is subject to a structural defect or is damaged in some way and a right of claim under an insurance policy (or a right of action against another person) existed in respect of that damage, a package valuation will be required comprising both the property in its existing condition together with the right to recover under the insurance policy or right of action against a third party some or all of the costs of remedying the damage.
In such circumstances HMRC(IHT) will usually refer cases on Form VOA 2 with an explanatory memorandum. However, if a caseworker becomes aware of damage which may be covered by an insurance policy or right of action against a third party and has not previously been informed of its existence by HMRC(IHT), the papers should be returned and further advice sought.
Normally HMRC(IHT) will require the following valuations:
- The value of the property as at the date of valuation, together with the benefit of any insurance policy or right that exists.
- The value of the property as at the date of valuation in its damaged condition.
In practice the value of the property at (a) above is generally likely to lie somewhere between its value with the damage repaired (this value may well be lower than the value of similar properties in the locality, which have not experienced damage, because of the “stigma” the market would attach to the fact that remediation works had been undertaken) and its value at (b) above. The discount from the value with the damage repaired will reflect:
(i) an allowance for the inconvenience to the purchaser in dealing with the claim and any nuisance while the repair works are carried out
(ii) the risk involved, for example, due to the possibility of the insurance company or third party disputing liability
(iii) any shortfall between the cost of the works and the sum recoverable, for example, due to an excess clause requiring the insured to bear part of the costs or due to underinsurance of the property.
When reporting such cases on Form VO 1110, supplementary endorsement vi) should be completed (see Section 27 para 27.58). In death cases where the property is subsequently sold and “falls-in-value” relief (see Section 12) applies, HMRC(IHT) may request the following valuations:
- the value of the property as at the date of sale, reflecting the condition of the property as at the date of death, excluding the value of the insurance policy
- and if not already provided, the value of the property as at the date of death in its damaged condition.
Lordships of the Manor
In England and Wales Lordships of the Manor are ancient titles comprising incorporeal property, that is property without body as distinguished from land which is corporeal. Although many of the pecuniary rights of the Lords of the Manor were abolished by the Law of Property Act 1922 a variety of privileges remain, including the right to call oneself “Lord of the Manor”. In some cases mineral rights may be held.
Values are generally influenced by:
- Location - whether there are likely to be any local residents who may be in the market.
- The title deeds - whether there are any illustrious former owners and the quality of the documents included in the sale.
- Any rights and privileges - e.g. mineral or fishing rights, or the right to hold a market or fair.
It should be noted that CEO (DVS) holds an extensive record of private transactions in lordships and is available to provide assistance in their valuation.
Instructing Branches will forward references to the VOA as follows:
1) References from HMRC(IHT) - All requests are forwarded via CEO (DVS) who will provide details of the title(s) to be valued plus details of any transactions which they consider will be helpful. Reports should be sent to CEO (DVS) for onward transmission to HMRC(IHT).
2) Reference from Inspectors of Taxes and other parts of HMRC - These will normally be sent direct to the DV without any input from CEO (DVS). Reports should be sent direct to the Instructing Branch and, at the same time, brief details of the interest(s) concerned and the value(s) reported should be forwarded to CEO (DVS).
General
Where a property to be valued is subject to a mortgage, the existence of the mortgage should be ignored in the opinion of open market value (see Section 4: paras 4.20, 4.21, 4.76 and 4.77).