Commissioners of Inland Revenue v Gray (Executor of Lady Fox deceased)
| Jurisdiction | England & Wales |
| Judgment Date | 09 February 1994 |
| Date | 09 February 1994 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Neill, Hoffmann and Waite L JJ.
Nicholas Warren QC (instructed by the Solicitor of Inland Revenue) for the Crown.
Richard Bramwell QC and Alun James (instructed by Farrer & Co) for the executor.
The following cases were referred to in the judgment:
A-G of Ceylon v Mackie & Anor UNK[1952] 2 All ER 775
Buccleuch (Duke of) & Anor v IR Commrs ELR[1967] 1 AC 506
IR Commrs v Crossman ELR[1937] AC 26
Burdett-Coutts v IR Commrs WLR[1960] 1 WLR 1027
Capital transfer tax - Valuation - Freeholder of farmland also had interest in partnership carrying on farming business - Whether value attributable to freehold interest in tenanted farmland to be determined as a proportion of aggregate of freeholder's interest and value of partnership - If so, whether valuation to be based on vacant possession value of freehold or investment value subject to tenancy of partnership - Finance Act 1975 section 22 subsec-or-para (1) section 38 subsec-or-para (1)Finance Act 1975, ss. 22(1), 38(1) (replaced by section 4 subsec-or-para (1) section 160Inheritance Tax Act 1984, ss. 4(1), 160).Jurisdiction of Lands Tribunal - Valuation of land - Whether Lands Tribunal had jurisdiction to value as one composite asset freehold interest in land and interest in farming partnership which held agricultural tenancy in the land -Finance Act 1975 schedule 4 subsec-or-para 7Finance Act 1975, Sch. 4, para. 7(4) (replaced by section 222 subsec-or-para (4)Inheritance Tax Act 1984, s. 222(4)).
This was an appeal by the Revenue by way of case stated from a decision of the Lands Tribunal ((1991) 1 CTC 451) that in valuing freehold agricultural land for capital transfer tax purposes, the deceased's interest in a partnership which held an agricultural tenancy of the land should not be taken into account. The respondent to the appeal was the surviving executor of the deceased.
Lady Fox, who died on 27 March 1981, was the freehold owner of a 3000 acre estate, known as the Croxton Park Estate in Cambridgeshire. The estate was let to an unassignable agricultural partnership in which she had a 92 1/2 per cent interest.
The estate would have been worth £2,751,000 tenanted but £6,125,000 with vacant possession. If both the freehold and Lady Fox's interest in the partnership, the main asset of which was the tenancy, were sold together, the purchaser would have been able to obtain vacant possession of the estate at a cost of the surrender value of the two other partners' interests. The district value put the combined value of the two interests at £5,565,000 and apportioned £4,280,768 to the freehold interest.
On that basis a notice of determination to capital transfer tax was issued to the executors of Lady Fox on the footing that the value at the date of her death of the freehold interest in the Croxton Park Estate was the aggregate of that interest and her share of the partnership business as a single unit of property for the purposes of theFinance Act 1975 section 38Finance Act 1975, s. 38.The notice of determination was framed in that way to overcome any difficulty arising as to the jurisdiction of the Lands Tribunal. Any dispute over the valuation of the freehold reversion was unarguably a matter for the Lands Tribunal by virtue of the Finance Act 1975 schedule 4 subsec-or-para 7Finance Act 1975, Sch. 4, para. 7(4), while a dispute as to the value of the partnership assets, which included personalty, might be a matter for the special commissioners.
The question for the Lands Tribunal was whether the freehold estate should be valued for capital transfer tax purposes as if it had been let to strangers or whether the valuation should take into account Lady Fox's interest in the partnership which held the tenancy.
That question involved consideration of the statutory hypothetical sale postulated by the Finance Act 1975 section 22 subsec-or-para (1)Finance Act 1975, s. 22(1) which provided that on the death of any person, tax should 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 valuation was to be open market value made in accordance withFinance Act 1975 section 38 subsec-or-para (1)s. 38(1)of the 1975 Act.
The Lands Tribunal accepted jurisdiction on the ground that the purpose of the determination was to determine the value of the land. They held that the value of Lady Fox's freehold interest was to be determined by reference to its investment value subject to the tenancy because the freehold interest and the partnership share could not be lotted together to constitute a single unit of property for the purposes of the Finance Act 1975 section 38Finance Act 1975, s. 38.
The Revenue contended that, in cases where the value of an estate would vary according to whether the separate items were sold separately or together, the vendor must be supposed to have taken the course which would get the largest price for the combined holding, subject to a caveat that it did not entail undue expenditure of time and effort. The Revenue took the view that the prudent vendor would have sold the freehold of the Croxton Park Estate together with Lady Fox's interest in the partnership.
The taxpayer contended that there were three reasons why the Revenue were not entitled to aggregate the two interests. The first was thatFinance Act 1975 section 38s. 38 of the 1975 Act required the open market value of a particular item of property to be ascertained. The process had to be one of valuation, not attribution. Even if it were permissible to lot the freehold interest and the partnership share together as a single unit of property, it would be valued as a single unit of property and apportionment would be neither admissible nor appropriate.
The second point argued by the taxpayer was that the division of jurisdiction as to the valuation of land and other property between the Lands Tribunal and the special commissione rs meant that land and other property, such as an interest in a partnership, could never be regarded as a single asset.
The taxpayer's third submission was that, even if the Lands Tribunal had jurisdiction to value both interests, the two interests could not be aggregated because together they did not form a "natural unit" of property.
Held, allowing the Revenue's appeal and confirming the determination to capital transfer tax:
1. The only assumption made by the determination about how a hypothetical sale would have been conducted was that the freehold interest and the partnership share would have been sold together to obtain the best price. That assumption involved the determination of a value for a single unit of property consisting of two interests. There was no objection to the aggregation of the two interests, and it was necessary to make an apportionment of the combined value of the two interests in order to ascertain the value of the freehold interest.
2. The Lands Tribunal had jurisdiction to hear an appeal against the Revenue's valuation because the entire determination raised questions "as to the value of land" within Finance Act 1975 section 38s. 38 of the 1975 Act. So far as the Lands Tribunal had to consider the value of assets which were not land, that was only part of the process of reasoning by which it arrived at an answer to the substantial question, namely the value of the freehold interest. It was therefore not necessary to decide whether Lady Fox's interest in the tenancy included an interest which was itself land, but the conclusion would have been that it did.
3. It would be dangerous to regard the term "unit of property" as a universal touchstone for the application of the principle that a hypothetical sale had to be supposed to have taken the course which would get the largest price provided that it did not entail undue expenditure of time and effort. The principle might involve the sale of an aggregate which could not reasonably be described as a natural unit. Here, a share in the farming partnership was not a natural item of commerce but Finance Act 1975 section 38s. 38 required an assumption to be made that it was sold, and, on that assumed sale, it would have been more advantageous to sell the partnership interest with the land.
Buccleuch (Duke of) & Anor v IR Commrs ELR[1967] 1 AC 506 applied and explained.
Hoffmann LJ: This is an appeal by way of case stated from the Lands Tribunal. It concerns the valuation of agricultural land for the purposes of what is now called inheritance tax but was at the material time called capital transfer tax on death. Lady Fox died on 27 March 1981. She was freehold owner of the 3000 acre Croxton Park Estate in Cambridgeshire, which was let to a farming partnership in which she had a 921/2 per cent interest. Shortly stated, the question for the Lands Tribunal was whether the freehold estate should be valued as if it had been let to strangers or whether the valuation should take into account Lady Fox's interest in the partnership which held the tenancy.
Finance Act 1975 section 19 subsec-or-para (1)Section 19(1) of the Finance Act 1975 said that capital transfer tax should be charged on "the value transferred by a chargeable transfer". Finance Act 1975 section 22 subsec-or-para (1)Section 22(1) said that on the death of any person, tax should 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.
Thus Lady Fox's personal representatives were liable to capital transfer tax on the value of her estate immediately before her death.
The estate consisted of a number of different items of property and its value was the aggregate of the values of all those items. "Property" is defined in s. 51(1) as...
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