Section 7
The Valuation Office Agency's (VOA) technical manual used to assess Capital Gains and other taxes.
Market value
7.1 Definition
There are a number of occasions where the market value of an asset on a particular date is required for Capital Gains Tax purposes. Market value is defined in s.272 as “the price which those assets might reasonably be expected to fetch on a sale on the open market” and, “no reduction shall be made 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”. This definition is similar to that used for IHT purposes and is further considered in Inheritance Tax Manual: Section 7 and Practice Note 1.
7.2 Date of valuation
The Inspector will always inform the DV as to the date of valuation. Generally this will be either a statutory date ie 31 March 1982 or 6 April 1965, or where an asset is acquired or disposed of under a contract, the date of contract and not, if different, the time at which the asset is conveyed or transferred (s.28 TCGA 1992). A variation is where the contract is conditional on the exercise of an option. In these circumstances the valuation date is that on which the condition is satisfied (s.28(2)).
7.3 Reason for valuation as at 31 March 1982
The requirement for a market valuation as at 31 March 1982 is found in s.35(2) TCGA 1992, viz: “it shall be assumed that on that date, the asset was sold by the person making the disposal and immediately re-acquired by him at its market value on that date”. Similar provisions for indexation allowance are included in s.55(2) TCGA 1992.
7.4 Acquisition on death
If an asset is acquired on death the acquisition cost may be determined by s.274 TCGA 1992 which says:-
“Where on the death of any person inheritance tax is chargeable on the value of his estate immediately before his death and the value of an asset forming part of that estate has been ascertained (whether in any proceedings or otherwise) for the purposes of that tax, the value so ascertained shall be taken for the purposes of this Act to be the market value of that asset at the date of the death”.
This applies for both IHT and CTT purposes. In the case of deaths between 31 March 1971 and 12 March 1975 it is the value adopted for Estate Duty purposes. Requests for assistance from Inspectors should be dealt with in accordance with para 6.137 et seq.
Values ascertained in respect of deaths prior to 31 March 1982 will, where a disposal is made after 6 April 1988, be subject to s.35 TCGA 1992 re-basing provisions (see Section 5). However for values ascertained in respect of deaths after 31 March 1982 s.274 TCGA 1992 will continue to apply.
Where the value has not been ascertained, then normal CGT principles apply, but see below at 7.28 regarding undivided shares.
Condition of property
7.5 General
An asset will normally be valued as it exists at the valuation date. The valuation should therefore reflect the physical condition of the property, the state of the locality and any encumbrances, tenancies, etc, as they existed at the valuation date(s).
7.6 Incomplete building work
An exception to the general rule may arise in cases involving the valuation of development sites or properties where building work is incomplete at the valuation date;
a) Where a taxpayer makes a gift or transfers a property to a connected person the DV may be asked for the market value at the date of disposal. If before the date of disposal the taxpayer has entered into a binding contract for development or improvement works to be carried out it will be necessary to ascertain what has been agreed between the parties so that the precise ‘asset’ transferred can be identified:-
i) If the property has been transferred with the benefit of the contract but with the transferee responsible for the cost of completing the building work then the valuation should normally be approached on the following basis:-
Notional value when completed = £
Less
1. Cost of completion payable under the building contract = £
2. Allowance for deferment risk and foregone interest = £ = £
Value at relevant date = £
In cases where the building work (or part of the building work) is being carried out with the benefit of an improvement, repair or similar grant under Part VIII of the Local Government and Housing Act 1989 (or similar earlier provisions), this would be a factor which should be taken into account when making the deduction for the cost of completing the work. The valuation should also have regard to the potential liability to repay the grant should a sale take place within a certain length of time.
(ii) If the work is to be completed at the transferor’s expense then the valuation should normally be approached on the following basis:-
Notional value when completed = £
Less
Allowance for deferment, risk = £ and foregone interest
Value at relevant date = £
In cases where the building work or part of the building work is being carried out with the benefit of an improvement, repair or similar grant, the valuations should also have regard to the potential liability to repay the grant should a sale take place within a certain length of time.
b) When valuing:-
(i) a property as at 31 March 1982 for indexation and rebasing (or as at 6 April 1965 for a deemed acquisition cost), or
(ii) a part of the property retained by a taxpayer following a part disposal,
the asset to be valued will be the property together with the benefit of any binding contract for development or improvement work entered into before the valuation date. In such cases the valuation should normally be approached on the same basis as in paragraph (a)(i) above.
c) In any case where there is no binding contract in existence at the relevant date (for instance if the work was being carried out by the taxpayer in person) then the general rule of valuing the property as it existed at the valuation date will apply.
In any of the above cases the DV’s report to the Inspector should explain the circumstances and the valuation approach that has been adopted.
Tenure
7.7 General
Guidance on the identification of the various types of tenancies and licences that may have been in existence on 31 March 1982 is contained in Practice Note 1. A summary of the current law is contained in Inheritance Tax Manual, Practice Note 3.
It should be noted that the assumed preliminary arrangements for the hypothetical sale do not extend to the extinguishment of a tenancy held by a company even if the taxpayer was a controlling shareholder. (See Henderson (HMIT) v Karmel’s Executors (1984)).
Liabilities
7.8 Subsisting charges transferred (s.26)
Where an asset is transferred subject to a subsisting charge (eg mortgage) it is to be valued as having been disposed of free of the charge. (The effect of the charge will be a matter for the Inspector to deal with). Where a valuation is required for example on a deemed disposal or gift, the interest in question should be valued free from any such charge registered against it.
7.9 Contingent charges transferred
If an interest is subject to a contingent charge which is taken over on acquisition or transferred on disposal (eg registered planning compensation) the valuation should reflect the existence of the liability.
7.10 Contingent charges not transferred (s.49)
Where the transferor retains or assumes a contingent liability no allowance will be made on that account, in the first instance, in the computation of the gains. If, at some future time, the liability is enforced any expenditure incurred by reason of its enforcement will be allowed to the taxpayer and any gain (or loss) will be recomputed.
Valuations for part disposals
7.11 General
The basic rules for part disposals are set out in Section 5 and DVs will normally be required to supply the market value of the retained interest for use in the part disposal formula.
7.12 Physical division of original unit
Where there is a physical severance of an original unit of acquisition eg the sale of a field from a farm which had been acquired as one unit, the valuation required (unless the separate asset basis has been adopted) is the market value at the relevant date of the “remainder” ie that part of the original unit of acquisition which remains unsold.
7.13 Other part disposals
Where an interest in, or right over, an asset is disposed of (eg by the grant of a lease at a premium, or of an easement, the release of a restrictive covenant or the total loss or destruction of a building etc) the valuation required is the market value at the relevant date of the “remainder”, ie the interest in the asset which is retained by the taxpayer after the disposal or after the depreciation etc has been suffered.
In valuing the “remainder” where this is a reversionary interest (eg after the granting of a lease) the value will include the capital value of the right to receive the rent under the tenancy.
Where land or an interest in or right over land has been acquired under compulsory purchase powers, in valuing the “remainder” the fact that the acquisition had been made compulsorily should be disregarded.
Agricultural tenancies
7.14 General
Regard should be had to Inheritance Tax Manual: Practice Note 5 ‘Valuation of tenant’s interest in agricultural tenancies for Revenue purposes’. In addition to valuations as at 31 March 1982 for indexation and re-basing, valuations are also required for CGT in sale and leaseback cases.
7.15 Sale and leaseback cases
Valuations of Annual Agricultural Tenancies were prior to 1995 required by Inspectors following sale and leaseback transactions because these are regarded as part disposals. Such valuations are required for the “B” factor in the A/A+B formula (s.42 TCGA 1992).
Such transactions are now understood to be very rare, as under the Agricultural Tenancies Act 1995 it is no longer possible to create an Annual Agricultural Tenancy which offers the security of tenure as provided for under the previous Agricultural Holdings Act scheme.
If caseworkers do receive instructions from HMRC concerning agricultural sale and leaseback transactions, they should seek specific advice from CEO DVS HMRC Section.
7.16 “Old hand” cases
The most usual situation is where a farmer sells the freehold of a farm for a capital sum, normally well below its VP value, subject to a leaseback to the farmer typically for a few years certain then annually, relying on Agricultural Holding Act 1986 (before 1.9.95) protection to give indefinite security of tenure. In such cases (often referred to as “old hand” cases) there is an apparent sacrifice by the farmer of the difference between the value of the freehold with vacant possession and the sum actually received which might be considered at first sight to represent the value of the tenancy which has actually been secured. However, the sale and leaseback arrangement not only brings the farmer the lease but also translates the freehold into substantial liquid capital without the need for the farmer to be disturbed in the occupation of the land. The farmer may well have been prepared to sacrifice a considerable amount for that facility as well as for the actual lease. Thus whilst the “sacrifice price” in such cases is the prime starting evidence of the value of an AAT it may need adjusting before being adopted as the AAT value. Comparison with the general level of AAT values will be needed.
7.17 “Newcomer” cases
There are occasional cases where a newcomer purchases a freehold farm with vacant possession at its VP value and then immediately resells on a sale and leaseback arrangement, usually to an institution or pension fund. These cases (known as “newcomer” cases) are important since the difference between the purchase price and the sale price subject to leaseback affords direct prima facie evidence of the value of the AAT, being the capital sacrificed in order to secure the tenancy. In this type of case there is normally no question of the amount sacrificed being attributable to anything other than the tenancy.
Distinction between valuation basis for CGT and income tax
7.18 General
DVs should be aware that valuation differences exist, and requests from Inspector should be made in memorandum form in Income Tax cases in accordance with their own instructions. In cases where a reference is made to the ITEPA 2003 or ICTA 1988, Section 1 hereof should be consulted. Any cases which present doubt or difficulty as to identification should be discussed with the originating Inspector before any action is taken on them.
Housing associations and similar bodies
7.19 General
When properties are disposed of by Housing Associations or similar bodies, valuations may be required as at 31 March 1982 for indexation and/or re-basing purposes (see Section 5).
It may be argued that similar circumstances which existed at the date of disposal should also be assumed as at 31 March 1982 (eg. tenant purchasing on vacant possession, subject to discount, basis under Right to Buy Legislation). This should be resisted.
7.20 Approach to valuation
At the relevant date properties were most likely occupied by “secure tenants” on tenancies similar to those under the Rent Acts, namely paying “fair rents” and with similar security of tenure to tenants of private landlords.
Given these circumstances, the 1982 values would prima facie be on an investment basis, ie. the amount the market would pay to purchase the landlord’s interest having regard to the existence of the tenancy and its specific terms. Consideration should however be given to any evidence that the tenant would have been a special purchaser prepared to buy at a figure above investment value.
7.21 Staircasing
Occasions may arise where a 1982 valuation is required of a shared ownership property. Here the valuation will be of the taxpayer’s interest, ie. the right to receive a fair rent as to the proportion owned. It may be argued that the tenant (and part owner) would be in the market as a special purchaser - but it would be necessary to show willingness and ability to purchase, given that continued occupation and the right to purchase future tranches will normally be written into the lease.
7.22 Apportionment of value on housing stock transfer
Where a disposal of a dwelling takes place by a Housing Association following a ‘housing stock’ transfer from a local authority, it is necessary to apportion the global acquisition price to the individual dwelling. In some instances it has been suggested that the average price per unit of the global sum paid represents a ‘just and reasonable’ apportionment. This average price figure is unlikely to truly represent the contribution that any particular unit makes to the total sum to be apportioned due to variations in size and quality of the accommodation, differing locations and states of repair, as well as differing circumstances of occupation. Nevertheless, in advising the Inspector we must consider the overall tax effect and whether the costs associated with undertaking a more refined apportionment can be justified. In such circumstances, adopting the average unit price may be considered a practical and acceptable solution. However, it is clearly important to establish full details of how the global sum was actually calculated. An alternative more refined approach is to base it on the capitalisation of the rent received for the property.
Undivided Shares
7.23 Valuation approach
The law relating to undivided shares and the valuation approach to be adopted is set out in detail in Inheritance Tax Manual, Section 18 and Practice Note 2. DVs should follow these instructions in any cases covered by this Manual.
There are a number of circumstances which should be borne in mind for CGT purposes where an undivided share discount is not appropriate and these are detailed at 7.28 to 7.30 below.
In CGT cases, even though the joint owners of a property may dispose of their interests together, if a valuation at 31 March 1982 is required it is necessary to separately value each taxpayer’s undivided share. It should not be assumed that the other shares are on the market at the same time.
7.24 Disposals by related co-owners
Husbands and wives, like other individuals, are separate taxpayers. Where an open market disposal by related co-owners, such as husband and wife, gives rise to a valuation as at 31 March 1982, the asset to be valued for either the husband or wife is the undivided share and in each case a sale by a hypothetical vendor must be assumed. It follows from the assumption of a hypothetical vendor that the other co-owner will not have any close relationship with the vendor as he or she is hypothetical.
It should not be assumed in a hypothetical sale that co-owners would act together to market their interests at the same time, as perhaps they might in the real world. Support for this approach is derived from the High Court decision in Battle v IRC [1980] STC 86. This was an estate duty case in which the High Court had to consider the correct method of valuing two 49% shareholdings in a private company owned by brothers. Balcombe J held that it could not be assumed “…that the hypothetical vendor of a minority holding of shares would only sell his holding in conjunction with other holders so that its value should be assessed on the basis of a sale of all the shares.”
7.25 Case law
The case law relating to undivided shares referred to in the Inheritance Tax Manual relates to IHT/CTT/ED cases, but the same principles apply equally to CGT because the definitions of ‘market value’ are all expressed in similar terms to S272 TCGA 1992. There is, however, one decided Lands Tribunal case which relates to a valuation as at 31 March 1982 for CGT purposes - Newman (HMIT) v Hatt [2001] R&VR 307. In this case it was necessary to value an undivided half share interest in a house let in multiple occupation where the co-owner was the taxpayer’s wife and neither resided at the property. The application of a discount was one of the issues determined by the LT whose decision was to confirm a discount of 10% from the arithmetic part share as contended by the District Valuer.
7.26 Size of discount
DV’s should follow the guidance in Practice Note 2 of the Inheritance Tax Manual regarding the size of the discount. It is important to note that in the ‘Nellie Wight’ case the co-owner was occupying the property as her home and this justified a 15% discount on the grounds that it was not ‘highly likely’ that a court would order possession. In cases where co-owners hold a property as a holiday home, they will have a right to occupy but in most instances the co-owners will not reside in it as their home or residence. In this circumstance a 10% discount should normally apply in preference to 15% because it is considered that the court is more likely to order possession than in the Nellie Wight situation.
7.27 Partnership property
It should be noted that if the property is held as a partnership asset, the Inspector will request an entirety value because each partner’s asset is taken to be a fraction of the entire asset held by the partnership.
7.28 Acquisition on inheritance
It is necessary to investigate the circumstances before deciding whether or not a discount for a share should be made when the required valuation is to establish the cost of acquisition on inheritance. Where the share acquired by the taxpayer is out of the whole share interest of a deceased person’s estate, a discount should not be made. This applies whether or not the value has been ascertained for IHT purposes as per CGT Manual, 6.137 to 6.140. The reason is that on a person’s death land may pass to two or more legatees, but first it passes, by virtue of s.62(1) TCGA 1992 to the personal representatives. The legatees are then deemed to acquire the property at the same value and the same time as the personal representatives, s.62(4). It follows that if two or more legatees acquire ownership of land together they acquire their respective interests at a value equal to a proportionate part of the entirety value.
If the deceased only held a share in the property then a discount should still be made, although an exception to this is where both the related property provisions apply and the value has been ascertained - Inheritance Tax Manual; Section 15.
7.29 Ascertainment of acquisition cost
Envisage the circumstance of an open market disposal of a property in co-ownership where the co-owners’ acquisition was by way of gift of the entirety from a connected party. The Inspector may request the valuation of either of the co-owner’s undivided half share interests at the time of acquisition in order to provide an acquisition cost. In this circumstance an undivided share discount should not be made unless the interest originally held by the donor was itself an undivided share. The reason is that for CGT the gift will have been a disposal by the donor. At the time of the gift, the disposal by the donor was of the entirety interest and the consideration for the disposal is deemed to be equal to the market value of the asset disposed of. In this situation, the same figure must be used as the acquisition cost of the persons who acquired the asset (just as it would be if they had acquired the entirety in an arms length transaction). Thus when two people acquire the asset their acquisition cost is simply a proportionate part of the donor’s deemed disposal consideration.
This circumstance should be distinguished from that where the donor only transfers a part share. In this situation the acquisition cost for the co-owner will equal the donor’s market value of the part disposed of, which should reflect an undivided share discount.
7.30 Connected party transfer of all shares
Where it is necessary to provide a market value in a connected party transfer involving the disposal of all undivided share interests by means of a single conveyance the circumstances of the sale have to be taken into account. An example would be when a husband and wife jointly own a property which they gift to one or more children. In considering the disposal for either the husband or the wife the asset to be valued is the half share interest. However, the valuation must reflect the reality of the situation that the other shares are, in the real world, actually being transferred at one and the same time and the co-owners are all acting in concert. In such circumstances it is unlikely that the vendors would accept any discount from their arithmetic share of the entirety value and similarly the purchaser would not expect to receive any discount. (This situation can be distinguished from that in a hypothetical sale of one share at say 31 March 1982 when the co-owner’s share cannot be assumed to be either on the market or forming part of the transfer at that date).
7.31 Application in Scotland
The law relating to undivided shares and the considerations to be taken into account in deciding the amount of the discount are different in Scotland. If caseworkers in Scotland require advice on the discount to be applied they should seek advice from CEO DVS HMRC Section.
7.32-39 Reserved
Goodwill
7.40 General
The term goodwill has been used in the commercial world since medieval times but the various attempts made by the Courts, the professions and Parliament to define it show there is no single or indeed simple answer. In the Shorter Oxford Dictionary the definition is given as:-
“Goodwill is the privilege granted by the seller of a business to a purchaser of trading as his recognised successor; the possessor of a ready-formed connection with customers considered as a separate element in the saleable value of a business”.
Goodwill may also be defined as the amount a business is worth over and above its net asset value.
7.41 Forms of Goodwill
The Inspector’s instructions refer to three forms of goodwill:-
1) Inherent Goodwill
This is the goodwill generated by the location of the property rather than the carrying on of a particular business. It is perhaps wrongly described as goodwill at all because all it really represents is the locational advantages of the property. It may be attracted by the address (for example a hotel in Park Lane). It may occur because of its strategic position (for example a hotel next to an airport). Or it may enjoy a monopoly position because of planning or licensing restrictions (for example the only hotel in town). It is impossible for such goodwill to be sold separately from the property and it will always be reflected in the property value.
2) Personal Goodwill
This is any trade generated by the personality, special skills or reputation of the person conducting the business (for example a restaurant run by an internationally renowned chef). Such goodwill cannot be transferred to another person or occupier of the property and, therefore, cannot form part of the value of the property.
3) Free Goodwill
This is goodwill created by a business conducted at the property and its value depends on how well that business has been carried on. It is the trade generated by the historical reputation of a business, the personality and skills of the staff and employees, the benefits of existing licenses and contracts with suppliers, customers etc. In most types of property “free goodwill” is capable of being sold separately from the property and constitutes a separate asset. However, occasionally such as in some of the specialist types of property mentioned in 2.1 above, most or all of the “free goodwill” is often incapable of being transferred to another property. In such properties “free goodwill” can be sub-divided into two categories, namely:-
A) “Adherent goodwill” which, although not inherent in the locational advantages of the property, sticks with it (for example this may represent satisfied customers who were not attracted by the personality of the particular person running the business and will continue to patronise the property provided the business continues to be run in a competent manner). As any “adherent goodwill” cannot be sold separately from the property, it does not constitute a separate asset and should be included in the DV’s valuation. In practice it may prove difficult to distinguish between “adherent” and “inherent” goodwill. However, DVs should not be too concerned with these definitions but should concentrate on arriving at a valuation reflecting all goodwill attaching to and inseparable from the property.
B) “Transferable goodwill” is any “free goodwill” which is capable of being sold completely independently of the property (for example the benefit of a trade name or a contract to provide a certain number of hotel beds etc). It is capable constituting a separate asset and should not normally be reflected in the DV’s valuation of the property.
7.42 Responsibility for the valuation of free Goodwill
The valuation of any ‘free goodwill’ which comprises a separate asset is normally the responsibility of the Inspector of Taxes or Shares Valuation (SV), although the DV may assist if requested to do so. To avoid any confusion arising from the division of valuation responsibilities, cases relating to the valuation of property where a large proportion of the ‘free goodwill’ may constitute ‘adherent goodwill’ are initially referred by the Inspector to SV. SV will in such cases endeavour to agree with the taxpayer whether or not there is any transferable ‘free goodwill’ which needs to be valued separately.
7.43 Cases referred via SV
The Inspector will refer valuation requests via SV when:-
1. both the business and the property have been sold or transferred and
2. the property is a hotel, restaurant, residential nursing home, public house, petrol filling station, mineral undertaking or a class of leisure property such as a cinema theatre, night club, casino, bingo hall etc.
If any difficulties over the nature of goodwill arise in cases involving other classes of property advice should be sought from CEO DVS HMRC Section.
7.44 Valuations to be provided by the DV
The valuations to be provided by the DV will depend upon the circumstances of the case:
a) If SV considers that none of the “free” goodwill is “transferable goodwill” then the DV will be asked to value the property inclusive of all “inherent” and “free” goodwill;
b) If SV considers that part of the “free” goodwill is “transferable goodwill” then the DV will be asked to value the property inclusive of “inherent” goodwill and “adherent goodwill” only. A separate valuation for the “transferable goodwill” may also be required;
c) If SV considers that all of the “free” goodwill is “transferable goodwill” then the DV will be asked to value the property inclusive of “inherent” goodwill only.
SV will normally request agreed valuations in all cases.
7.45-49 Reserved
Milk and potato quotas
7.50 Milk quotas
Milk quota is an immunity from the payment of a levy on a specified volume of milk production, identified by reference to the “holding” on which it is produced. The background to milk quotas is explained in detail in Inheritance Tax Manual: Practice Note 7.
Milk quota is regarded as a separate asset from the land to which it is attached. If milk quota was acquired, or disposed of, as part of a single transaction the total consideration has to be apportioned on a just and reasonable basis in accordance with s.52(4) TCGA 1992. Where such an apportionment is required the Inspector may seek the advice of the DV.
As milk quota did not exist before April 1984 DVs should not receive requests for valuations of quota as at 31 March 1982. If such a request is received it should be returned to the Inspector.
7.51 Potato quota
The Potato Marketing Board and thus Potato Quota was abolished in 1995 by the then MAFF as part of a drive toward the freeing-up of markets, thus ending 40 years of market intervention. The winding-down of intervention began in 1993 with the removal of support buying powers, which in effect rendered the quota redundant. Although the 1995/6 season was the last in which a quota was set, its value had begun to significantly decline from 1993.
The background to potato quotas is explained in detail in Inheritance Tax Manual, Practice Note 8. Consequently a request from HMRC to value potato quota will now be very rare, but any caseworkers requiring assistance should contact CEO DVS HMRC Section.
Chose in action
7.52 General
DVs may be requested to provide a valuation of the right to receive further payments which are unascertainable at the date of disposal, this is known as “chose in action” (see Section 5, paragraph 5.58). Detailed guidance on the valuation of such assets is contained in Practice Note 3.
7.53-59 Reserved
Section 87 TCGA 1992 - Rental value for purposes of assessing CGT charge to beneficiary of a non-resident trust
7.60 Introduction
HMRC may request rental valuations for CGT purposes for a particular tax year. These arise where an interest in a property is held by non-resident trustees and a beneficiary of the trust is in occupation. It is necessary to quantify the benefit received by the beneficiary.
Typically the properties concerned are ‘high value’ houses or flats. It is considered that comparison with rents of assured shorthold tenancies (AST) or market rents of such similar properties as can be found would be the best starting point but it may often be necessary to make significant adjustments to these so as to accord with the facts and terms of the actual occupation. There are many factors that may substantially affect the rental value and some potential problem areas are outlined below.
7.61 Basis of valuation
Section 87 Taxation of Chargeable Gains Act 1992 is concerned with cases where non-resident trustees have made chargeable gains. Subsection (4) states that “….the trust gains for a year of assessment shall be treated as chargeable gains accruing in that year to beneficiaries of the settlement who receive capital payments from the trustees in that year….”The expression ‘trust gains’ includes undistributed gains of earlier years. Because a cash distribution would give rise to CGT liability various devices have been adopted to confer benefits with no or minimal liability
Section 97(1) TCGA 1992 defines ‘capital payments’ as including “the conferring of any other benefit”. Section 97(4) provides that “…the amount of a capital payment made by loan, and of any other capital payment which is not an outright payment of money, shall be taken to be equal to the value of the benefit conferred by it.”
Billingham (HMIT) v Cooper (2001) 74 TC 139 gives important guidance on the interpretation of these sections. The case concerned the quantification of the benefit arising in a tax year during which an interest free loan to a beneficiary remained outstanding. It was held that in leaving the loan outstanding, even for a day, the trustees confer a benefit on the beneficiary. In the High Court Lloyd J said:
By conferring such a benefit day by day or over a longer continuous period the trustees make what S.97(2) treats as a “payment”. It is a payment within S.97(1)(a) and it is therefore a capital payment as defined in S.97(1). There is no difficulty in quantifying the value of the benefit further for the purposes of S.97(4) even though it has to be done retrospectively.”
This approach was accepted by the Court of Appeal.
In the circumstance of a beneficiary occupying a non-resident trust property throughout a particular tax year, the benefit derived is in occupying the property for the whole of the particular tax year in question. The benefit is in receiving one year’s uninterrupted occupation. The quantification of this benefit is the rent that would have to be paid to secure identical accommodation for an uninterrupted term of one year. This can reasonably equate to the open market rental value for a one year term.
Retrospection is used in these cases to establish the nature and extent of the benefit received during a tax year. Thus any terms of a licence, tenancy or occupancy agreement that may appear artificial and does not accord with the facts surrounding the occupation during that year should be ignored. If in doubt, seek advise from CEO DVS HMRC Section.
7.62 Assumed term of letting
It is clear from 7.61 above that the assumed term of the letting is for a one year period. In circumstances where the occupancy can be determined at short notice under a licence agreement such as 2 months, then the trustees confer an initial benefit of two months use of the property on grant of the occupancy. Thereafter, they confer additional benefit for each day that they refrain from giving written notice determining the occupancy. Thus at the end of a years uninterrupted occupation the benefit is of one years occupation. This accords with the Billingham case.
In order to assess the yearly rent comparison should be made with AST or open market lettings for a term of one year where renewal at the end of the year may or may not occur, as with any real world letting for a one year term.
7.63 Ownership of chattels by beneficiary
Often in these cases the occupying beneficiary has provided all the furnishings and chattels. This may include carpets, curtains, light fittings, white goods in addition to furniture. The rental value should exclude the benefit derived from chattels owned by the beneficiary.
It may be argued that the rental evidence should be restricted to properties that are totally unfurnished and that an incoming tenant would have to buy all these ‘essential’ furnishings. This would move away from the reality of the market place where even properties described as ‘unfurnished’ will include carpets, curtains and light fittings. This may be argued to have a very significant affect on rental value that appears out of proportion to the value of the chattels compared with the dwelling. Additionally it moves away from the reality of the fact that the subject property was indeed furnished, albeit provided by the beneficiary.
A realistic approach to this problem is to consider AST rents of furnished or partially furnished dwellings and apportion those rents between the rental element relating to the owner’s interest in the unfurnished property and the element that relates to furnishings. The apportionment should be on a ‘just and reasonable’ basis. No particular “just and reasonable” method of apportionment is laid down, but the object should be to arrive at the contribution which each part makes to the sum to be apportioned. It could be argued that an apportionment based on the relative capital value of the parts would be reasonable.
7.64 Repairing and insuring liability
With regard to the actual costs incurred by the beneficiary in running the property, any ‘normal’ occupier’s costs such as council tax, water rates, utility bills, contents insurance, wages for cleaning etc, should be ignored.
However, any actual costs in a particular tax year that go beyond that normally expected to be borne by a typical tenant in this letting market, such as repairing and insuring the property, should be deducted from the estimated rent.
Where there are onerous liabilities, it may be difficult to find comparable lettings with similar terms and indeed they may not make good comparison because of different potential costs due to the condition of the property concerned. Such direct evidence is therefore likely to be unreliable.
The way to deal with this is to ascertain how much money was actually expended on the property in the particular year under consideration by the beneficiary. To the extent that this related to costs that go beyond what a tenant would be expected to pay in comparison with a ‘usual’ AST letting, this amount should simply be deducted from the ‘normal’ market rental value. This is consistent with the logic in Billingham v Cooper as it represents the actual benefit received in a particular year and is preferable to deducting a notional amount for the potential liability arising from the repairing liability. This needs to be reviewed for each year but the Inspector may be able to assist with this.
7.65 Condition
With regard to the decorative condition and quality of the fixtures as existing at each year of assessment, the property should be taken as it existed at these dates. Thus if it was in poor decorative condition then that should be reflected.
Experience has shown that when considering the high rents achieved for the most ‘prestigious’ properties in the letting market, it will often be the case that the standard of finish and quality of fittings will be of the highest order. Where the condition of the property under consideration is only average to good, this may have a significant affect on the rental value. It is important to thoroughly investigate the letting market for the property concerned so as to see behind the headline rent of comparable lettings.
7.66 Improvements carried out by the beneficiary
If the beneficiary carries out improvements or redecoration to the owner’s property (eg, new bathroom or kitchen fixtures) then there are two possible approaches. It will be necessary to agree with the Inspector and the parties the approach to be adopted so as to ensure a consistent treatment for future years.
One approach is for the additional value of the enhancements to be excluded from the rental value. The best means of doing this is by carrying out a ‘just and reasonable’ apportionment of rent by reference to the contribution which the improvements make to the whole property.
The alternative approach is for the cost of the improvements to be deducted from the assessed benefit (ie the rent) for the year in question. It follows that in subsequent periods the rental value should be increased to reflect the benefit of these improvements, which now form part of the landlord’s premises.
7.67 Non-exclusive occupation
In some instances the beneficiary in occupation may have non-exclusive occupation. For example, the trustees may be co-owners of the building with the beneficiary’s spouse.
In this circumstance, if practical, the benefit should be computed by reference to what the trustees could charge a tenant if they were to exercise their right as joint owners to rent the property to someone else.
Where the interest is a 50% share and the property is a two-bedroom flat, it may be possible to quantify by reference to the ‘flat share’ market. For other properties and different shares it will in practice be difficult to quantify.
A practical solution is simply to look at the co-owner’s share of the open market rental value of the whole premises for a single joint letting. With co-ownership it is important to know what is said in the actual trust deed to see if any light is shed on the purpose of the trust’s ownership. Subject to this, it can be assumed that both co-owners, regardless of shares, have equal and unrestricted occupational rights to all of the premises under the Trusts of Land and Appointment of Trustees Act 1996. Hence neither party can say they have exclusive occupational rights to any specific part of the premises. Similarly and very importantly, both co-owners have a right to their portion of any rent received from the whole property. Both co-owners will be responsible for the outgoings to the premises in proportion to their share.
If the property were sub-let in a single letting of the whole premises then the beneficiary is entitled to his share and the co-owner to theirs. As the beneficiary is choosing to occupy the property rather than co-operate in renting it, the benefit foregone is simply the loss in rent they would otherwise have achieved. That can simply be quantified by reference to their share of the open market rent of the whole premises. This is a realistic quantification of the benefit received by the beneficiary. If there are unusual circumstances surrounding non-exclusive occupation or if it is argued that the purpose of S.12 TLATA 1996 is for one party to occupy the property and comparison with vacant possession rental values is inappropriate then seek advice from CEO DVS HMRC Section.
7.68 Procedure
These requests should be treated as case type 142 and normal CGT case procedures apply.
Where informal requests are received without full details of the above factors surrounding the occupation and without making an internal inspection, there is a risk of providing an excessive rental value. These risks should be pointed out to the Inspector when reporting the case.
If there are other situations that appear artificial or difficult to quantify, the caseworker should refer to CEO DVS HMRC Section for advice.