Inheritance Tax Manual

Practice Note 1: appendix A - Duke of Buccleuch v Commissioners of Inland Revenue (1967) IAC 506

The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.

Appeal against Principal Value for Estate Duty

For the purpose of ascertaining the estate duty payable in consequence of the death, on 26 November 1950, of the tenth Duke of Devonshire, the value of that part of the assets of a company (the Chatsworth Estates Company) which consisted of real and leasehold property in 10 English and one Scottish estate fell to be determined by the Inland Revenue Commissioners in accordance with the directions in s.7(5) of the Finance Act 1894.

This section provides that:-

“The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased…..”

Finance (1909-10) Act, 1910, s.60: “(2) In estimating the principal value of any property under section 7(5) of the principal Act …. the Commissioners shall fix the price of the property according to the market price at the time of the death of the deceased, and shall not make any reduction in the estimate on account of the estimate being made on the assumption that the whole property is to be placed on the market at one and the same time:…..”

The trustees of the Chatsworth Settlement disputed the value attributed to eight of the English estates, claiming that the basis of valuation adopted by the Revenue did not accord with the statutory requirements. One English estate was taken before the Lands Tribunal in order to obtain an interim decision, on the basis of which the valuation of the other estates might be agreed.

The estate, 20,635 acres in area, comprised principally farms, but also included smallholdings, allotments, gardens, agricultural and industrial land, woodlands, residential properties, sporting rights, ground rents and licensed houses.

The Revenue valued the estate by dividing it into 532 separate units, and the total valuation of £868,129 was made on the assumption that each unit had been sold in the open market on the date of the Duke’s death at the best price which a purchaser might then reasonably have been expected to pay, irrespective of whether it would or would not have been possible to put the property on the market or of actually realising the open market price at that time. The trustees, while agreeing the value attributed to the individual units on that basis, contend that as it would be impossible to sell an estate of this complexity within a reasonable period of the death (which they put at one year) unless the bulk of it were sold in one block, the correct basis in accordance with section 7(5) was, after extracting 46 readily saleable separate units, to postulate offering the remaining 486 units in one block to a hypothetical buyer; that such a buyer would be either an investor or a speculator; but that the price which such a buyer would pay would be some 20 per cent less than the total of the individual 486 units, viz, £537,966. The total for the 532 units on that basis was calculated by experts for the trustees at about £727,000. The Lands Tribunal held that the correct basis in law under the statutory provisions was that applied by the Revenue; but they made an alternative valuation on the basis of the trustees’ method. In their final decision the tribunal found the total values of the 10 English estates to be £3,176,646 according to the Revenue method and £2,743,760 according to the trustees.

The trustees appealed to the Court of Appeal, which held that the Lands Tribunal had not erred in law, for the value adopted by it was, in accord with the evidence, the statutory directions and the authorities, and the best price that could reasonably have been expected on a hypothetical sale of the property divided into saleable units in the open market at the time of the duke’s death.

The dispute between the parties was as to the basis of valuation to be adopted in the light of the statutory provisions applicable. The trustees grounds of appeal to the House of Lords were:-

1. That the value of £3,450,874 determined by the Inland Revenue Commissioners exceeded the price which the real and leasehold property would have fetched if sold in the open market at the time of death.

2. That the amount of £3,450,874 represented the aggregate of the individual values of each unit comprised in the property, each unit having been considered separately and on the basis that there would have been a purchaser prepared at the time of death to give the full open market value for that unit.

3. That that amount should be reduced to take into account the following matters:- ◦ The impossibility of offering for sale at the time of death all the real and leasehold property except as a whole or as individual estates, which would not have been expected to fetch £3,450,874.

  • (i) As the property had to be assumed to be offered for sale in the open market at the time of death, the only purchaser or purchasers of it would have been an investor or investors or a speculator or speculators.

(ii) The price which he or they would have been willing to pay would have been fixed by reference to all the relevant circumstances, and, in particular, would in the case of an investor or investors have been a sum or sums determined on a consideration of the income available from, and the future breakup value of, the real and leasehold property (which would have been less than £3,450,874): and in the case of a speculator or speculators would have been reduced as a safeguard against the risks, delays, and uncertainties which could have affected any resale, and to cover the costs of any resale and to provide profits on resale.

  • The size and diversity of the property to be sold and the uncertainties that buyers would have been available at the time of death for the whole of the property.

  • The chance of there being no purchaser for some of the various units included in the property.

  1. The only way of achieving the sum of £3,450,874 on a sale of the property would have been by an orderly disposal of the various units which would have taken a very considerable time and accordingly, to arrive at a price which the property would have been expected to fetch at the time of death, deductions had to be made to cover deferment to probable dates of sales, uncertainties as to conditions at the date of such sales, and costs of preparing for such sales.

The House of Lords held that the Tribunal came to the right decision in accepting the valuation of the Revenue and rejecting that of the trustees. Ellesmere (Earl of) v Inland Revenue Commissioners (1918) applied. (See Practice Note 1: Appendix B).

Per Lord Reid. 1. On the true construction of section 7(5) “any property” did not refer to the deceased’s whole estate but meant any part which it was proper to treat as a unit for valuation purposes; one had to envisage a hypothetical sale of the actual unit on the day on which death occurred, after having taken such steps as were reasonable to attract as much competition as possible for the particular piece of property. The estate had to be considered as it was when the deceased died; generally it would consist of easily identified natural units and there was no justification for requiring elaborate subdivisions.

If the costs of realisation of 532 units were calculated as a percentage of the total value and that percentage was greatly in excess of the costs of realisation of one single unit, that would be evidence that the units were not natural units. But that factor could not have accounted for the greater part of the difference between the two valuations in the present case, which was not one in which a remit would be justified.

Per Lord Morris. The stipulation that an estimate must be made of the value which a property would fetch if sold in the open market does not require an assumption that the highest possible price will be realised. It involves that an estimate should be made of the price which would be realised under the reasonable competitive conditions of an open market on a particular date.

Per Lord Wilberforce “The estate is to be taken as it is found: it is not to be supposed, in order to obtain higher figures of valuation, that any substantial expense is to be incurred or work done in organising the estate into units; on the other hand, some practical grouping or classification, such as can reasonably be carried out without undue expenditure of time or effort, by a prudent man concerned to obtain the most favourable price, may be supposed.”

The Decision of the Court of Appeal was affirmed.