Inheritance Tax Manual

Practice Note 1: appendix E - Alexander v Inland Revenue Commissioners (1991)

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

The appeal concerned the valuation of a flat for Capital Transfer Tax purposes which had recently been acquired from the Local Authority under the right to buy. The difficulty was that the lease, and the Housing Act 1980, required the discount to be repaid on a sliding scale if it were resold within 5 years.

The death of the deceased did not trigger this clause but if the flat was sold at the date of death, as this was within 1 year of the original purchase, the full amount of the discount would have been repayable.

The Lands Tribunal had determined the value, without deduction for this obligation at £63,000. The parties successfully argued at an earlier hearing before the Special Commissioners that this value should be reduced by the discount of £24,600. The Revenue contended for the DV’s valuation of £50,000, being what someone would pay on the footing that if they then resold within the relevant period the discount (or part of it) would be payable, but not otherwise, and no further deduction.

Ralph Gibson L J said:

“The essential question may be described thus: is the value of the lease to be taken as the value which the lease would have, if transferred, on the basis that the transferee must pay the relevant percentage of repayable premium, or is the lease to be valued as in the hands of the deceased immediately before her death when nothing had happened to cause any proportion of premium to be repayable?”

Ralph Gibson L J concluded that the principles stated in Inland Revenue Commissioners v Crossman are applicable, and commented:

“It is first necessary to examine what those principles are. In Crossman, a testator at the time of his death owned a number of shares in a company the articles of association of which imposed rigid restrictions upon the alienation and transfer of the shares. It was contended for the personal representatives of the testator that the value of the shares for the purposes of the Finance Act 1894 was limited to the restricted price fixed by the articles to be paid by any existing shareholder exercising his right of pre-emption under the articles. Two of the provisions in the 1894 Act must be noted; the first is section 1:

In the case of every person dying after the commencement of this part of the Act, there shall … be levied and paid upon the principal value ascertained as hereinafter provided of all property real or personal … which passes on the death of such person a duty, called estate duty …

Next, by section 7(5):

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.

The contention of the personal representatives was rejected by the majority decision of the House. Viscount Hailsham LC at p 41 said:

It seems to me that this construction (contended for by the personal representative) involves treating the provisions of section 7(5) as if their true effect were to make the existence of an open market a condition of liability instead of merely to prescribe the open market price as the measure of value.

Later on p 42 he said:

The purpose of section 7(5) is not to define the property in respect of which estate duty is to be levied merely to afford a method of ascertaining its value.

Lord Roche, to the like effect at p 74, said:

Section 7(5) … is simply a provision for estimating by means of an hypothesis the value of property which has passed otherwise than by an actual sale and transfer and may be incapable of so passing.

In Re Sutherland, deceased [1963] AC 235 Lord Guest at p 262 said:

The purpose of section 7(5) … is to value the property. “It does not,” as Lord Evershed M R said “require you to assume that the sale … has occurred.” It simply prescribes, as the criterion for value, price in the open market as between a willing seller and a willing buyer, which is a familiar basis for valuation.

In Lynall v Inland Revenue Commissions [1972] AC 686 the correctness of the decision of the majority in Crossman was challenged but approved by the House of Lords.

I have no doubt that the principles stated in Crossman’s case are applicable to section 38 of the 1975 Act, which in substance is the same as section 7(5) with words added to give statutory recognition to the decision of the House of Lords in the Duke of Buccleuch’s case. It follows that, in valuing that which passed from the deceased upon the deceased’s transfer of value immediately before her death under section 22, in order to determine the amount by which the value of the estate is less by the transfer, the Lands Tribunal is required to determine the amount which, on a hypothetical sale, a person would be willing to pay to acquire the lease held by the deceased subject to the obligation which would fall on the hypothetical purchaser to make a repayment to the landlord in the event of a disposal within section 8(3) of the 1980 Act but on the footing that his own hypothetical acquisition did not itself give rise to such a disposal.”

Agreeing Nicholls LJ said

“Thus, the legislation makes it necessary to identify the “value” of an estate at a particular time. In short, value means market value: “the price which the property might reasonably be expected to fetch if sold in the open market at that time” (section 38(1)). This mode of valuation involves a notional sale of the property in question at the relevant time. But, in prescribing a notional sale, the section is doing no more than prescribe the basis on which the valuation shall be made. The notional sale does not change the subject-matter of the valuation. What is being valued is property belonging to the transferor, and it is being valued as at a time when he still owned it. The notional sale is designed merely to identify the sum which a purchaser in the open market might reasonably be expected to pay to be placed, in respect of that property, in the same position as the transferor. This interpretation of section 38 accords with the decision of the House of Lords in Inland Revenue Commissions v Crossman [1937] AC 26 regarding the comparable valuation provisions in the estate duty legislation (Finance Act 1894, section 7(5)). As Viscount Hailsham LC said (at p 42), the notional sale is “merely a statutory direction as to the method by which the value is to be ascertained”

These principles have now been reproduced in corresponding provisions in sections 2, 3, 4 and 160 of the Inheritance Tax Act 1984. In my view, application of these principles leads inevitable to the primary conclusion for which the Crown contended on this appeal.