Inheritance Tax Manual

Practice Note 1: appendix F - Inland Revenue Commissioners v Gray (Executor of Lady Fox deceased) (1994)

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

This was an appeal to the Court of Appeal by way of case stated from the Lands Tribunal. It concerned the valuation of agricultural land for Capital Transfer Tax. The statutory references are therefore to the Finance Act 1975 but there are no significant differences between those and the relevant sections of the Inheritance Tax Act 1984.

Lady Fox died on 27 March 1981. She was the freehold owner of the 3,000 ac Croxton Park Estate in Cambridgeshire, which was let to a farming partnership in which she had a 92½% interest. Basically the question was, should her freehold reversion and her interest in the partnership be valued separately as decided by the Lands Tribunal or together as contended by the Inland Revenue?

In giving his judgement, with which Waite L J and Neil L J agreed, Lord Justice Hoffmann said:-

The statutory hypothetical sale

Section 19(1) of the Finance Act 1975 said that capital transfer tax should be charged on “the value transferred by a chargeable transfer”. 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 section 51(1) as “rights and interests of any description”. The valuation of each item must be made in accordance with section 38, which says that “the value at any time of any property shall for the purposes of capital transfer tax be the price which the property might reasonably be expected to fetch if sold in the open market at that time”. The section thus predicates a hypothetical sale immediately before Lady Fox’s death of each item of property in her estate.

The only express guidance which section 38 offers on the circumstances in which the hypothetical sale must be supposed to have taken place is that it was “in the open market”. But this deficiency has been amply remedied by the courts during the century since the provision first made its appearance for the purposes of estate duty in the Finance Act 1894. Certain things are necessarily entailed by the statutory hypothesis. 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. The question is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date: Inland Revenue Commissioners v Crossman [1937] AC 26. Furthermore, the hypothesis must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market: Duke of Buccleuch v Inland Revenue Commissioners [1967] AC 506, 525. To this extent, but only to this extent, the express terms of the statute may introduce an element of artificiality into the hypothesis.

In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part

in the calculation. The inquiry will often focus upon what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others but taking into account if appropriate the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened.

It is often said that the hypothetical vendor and purchaser must be assumed to have been “willing” but I doubt whether this adds anything to the assumption that they must have behaved as one would reasonable expect of prudent parties who had in fact agreed a sale on the relevant date. It certainly does not mean that having calculated the price which the property might reasonably have been expected to fetch in the way I have described, one then asks whether the hypothetical parties would have been pleased or disappointed with the result; for example, by reference to what the property might have been worth at a different time or in different circumstances. Such considerations are irrelevant.

Then under the heading “Splitting and Joining” he considered the cases of Duke of Buccleuch v Inland Revenue Commissioners (see Practice Note 1 Appendix A) and Attorney General of Ceylon v Mackie (which is a case about the valuation of two different types of shares which were worth more if sold together than if sold separately) and said:

This shows that whether one is taking apart or putting together, the principle is that the vendor must be supposed to have “taken the course which would get the largest price for the combined holding”, subject to the caveat in Buccleuch that it does not entail “undue expenditure of time and effort”.

After reviewing the arguments for both sides he concluded:

The tribunal stated the case in following terms:

“The questions upon which the decision of the Honourable Court is desired are: 1. (1) Whether as a matter of law a unit of ‘property’ for the purposes of valuation under s.38 Finance Act 1975 can comprise two or more component parts where at least one of those parts is ‘land’ (within the meaning of para 7 sch 4 to the Finance Act 1975) and at least one of those parts is not ‘land’.

(2) If the answer to question 1(1) is ‘no’, whether, as a matter of law, Lady Fox’s partnership share (‘the share’) includes ‘land’ for this purpose.

  1. If the answer to either of questions 1(1) and 1(2) is ‘yes’, what as a matter of law is the correct test for determining whether Lady Fox’s reversion (‘the reversion’) and the share should be valued as one unit of property for the purposes of s.38 of the Finance Act 1975.

  2. Whether the Lands Tribunal could, as a matter of law and on the facts found, have reached the conclusion that the reversion and the share did not form a unit of property for the purposes of valuation under s.38 of the Finance Act 1975.

  3. Whether, on the footing that the reversion and the share did form a unit of property for the purposes of valuation under s.38 of the Finance Act 1975, it is permissible to apportion the value of that unit between the reversion and the share for any of the purposes of the Finance Act 1975.”

As will appear from what I have said so far, I would answer these questions as follows:

  1. (1) Yes. (2) Does not arise, but in my view Yes.

  2. The principle in Buccleuch as explained above.

  3. No.

  4. Yes.

He allowed the Inland Revenue’s appeal and confirmed the Commissioners notice of determination. Leave to appeal to the House of Lords was refused.