Practice note 6: full consideration in money or money's worth
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
This note gives guidance and background information to valuers who have received a reference from the CTO requesting the DV to give an opinion of ‘full open market rent’ (see Section 9 para 9.28 et seq) in the context of ‘full consideration in money or money’s worth’ contained in s.16 IHTA 1984.
2.1 It is known that the grant of an agricultural tenancy will usually result in a substantial drop in value of the grantor’s freehold interest. When CTT was introduced it was generally thought that the grant would not give rise to any charge to tax, even though it significantly reduced the value of the grantor’s estate.
2.2 The view that such grants were exempt was based on interpretation of s.20 (4) FA 1975 (now s.10(1) IHTA 1984). This subsection provided exemption for transfers which were not intended to confer gratuitous benefit, either where the transaction was made at arm’s length between persons not connected with each other, or where it was such that it might have been expected to be made between persons not connected with each other.
2.3 This was not a view automatically taken by the Revenue who instanced, for example, cases where an agricultural tenancy was granted to the grantor’s son at full market rent but nevertheless where the grantor intended to confer gratuitous benefit on the son. The Revenue’s view led to considerable discussion and representations being made.
2.4 To remove the doubts expressed, an exempting provision s.97 FA 1981 was enacted. This is now s.16 IHTA 1984, which provides that for IHT purposes the grant of a tenancy of agricultural property in the UK “for use for agricultural purposes is not a transfer of value by the grantor if he makes it for full consideration in money or money’s worth”.
3.1 The expression ‘full consideration in money or money’s worth’ is not statutorily defined. Nevertheless, it is not an expression specially minted for s.16 and has a long history and broad application dating back to s.3(1) FA 1894.
3.2 In Hanson’s Death Duties the expression was considered:
“Consideration and value are not synonymous. While a sale at less than full value may raise a doubt as to the nature of the transaction, especially if it is between relatives it seems clear from the decisions on the section (s.3(1) FA 1894) that, even though the transaction is in form a family arrangement, if it is in the nature of a business deal whereby the vendor gets what he genuinely considers to be a fair equivalent of what he gives up, then he is regarded as having received full consideration, whether or not the mutual exchanges balance”.
3.3 The broad approach which the Courts have adopted in deciding whether or not there has been full consideration in money or money’s worth was indicated by Hamilton J in A G v Boden (1912) 1KB 539 at 561:
“The question whether full consideration was given or not may no doubt be solved by putting a value on the property which passed on one side, and weighing against it the value of the obligations assumed on the other; but that is not the only method of solving the question. Another method is by looking at the nature of the transaction and considering whether what is given is a fair equivalent of what is received”.
3.4 This approach was given further judicial authority by Lord Sterndale MR in A G v Earl of Sandwich (1922) 2KB 200:
“the way to answer this question (whether there was full consideration) is not necessarily to estimate the value of the thing granted and the consideration and ascertain whether they exactly agree, but to look at the nature of the transaction and to consider whether what is given is a fair equivalent of what is received”.
3.5 Perhaps, the neatest comment is that in the Bateman case (1925) 2KB 429, where according to the judge it meant that the full fair price has been paid and that nothing is left over for gift or natural love and affection or any other consideration.
3.6 It is recognised that whilst there would usually be a written tenancy agreement, some of the terms on which the tenancy was granted might not be contained in that agreement, and might have been agreed orally. Further, where all the terms on which the tenancy was granted were in writing, some of those terms might be in instruments other than the tenancy agreement. For example, an owner-occupying farmer may take others into partnership, and grant a tenancy to the partners. The terms of the tenancy granted might be affected by the terms of the partnership agreement.
3.7 CTO will take into account all the circumstances surrounding the grant of the tenancy agreement. Any oral terms upon which the parties agreed at the time the tenancy was granted will be included, as will the terms contained in any other instrument which came into being as a larger transaction of which the grant of the tenancy was part. All these circumstances, however, must be shown to relate to the grant of the tenancy and to have a monetary value that contributes to the total ‘full consideration’ claimed.
3.8 The DV will be required on first reference to consider the full open market rent having regard only to conditions and obligations contained in the written tenancy agreement. It will not be necessary at this stage to consider the merits of those terms which are not contained in the agreement. If the tenancy was made orally, the opinion will have regard to those terms known to CTO and either evidenced in writing or subject to acts of part performance. The DV may be called upon to give advice to CTO on circumstances over and above full open market rent in referred back cases, but each such case will be treated on an “ad hoc” basis and will be returned to the DV via CEO with suitable guidance being provided.
4.1 In considering whether the grant was for full consideration in money or money’s worth, CTO will need to look firstly at the rent passing under the tenancy and consequently will call on the DV for advice.
4.2 S.16 refers to the grant of a tenancy; that is, the creation of a new tenancy. The test as to what is the appropriate rent under such a grant is whether it is the full open market rent, namely the rent which would be expected to be achieved in the open market on the grant by a willing landlord to a willing unconnected tenant of a new tenancy of the subject land, having regard to all the other terms on which the tenancy is actually granted, including provisions for rent review and repairing obligations.
4.3 In forming an opinion as to the full open market rent, the DV will need to consider all the rental evidence available for that type of property in the locality. This will include the level of arbitrated rents, tender rents and rents freely negotiated between unconnected parties.
4.4 (i) New rents charged on review to sitting tenants, often referred to as arbitrated rents are considered generally to be below full open market rents, although this is a matter for local evidence in individual cases. There were good reasons why this was so with arbitrated rents fixed under s.8 AHA 1948. These reasons were summarised in the RICS/CAAV Guidance Notes published in June 1980, notably:-
- Increases in rental value due to tenants improvements are to be disregarded, as are landlords improvements, where the landlord had received grants out of public money.
- No account should be taken of the relief from payment of rates by occupiers of agricultural hereditaments.
- Any decrease in rental value should be disregarded where this arises from dilapidations or deterioration of the holding permitted by the tenant.
(ii) Furthermore, it had been common practice for some time for arbitrators to value by ignoring scarcity even though not statutorily required to do so, and new rents agreed on review without recourse to arbitration tended to follow this practice.
(iii) S.12 AHA 1986 (which replaced s.8 AHA 1948) provides a completely new rental formula for determining the arbitrated rent. Amongst the substantial changes made are:-
- Statutory authority has now been given to the previous practice of arbitrators of excluding scarcity.
- The formula omits any express reference to the ‘open market’.
- The relief from payment of rates provision is abolished.
Levels of rent so determined will need to be weighed most carefully in making a judgement as to whether or not they may be regarded as a measure of full open market rent.
4.5 Rents obtained by owners inviting tenders for the grant of a new tenancy, often referred to as ‘tender rents’, will usually be acceptable and afford appropriate evidence to which proper weight must be given. It is possible nevertheless, that a particular tender rent may be out of line with the general level of tenders; this might indicate a change in the market and constitute acceptable evidence of new levels; or it may be a ‘one off’ tender genuinely ill-considered and not constituting acceptable evidence of the rent which would be freely negotiated between the landlord and a new unconnected tenant, in which case it should be rejected.
4.6 Rents achieved on new lettings made by agreement at arms length would be consistent with what is meant by full open market rent and would provide pertinent evidence when the DV is weighing up all the information available.
4.7 An existing tenant may be able to take a new holding from the existing unconnected landlord. In considering the rent so obtained the DV may regard the arbitrated level of rent on the existing holding to have limited the landlord’s freedom to manoeuvre in the negotiations, although by the same token, the “marriage value” to the existing tenant may have strengthened the landlord’s negotiating position. For the avoidance of doubt, persons in partnership would be considered to be connected.
4.8 To summarise, the DV must not exclude any evidence and should compare all rental evidence for similar agricultural property in the area, ascribing such weight to the available evidence as meets the appropriate test of what is full open market rent having regard to relevant local practice and custom. Care should be taken not to draw too fine a line between the actual rent and the full open market rent especially where firm evidence is hard to come by. The taxation consequences of the decision can be substantial.
5.1 The DV will be required to have regard to all the terms of the tenancy in arriving at an opinion of the full open market rent. It is therefore necessary to be sure that all the relevant details are to hand, especially a copy of the written tenancy agreement, before coming to an opinion.
*5.2** Some tenancies will place unusual onerous conditions and obligations upon the tenant, such as putting into good repair a holding which had been allowed to deteriorate badly; or to carry out substantial and expensive improvements at the commencement of the tenancy which would not be disregarded on rent review under s.12 AHA 1986. Another example would be where the tenancy restricts the tenant to a form of husbandry where inorganic fertilisers, pesticides, etc are not permitted.
5.3 It is not possible to cover all the onerous conditions and obligations likely to be found in practice, nor to give guidance as to what is unusual. It will be for the DV to consider, based on knowledge of local custom and practice, for what is onerous or unusual in one locality may not be the case in another. Should the DV experience any points of difficulty, the RD and CEO should be consulted.
5.4 It is expected that the normal form of tenancy will be on a year to year basis which would thus be covered by s.12 AHA 1986 so that the rent can be reviewed every three years, or less in certain circumstances. The DV may find, however, that the form of the tenancy is for a term of years certain with either no provision for rent review, or with review periods of longer intervals than three years, or to rents at less that s.12 levels, and as with unusual obligations and conditions, it is necessary to take into account the likely effect these would have on the full open market rent.
5.5 The opinion of full open market rent should reflect those conditions and obligations in the tenancy agreement which the DV finds unusual or particularly onerous compared to the terms one would normally expect to find in a tenancy agreement within the locality. In reporting to CTO, the DV should draw attention to such conditions and obligations where these have been reflected in the opinion of full open market rent.
5.6 The DV may be aware of other circumstances surrounding the grant of the tenancy which are not contained in the tenancy agreement. These should not be reflected in the opinion of full open market rent, but details should be provided in the report to CTO. CTO may ask to be advised on the effect of these circumstances if the case is referred back, but such references will be treated on an ad hoc basis and will be returned to the DV via CEO with suitable guidance being provided.
6.1 For s.16 IHTA 1984 to apply the grant must be of agricultural property, and agricultural property is given the same meaning as in s.115 IHTA 1984.
6.2 CTO may request the DV to advise whether the property the subject of the grant was agricultural property for use for agricultural purposes. Guidance on the meaning of agricultural property is given at Section 9: Part 2.
6.3 “Agricultural property” may have a particularly attractive farmhouse of a character appropriate to the holding. There may be a considerable demand to use the property for residential purposes, and evidence that anyone wishing to use it for these purposes is prepared to outbid the price a farmer is prepared to pay to use it for agricultural purposes. This overbid should not be reflected in the DV’s opinion of full open market rent as it would not accord with the expression “for use for agricultural purposes”.
6.4 Where there is doubt on the meaning of ‘agricultural property’ or ‘use for agriculture’ the case should be referred to CEO via the RD.