Rating Manual section 3: valuation principles

Part 5: composite hereditaments

The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.

1. Definitions

A composite hereditament is a hereditament which has both domestic and non-domestic property within it (Local Government Finance Act 1988 s64(9)).

Property is defined as being domestic “if it is used wholly for the purposes of living accommodation…….” (s66(1)(a)). To be a composite there must be domestic use, for example, the mere fact that part of a hereditament is set out as a flat will not make it composite if it is not actually used as living accommodation but instead is used for the storage of stock or some other non domestic use.

NB If a hereditament is wholly used for domestic purposes, even though “vacant and to let” it would be capable of non-domestic use, it is to be excluded from assessment. If it is wholly used for non-domestic purposes it is entirely rateable. If there is some non-domestic use of an otherwise domestic property, it is a composite hereditament. Property which is not in use is defined as being domestic ‘if it appears that when next in use it will be domestic’ (s66(5)).

In deciding whether a hereditament is composite it is necessary to consider whether any use (either domestic or non-domestic) is de minimus. If it is, it should be left out of account in determining whether property is domestic or non-domestic (what constitutes de minimus in this context is considered in RM 4:2 Part B).

2. Significance

The LGFA 1988 in s42(2) provides that both wholly non-domestic and composite properties are rateable, but it should be noted that they are valued on quite different assumptions.

Wholly Non-domestic property is to be valued in accordance with paragraph 2(1) of Schedule 6:

the rateable value of a non-domestic hereditament none of which consists of domestic property and none of which is exempt from local non-domestic rating shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected let from year to year if the tenant undertook to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent.

Composites are to be valued in accordance with paragraph 2(1A) of Schedule 6:

The rateable value of a composite hereditament none of which is exempt from local non-domestic rating shall be taken to be an amount equal to the rent which, assuming such a letting of the hereditament as is required to be assumed for the purposes of sub-paragraph 2(1) above, would reasonably be attributable to the non-domestic use of property.

3. Application of the “De minimis” test

In cases where there is only limited use made of living accommodation for other than strictly domestic purposes, a de minimis rule should be applied. Where, for example, the front room of a dwelling-house is used intermittently for non-domestic purposes (such as hairdressing or a shirt ironing service) or where spare rooms are let out at peak holiday periods for “bed and breakfast” purposes, this is not intended to breach the “wholly used” requirement, so as to bring the property into assessment.

On the other hand, where the dominant use of part of a hereditament, such as a front room used as a doctor’s surgery , is clearly non-domestic, then the hereditament will fall to be treated as composite.

The same test applies when there is some minor use being made of a non-domestic property for occasional domestic purposes. For example, there may be occasions when the non-domestic occupant chooses to sleep on the property, for security or other reasons in other than defined living accommodation. That would not be considered sufficient to make the hereditament composite. It should be valued wholly as a non-domestic hereditament.

The de minimis rule is considered in detail in RM 4:2.

4. Valuation by reference to general patterns of use: ‘Notionality’

Whether a hereditament constitutes a ‘composite hereditament’ depends on the actual use made of it. To be composite a part has to actually be domestic (or, if unused, it appears it will be domestic when next in use).

Because of the difficulty in monitoring changes to the extent of the actual domestic use of a composite and the variations between properties, the legislation sets out a special valuation assumption for composites based on a notional distribution of uses. This requires that the property should be valued “vacant and to let” having regard to its present physical state, but ignoring any distribution of domestic and non-domestic uses which are clearly out of conformity with the prevailing pattern for accommodation in that locality.

This approach follows from the RV definition for composite hereditaments (see para 2 above) ie what is required is an apportionment of the rental value of the whole hereditament to what ‘would reasonably be attributable to the non-domestic use of property’.

In the first place, ‘notionality’ requires that the VO should stand in the shoes of the hypothetical tenant and seek to determine the reasonable expectation of the hypothetical tenant’s occupation of the unit in question. For example, should the ratepayer have an abnormally large family which requires the occupation of accommodation for domestic purposes which is clearly non-domestic, the view would be taken that, vacant and to let, some part of the living accommodation should be treated as non-domestic.

There will be instances where a clearly discernible pattern is evident (for example, a parade of shops with living accommodation when most units are being occupied in one particular way), and there will be other circumstances where no such pattern can be observed. Where there is no obvious pattern, VOs are likely to follow actual patterns of occupation to a greater extent, but the notional approach to the valuation of composite property, which accords with the usual “vacant and to let” rule, will allow the resolution of disputes at the margins where, for example, a ratepayer seeks to argue a quite unreasonable occupation for domestic purposes simply to minimise the non-domestic property to be included in the valuation for rating. The part treated as domestic will need to be banded for Council Tax purposes. See CTM:PN2 ‘The Valuation of Composite Hereditaments for Council Tax’, and also CTM:PN8 para 4.14 Borderline properties, vacant living accommodation over shops or pubs.

5. Application of the “notional” approach

It is appreciated that a wide variety of different circumstances exist where the notional approach will be applied and it is impossible to prescribe rules in every case. VOs should take a commonsense approach to this difficult category of property.

Examples

To clarify the various issues concerned, take the example of a terrace of shops, all with living accommodation on upper floors.

Shop Number 1 is wholly occupied for non-domestic purposes, the upper two floors being used for storage purposes. It is entirely non-domestic, and should be wholly valued and entered in the rating list as “Shop and premises”.

Shop Number 2 is occupied, as are many of the other shops in the parade, as a non-domestic unit on the ground floor (including some storage accommodation) and for living purposes on the upper floors. Valued vacant and to let, its actual occupation accords with its expected notional occupation, and only the ground floor would be assessed, the entry in the list being “Shop and premises (Part)”.

Shop Number 3 is a non-conforming occupation, in that the living accommodation on the two upper floors is wholly used for domestic purposes, as is the store room at the rear of the ground floor shop. No structural alterations have been made and, vacant and to let, it would be most unlikely that the hypothetical tenant would want to occupy the property in the way that it is actually being occupied. This is where the notional test comes into application, and the property should be assessed and described as for Shop Number 2.

Shop Number 4 is like Shop Number 3, except that a structural alteration has been made to the ground floor storage accommodation so that it is no longer physically capable of occupation for non-domestic use. This is a case where physical actuality has to override any question of notionality. The property to be valued will be merely the front ground floor part.

Shop Number 5 is a variant on Shop Number 1. Here it is the non-domestic accommodation which overspills into the upper floors, but there is still some living accommodation. This comprises a bed-sitter, on the top floor with access through the non-domestic part. Everything else is in non-domestic use, through the remainder of the 2 floors of living accommodation are equally capable of domestic use, were the premises vacant and to let. This, too, should be valued on a notional basis, and the assessment should accord with that for Shop Number 2.

Shop Number 6 is wholly occupied for domestic purposes. It is not rateable, being neither wholly non-domestic, nor composite.

6. Valuation

Once the unit to be valued has been determined - whether it is the actual non-domestic part or the notional part - it is necessary to ascribe a rateable value to that accommodation. The LGFA 1988 provides in Schedule 6(2)(1B) that the RV shall be such amount of the rental value, on the statutory assumptions for RV, for the whole hereditament as ‘would reasonably be attributable to the non-domestic use of property.’ This wording is used to indicate that regard may properly be had to facilities which exist within the hereditament, but which are shared with the domestic part. For example, if the toilet accommodation is shared with the living space, its existence may be taken into account.

7. Composite hereditaments: holiday accommodation

Holiday accommodation ranges from beach huts to purpose-built hotels. Some properties are occupied all year round for business purposes (ie the provision of short-term accommodation on a commercial basis), and some for only part of the year. Some have a fluctuating use, where the balance between domestic and non-domestic changes during the course of the year in other cases the balance will remain static. Some will be occupied as entirely non-domestic property, some as composite property.

Where holiday accommodation is composite the principles concerned are exactly the same as for other classes of composites. First, it is necessary to identify whether or not the property is composite; second, the property to be valued as non-domestic may not necessarily be that actually used for non-domestic purposes but instead is the notional use as described in 4. above.

8. Hotels, boarding houses and bed and breakfast accommodation

Section 66(2) LGFA 1988 specifies that

(2) Property is not domestic property if it is wholly or mainly used in the course of a business for the provision of short-stay accommodation, that is to say accommodation:-

(a) which is provided for short periods to individuals whose sole or main residence is elsewhere, and

(b) which is not self-contained self-catering accommodation provided commercially.”

This provision was specifically intended to ensure hotel accommodation constituted non-domestic property.

Where staff reside on the premises, (eg the hotel manager’s flat) or where it is known that there are permanent guests who have no main residence elsewhere, the accommodation which those persons occupy is domestic and the hereditament will be composite.

To avoid the need to alter the entry whenever permanent guests change rooms (for example, occupying better rooms in the winter than in the summer) it will be appropriate to take a fairly broad-brush approach to the apportionment of the residential accommodation for such permanent occupiers (for example, an allowance based on the number of bedrooms that might be so occupied from year to year).

Section 66(2) LGFA 1988 provides that hotels should be treated as non-domestic also applies to boarding houses and bed and breakfast accommodation. However S66(2) is subject to S66(2A) which provides that short stay accommodation will not be rateable if:

i. The proprietor intends to make short stay accommodation available in the coming year for no more than six persons at any one time AND

ii. The proprietor intends to have his/her sole or main residence in the hereditament AND

iii. The use for short stay accommodation is secondary or incidental to its use for domestic purposes.

This limitation applies as from 1 April 1991.

See RM 5:125 ‘Boarding Houses, Guest Houses and Bed and Breakfast Accommodation’ for guidance on the “Six Person” Test and on the valuation of seasonal property.

9. Disused Living Accommodation in Composite Hereditaments

S66(5) LGFA 1988 provides:

Property not in use is domestic if it appears that when next in use it will be domestic.

S66(5) applies to composite hereditaments as well as wholly domestic ones. It follows that a hereditament may be composite even though there is no present actual domestic use providing it appears that part of it will be domestic when next in use.

In many cases where part of a composite is vacant it will be a straightforward matter to determine its next likely use and whether that part is therefore domestic or non-domestic. In other cases, particularly where there is little demand for such parts, eg upper floors over shops, either for domestic or non-domestic purposes, deciding what is the next likely use may be more difficult. For example, a shop may be in use but over it there are unused rooms which have the characteristics of domestic accommodation - old fireplaces still present, kitchen fittings and perhaps a bathroom with its plumbing still intact. Indeed, such upper parts may have been disused for a number of years.

The test of whether a hereditament is composite is one of use, not the physical characteristics of the property. The obvious example is a shop used wholly for living accommodation. No matter how unattractive or unsuited this use of the property may seem, it will be domestic property for the period it is so used. Accordingly, when considering the application s.66(5) in the circumstances mentioned, VOs should not have regard solely to the physical characteristics of the unused accommodation. There is a need to consider what future pattern of use might be expected, for the property will be treated as domestic if it appears that when next in use it will be domestic.

For example, in a locality where it is generally found that accommodation within a hereditament which is constructed or adapted for use for domestic purposes is used as such, it will be appropriate to treat a shop hereditament with unused living accommodation as composite. Where, however, the general pattern is that upper parts of shops are either left empty or, if used, are only used for non-domestic purposes, it is much more difficult to make a satisfactory case for maintaining that when next in use

disused property will be domestic; in such cases the property should not entered in the list as composite. The valuation of the hereditament will have to include an appropriate amount for the upper parts, bearing in mind that the value may be merely nominal, either because of demand, obsolescence or state of repair.

Where the situation is unclear and if having regard to the facts then before the VO, it is considered reasonable, then the hereditament should be entered into the list as composite. In making this judgement, VOs may find it helpful to consider whether or not the state of repair etc. render the empty parts fit for human habitation.