Bernard Everall Williams (Deceased) v Commissioners of Inland Revenue

I consider separately each of the issues for determination in the appeal. I was unable to form a final view on the first issue (of jurisdiction) without first considering the arguments of the parties on the second. Accordingly, I begin with the second issue.

The second issue in the appeal is whether the value of Mr Williams' interest in Ash Lane Farm is a mathematical one-half of the vacant possession value.

The Appellants argued that the interests of Mr Williams and Mrs Williams were not of equal value prior to Mr Williams' death and that Mr Williams' interest was of less value than that of Mrs Williams. This was because Mrs Williams had rights under The Trusts of Land and Appointment of Trustees Act 1996 (the 1996 Act) to occupy the house and not to have it sold without her consent and those rights meant that, immediately before the death of Mr Williams, the value of her interest was greater than his. The Inland Revenue argued that the value of Mr Williams' interest was a mathematical one-half of the vacant possession value because, having regard to the proviso to section 171(2) of the Inheritance Tax Act 1984 (the 1984 Act), the imminent death of Mr Williams was to be disregarded for the purposes of the valuation of his interest. They argued, in the alternative, that the related property provisions in section 161 of the 1984 Act applied and, specifically, that the phrase "units of any other description of property" in section 161(4) extended to the co-ownership of property which was commonly so held and that the family home was such property.

Thus, as argued, this issue raised three questions which were:

I therefore first consider the normal rules about valuation beginning with the relevant legislation and then referring to the authorities cited by the parties.

Section 12 of the 1996 Act provides that a beneficiary who is beneficially entitled to an interest in land subject to a trust of land is entitled to occupy the land at any time if, at that time, the purposes of the trust include making the land available for his occupation or the land is held by the trustees so as to be so available. Section 13 provides that, where two or more beneficiaries are entitled under section 12 to occupy land, the trustees may exclude or restrict the entitlement of any one or more (but not all) of them but may not unreasonably exclude any beneficiary's entitlement to occupy land or restrict any such entitlement to an unreasonable extent. Section 13(7) provides that the powers conferred on trustees by the section may not be exercised so as to prevent any person who is in occupation of land from continuing to occupy the land.

It was not disputed that, as a result of these provisions, on the death of Mr Williams, Mrs Williams remained entitled to occupy Ash Lane Farm.

Section 4(1) of the 1984 Act provides:

It was not disputed that, in this appeal, Mr Williams' interest in Ash Lane Farm should be valued immediately before his death.

Part VI (sections 160 to 196) of the 1984 Act contains the provisions about valuation. Section 160 provides:

The parties agreed that the open market value of Ash Lane Farm with vacant possession immediately before the death of Mr Williams was £550,000. The parties also agreed that, in this appeal, the value of Mr Williams' interest immediately before his death was the price which his interest might reasonably be expected to fetch if sold in the open market at that time.

Mr Twiddy drew my attention to the following passage in Alexander v Inland Revenue Commissioners [1991] STC 112 at 125c:

Applying those principles to the facts of this appeal what has to be done is to find the price which Mr Williams' share might reasonably be expected to fetch if sold in the open market immediately before his death. The subject matter of the valuation remains Mr Williams' share and that share is to be valued at a time when he still owned it. The value is the sum which a purchaser in the open market might reasonably expect to pay to be placed in the same position as Mr Williams. Immediately before his death Mr Williams owned a half share in the property which he could dispose of subject to the rights of Mrs Williams to occupy the property until she died. Immediately before the death of Mr Williams Mrs Williams owned a half share in the property which she could dispose of subject to the rights of Mr Williams to occupy the property until he died. The question therefore is whether the rights of occupation of each were equal or whether Mrs Williams' rights of occupation were greater and Mr Williams' rights were less.

Mr Maugham cited Lynall v Inland Revenue Commissioners [1972] AC 680 at 694C, 695G, 697H and 698F as authority for the principle that the 1984 Act assumes an open market hypothetical sale immediately before the death between a hypothetical willing vendor and a hypothetical willing purchaser who has informed himself of all the available facts relating to the property. He argued that, in valuing Mr Williams' share, the available facts would include the fact that both Mr and Mrs Williams were tenants in common in equal shares of the property. The hypothetical willing purchaser would also be aware that, pursuant to the 1996 Act, each spouse enjoyed rights over the property by virtue of being tenants in common and that such rights reduced the open market value of the other's share. The hypothetical willing purchaser would also know that, immediately before the death of Mr Williams, Mrs Williams was in occupation of the property which had been purchased to provide her and Mr Williams with a home and that she would be in occupation longer than Mr Williams who was older than she was and not in such good health. He would, therefore, discount the value of Mr Williams' interest to take account of the fact that the purchaser of that interest would be unable to benefit from his investment until Mrs Williams died. In valuing Mrs Williams' share the hypothetical purchaser would know that Mr Williams was older than she was and not in good health and that, after his death, Mrs Williams would have a right of continuing occupation. It followed that the value which a hypothetical willing purchaser would place on Mr Williams' share immediately before his death would be less than the value that the same hypothetical willing purchaser would place on the value of Mrs Williams' share immediately before the death of Mr Williams. It followed that the values of the two shares were not identical.

I find these arguments persuasive and, on the ordinary method of valuation, would conclude that the value of Mr Williams' interest in Ash Lane Farm was less than a mathematical one-half of the vacant possession value.

Before leaving this question I consider Fetherstonaugh and others v Inland Revenue Commissioners [1984] STC 261 to which my attention was very properly drawn by Mr Maugham. In that case the appellants were the trustees of a settlement of land of which the deceased was the tenant for life in possession. Prior to his death the deceased had carried on a farming business on part of the land and the trustees claimed business property relief for that land. The Inland Revenue argued (among other things) that, even if the life interest was an asset used in the business, it could be valued only as a life interest and as such had no value because, immediately before his death, the deceased was on the point of death. The Court of Appeal held that the life interest of the deceased was relevant business property as it was an asset used in the business and that, having regard to the predecessor of section 49(1) of the 1984 Act, its value fell to be determined on the basis that the deceased was the absolute owner of it. (Section 49(1) of the 1984 Act provides that a person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of the Act as beneficially entitled to the property in which the interest subsists.)

At page 268c Oliver LJ discussed the arguments of the Inland Revenue (that even if the life interest was an asset used in the business it could be valued only as a life interest and as such had no value because immediately before his death the deceased was on the point of death) and said:

These remarks were not part of the decision because, in Fetherstonaugh, the reason for the decision was that the deceased had a life interest in possession in land and the statute provided that he was to be treated as if he was beneficially entitled to the property in which the interest subsisted. Those facts are very different from the facts in the present appeal. Here the deceased's interest in the Ash Lane Farm was not a life interest but a share in the freehold and that share continued after his death as it was left to his two daughters. Thus the judgment in Fetherstonaugh does not appear to provide direct assistance in this appeal.

I conclude that, under the normal rules of valuation, Mr Williams' interest in Ash Lane Farm should be valued taking into account the rights of occupation given to Mrs Williams by the 1996 Act.

The second question relating to the second issue is what is the effect of section 171 of the 1984 Act.

Section 171 provides:

The Appellants argued that section 171 did not apply in this appeal. No change in the value of his estate was brought about by the death of Mr Williams rather it was the imminence of his death which reduced the value of his interest (making it certain that any purchaser of that interest would be subject to Mrs Williams' right of occupation) and increased the value of Mrs Williams' interest (by effectively giving her control of the use to which the property would be put). However, even it were the death which reduced the value of Mr Williams' interest, section 171(1) provided that such change had to be taken into account as if such change occurred before the death. The effect of the proviso to section 171(2) was that section 171(1) did not apply to the termination on the death of any interest or the passing of any interest on survivorship; however, the deceased's interest had not determined on his death and his interest did not pass by survivorship.

Mr Twiddy argued that the proviso to section 171(2) applied and that the fact of death was not to be taken into account in determining the values.

In considering the arguments of the parties I start with the proviso to section 171(2). The proviso makes it clear that section 171(1) does not apply to the termination on the death of any interest or the passing of any interest on survivorship. However, as the deceased's interest did not terminate on his death (as it passed to his two daughters) and as his interest did not pass by survivorship (but by his will as amended by the deed of variation) the proviso cannot apply. Turning to the substantive part of section 171(2), it is clear that by reason of the deceased's death there was a change in the value of his interest in Ash Lane Farm because that interest decreased in value. If his interest were determined under the normal rules (and valued immediately before his death without having regard to the fact of his impending death) then a change in the value of his estate would occur by reason of his death, as by then it would be a certainty and not a possibility that he would die before Mrs Williams. Such a change would be a decrease in the value of his interest and so within section 171(2). As a result, section 171(1) applies and, as a result of section 171(1), the decrease in value has to be taken into account as if the change occurred before the death.

I conclude that, as a result of section 171, the decrease in value of Mr Williams' interest in Ash Lane Farm which occurred by reason of his death has to be taken into account when determining the value of his interest immediately before his death.

The third question relating to the second issue is what is the effect of section 161(4) of the 1984 Act.

Section 161 provides:

Thus section 161 concerns the valuation of related property. Section 161(2) defines related property so as to include property comprised in the estate of a person's spouse. In this appeal the parties agreed that Mrs Williams' interest as tenant in common of Ash Lane Farm was related property within the meaning of section 161(2)(a) as it was property related to Mr Williams' interest.

The effect of section 161(1) and 161(3) is that, where there is related property, it is first necessary to determine the value of the aggregate of the deceased's property and the related property taken together (the aggregate). It is then necessary to value the deceased's property and the related property separately as if they did not form part of the aggregate and, from those two values, to establish a ratio. That ratio is then applied to the aggregate and, if the value of the deceased's part of the aggregate is greater than the value of his property taken separately, it is his part of the aggregate which is taken as the value of his property.

It follows that it is only if the values of the deceased's property and the related property are the same that the value of the deceased's property will be exactly one-half of the aggregate. Otherwise the value of the deceased's property will always be more or less than one half of the aggregate. So far these conclusions were agreed by the parties. Thereafter the arguments diverged.

The Inland Revenue relied upon section 161(4) which provides:

What this subsection is saying is that where one has units of property like shares the ratio of the values for subsection (3) is the ratio of the smaller number to the greater number.

The Inland Revenue argued that the shares of Mr and Mrs Williams were "units of any other description of property" within the meaning of section 161(4) from which it followed that the ratio for the purposes of subsection (3) was one half. The Appellants disagreed with this argument on three grounds. First, because incorporeal shares in land were not "units of property"; secondly, because the subsection referred to "number" which was not appropriate for percentage shares in land; and thirdly, because the subsection referred to "smaller number" and "greater number" and so did not apply to two equal units.

Expanding on his argument that incorporeal shares in land were not "units of property" Mr Maugham first referred to the Shorter Oxford English Dictionary which defined a unit as "a single magnitude or number regarded as an undivided whole and as the ultimate base of all number" and as "having the distinct or individual existence of a unit" and argued that a percentage or a half share could not be a unit but was rather a fraction of a unit. He also cited New Zealand Railways v Progressive Engineering Company Limited [1968] NZLR 1053 at 1056/10 for the principle that a unit imported something which was a separate thing, such as a single manufactured article. That meaning also followed from the context of section 161(4) which referred to shares and "stock, debentures and units" each of which were separate and distinct units of ownership. Thus although section 161(4) could apply to units in unit trusts, and sets of furniture (for example twelve dining chairs) it could not apply to incorporeal shares in land.

Expanding on his argument that because the subsection referred to "smaller number" and "greater number" it did not apply to two equal units, Mr Maugham argued that section 161(4) was intended to apply to the splitting of related property where there would be a greater diminution in the value of the smaller share and so it did not apply to half shares.

I find all three arguments of the Appellants on the ambit of section 161(4) persuasive and conclude that section 161(4) does not apply in this appeal.

That means that one has to return to section 161(3) and to value the aggregate; to value each share separately and establish a ratio; to apply that ratio to the aggregate; and, if the value of deceased's share of the aggregate is greater than the value of his separate share, the value of his share is taken to be his part of the aggregate.

Having considered the three questions arising out of the second issue I conclude:

The conclusion on the second issue is, therefore, that the value of Mr Williams' interest in Ash Lane Farm is not a mathematical one-half of the vacant possession value.

In the light of those conclusions on the second issue for determination I can now return to consider the first issue which is whether the appeal should be struck out because the question in dispute is a question as to the value of land and so should be determined by the Lands Tribunal.

Before considering the arguments of the parties I refer to the relevant legislation.

Section 222 of the 1984 Act provides that normally appeals against notices of determination shall be to the Special Commissioners although in some cases the appeal may be to the High Court. Section 222 (4) to (4B) provides:

Where any question in an appeal has been referred to another tribunal in accordance with paragraph (1) above, the Tribunal before whom the appeal is brought-

For the Inland Revenue Mr Twiddy referred to section 222(4) to (4B) of the 1984 Act and also to Regulation 3(2) of the 1994 Regulations and argued that if, in any appeal, there were a question as to the value of land and also a question of law which was part of the question as to the value of land, both should be referred to the Lands Tribunal. He argued that this appeal concerned a dispute which was subsidiary to the valuation exercise and that was a proper matter for the Lands Tribunal. He cited Alexander v Inland Revenue Commissioners [1991] STC 112 at 112g and Inland Revenue Commissioners v Gray [1994] STC 360. Mr Twiddy accepted that these authorities were concerned with the predecessor of section 222(4) but argued that the changes to the section in 1993 had had not altered the matters within the jurisdiction of the Lands Tribunal but had made the administrative arrangements between the Special Commissioners and the Lands Tribunal more convenient.

For the Appellants Mr Maugham argued that the expertise of the Special Commissioners on the one hand and the Lands Tribunal on the other indicated that all questions of statutory interpretation should be considered by the Special Commissioners and all questions as to the value of land should be considered by the Lands Tribunal. Questions of statutory interpretation were not subsidiary to questions of value but questions of value were subsidiary to questions of statutory interpretation. In this appeal there were disputes about the meaning of sections 161(4) and 171(2) which had to be resolved before any reference to the Lands Tribunal. If the Inland Revenue were right about their interpretation of section 161(4), the value of Mr Williams' interest would be a straight 50% of the market value of Ash Lane Farm and there would be nothing to refer to the Lands Tribunal. Mr Maugham agreed that, if the Inland Revenue were wrong about section 161(4), then the interests would have to be valued and, in such a case, a reference under section 222(4A) could be made to the Lands Tribunal. However, even in that case regulation 23(2)(a) made it mandatory for the tribunal before whom the appeal had been brought to determine all the remaining questions before it. Under Regulation 3(2) the Special Commissioners had accepted jurisdiction and so the correct procedure, if any question concerned the value of land, would be for the Special Commissioners to refer that question to the Lands Tribunal. Mr Maugham distinguished Alexander and Gray which related to the previous version of section 222(4).

In considering the arguments of the parties I begin with the legislation and especially section 222(4) to (4B). From these provisions it is clear that, this appeal having been brought to the Special Commissioners, if and so far as the question for determination is a question as to the value of land, the correct procedure would not be to strike out the appeal but for the Special Commissioners to make a reference to the Lands Tribunal. That then raises the question as to whether the question in dispute is a question as to the value of land.

The authorities cited by Mr Twiddy both concerned the previous version of section 222(4). Before the 1984 Act the legislation about what was then called capital transfer tax was contained in sections 19 to 52 and Schedules 4 to 11 of the Finance Act 1975. Schedule 4 contained the provisions about the administration and collection of the tax. Paragraph 7 of Schedule 4 contained the provisions about appeals and provided that normally appeals against notices of determination should be to the Special Commissioners although in some cases the appeal might be to the High Court. Paragraph 7(4) provided:

When the legislation in the 1975 Act was consolidated in the 1984 Act what was paragraph 7 of Schedule 4 of the 1975 Act became section 222 of the 1984 Act. However, both Alexander and Gray concerned deaths before the 1984 Act where the 1975 legislation was still in issue.

InAlexander (1991) the deceased in 1983 acquired for £35,400 a leasehold interest in a Barbican flat under the "right to buy" legislation at a discount of £24,600. The lease contained a covenant to repay a proportion of the discount if the interest were sold within five years. The liability to pay was a charge on the property. The appellant died in less than a year which meant that all the discount had to be repaid. The Inland Revenue gave notice to the executors that the value of the lease immediately before the death had been determined at £52,000. The appellant appealed to the Lands Tribunal arguing that the market value of the flat was £60,000, but because the discount of £24,600 had to be repaid, the net worth was £35,400. The Lands Tribunal determined that the market value was £63,000 but also determined that they had no jurisdiction to decide the appropriate deduction for the discount. They considered that the liability to repay the discount might well be a charge against the estate of the deceased but was not a matter which affected the open market value of the property.

The Inland Revenue then asked the Special Commissioners whether they considered that they had jurisdiction to value the liability or charge represented by the discount and then to establish the value transferred. Mr Widdows, the Special Commissioner, held that the issue as the amount of the deduction was a question of law and not one of land valuation and was, therefore, within the jurisdiction of the Special Commissioners; that the liability to repay the discount was a current liability at the date of death; and that the market value of £63,000 determined by the Lands Tribunal had to be reduced by £24,600, the amount of the discount repayable as at the date of death.

Meanwhile the Inland Revenue had appealed to the Court of Appeal against the decision of the Lands Tribunal. At 122b Ralph Gibson LJ said:

Ralph Gibson LJ went on to hold that that question was as to the value of the land and so within the exclusive jurisdiction of the Lands Tribunal.

The principle I derive from this authority is that where a lease contains a covenant to repay a liability, and where that liability is a charge on the leasehold interest, the liability is an incumbrance on the property and reduces the value of the property. The value of the liability is, therefore, a question as to the value of land and for determination by the Lands Tribunal. This principle is still applicable because section 162(4) of the 1984 Act replaces paragraph 2 of Schedule 10 of the 1975 Act and provides that a liability which is an incumbrance on any property shall, so far as possible, be taken to reduce the value of that property.

In my view Alexander was decided by specific reference to paragraph 2 of Schedule 10 of the 1975 Act (now section 162(4) of the 1984 Act) but those provisions are not in issue in this appeal. I do not read Alexander as authority for the more general principle advocated by Mr Twiddy that if, in any appeal, there is a question as to the value of land and also a question of law which is part of the question as to value, both must be referred to the Lands Tribunal. The only issue in Alexander which was considered to be for the Lands Tribunal was the question of value.

In Gray (1994) at the date of her death in 1981 the deceased was the owner of the freehold of a 5,000 acre estate which was let to a farming partnership in which she had a 92.5% interest. The Inland Revenue argued that the valuation of the freehold estate should take into account the deceased's interest in the partnership. It seems (see 367a) that originally the appeal went to the Special Commissioners on a preliminary issue as to jurisdiction and the Special Commissioner (Mr Widdows) considered whether the question of aggregation was one of law or one of valuation. He assumed that it was a question of valuation because the purpose of aggregation was to obtain a higher value than the sum of the two separate values. However, he went on to ask whether that was wholly or partly a question of the value of land and did not find a clear answer.

In the event the appeal also went to the Lands Tribunal who, at 367d, also had doubts about its jurisdiction because the question concerned both land and personalty. However, the Lands Tribunal accepted the assurances of counsel that it had jurisdiction primarily because the notice of determination was to determine a value for the land and nothing but the land.

The decision of the Lands Tribunal (but not that of the Special Commissioners) went to the Court of Appeal. At 371d Hoffmann LJ stated the question as: whether the freehold estate should be valued as if it had been let to strangers or whether the valuation should take into account the deceased's interest in the partnership which held the tenancy. At 377e he held that the deceased held a 92.5% interest in the tenancy which the Lands Tribunal had jurisdiction to value as an interest in land.

I read Gray as authority for the principle that the value of a tenancy is a question of the value of land and so a question for the Lands Tribunal. Again, I do not read Gray as authority for the more general principle advocated by Mr Twiddy that if, in any appeal, there is a question as to the value of land and also a question of law which is part of the question as to value, both must be referred to the Lands Tribunal. Indeed, it is relevant that in both Alexander and Gray it was the Court of Appeal which decided the questions of law and identified the questions of value which were for determination by the Lands Tribunal.

Alexander and Gray highlighted the practical difficulties which arose out of the provisions of paragraph 7(4) of Schedule 4 (later section 22(4) of the 1984 Act) which required an appellant either to appeal to the Special Commissioners or to the Lands Tribunal. The decision was easy if it was clear that the question for determination was, or was not, a question of the value of land. However, there was no procedure for resolving a dispute as to whether the question for determination was a question as to the value of land. If an appellant got it wrong he had to start again with the other tribunal and there was always the risk that both tribunals might refuse jurisdiction. For these reasons section 200 of the Finance Act 1993 amended the provisions of section 222 of the 1984 Act. The current provisions allow the Special Commissioners to accept the appeal but to refer questions as to the value of land to the Lands Tribunal.

I therefore agree with Mr Twiddy that the changes to section 222(4) made in 1993 did not alter the matters within the jurisdiction of the Land Tribunal but made the arrangements between the Special Commissioners and the Lands Tribunal more convenient for appellants. However, I also agree with Mr Maugham that Regulation 23(2)(a) requires the Special Commissioners to determine all questions other than questions as to the value of land.

My conclusions on this issue are that the appeal should not be struck out. To the extent that the question in dispute is a question as to the value of land it should be referred to the Lands Tribunal. In my view the questions raised by the second issue in the appeal (which I considered first) are not questions as to the value of any land but rather questions as to the interpretation of the legislation. However, now that those questions have been resolved Mr Williams' interest in Ash Lane Farm still needs to be valued and that is a question for the Lands Tribunal.

My decisions on the issues for determination in the appeal are:

Accordingly, the parties should first attempt to agree the value of Mr Williams' interest on the above basis. If they cannot agree then they should apply to the Special Commissioners for a reference to be made to the Lands Tribunal.

This is a preliminary decision and does not determine the appeal. Either party has liberty to apply to the Special Commissioners to make a reference to the Lands Tribunal if the value of Mr Williams' interest, on the basis of this decision, cannot be agreed.