[2010] UKFTT 474 (TC)

TC00736

Appeal numberTC/2009/14361

INHERITANCE TAX – Related property provisions – what is the proper construction of the words “the appropriate portion of the value of the aggregate of that and any related property” in section 161(1) IHTA? – Appellant contending that the concept of the aggregate of two properties cannot connote their transformation into a different description of property – HMRC contending that the aggregation required the deceased’s undivided half share in a property to be taken together with her spouse’s identical undivided half share, with the result that the freehold of the property with vacant possession was the subject of the required valuation – section 161(3) IHTA which provides the meaning of “the appropriate portion” also construed – held following IRC v Gray that ‘the value of the aggregate’ was to be taken to be the price which the two items of property would fetch in the open market if offered for sale at the same time – held further that no deduction from the value was to be made on account of the notional costs of selling or the liabilities charged on the property- HMRC’s Determination upheld in principle – further valuation points to be referred to the Upper Tribunal pursuant to section 222(4A)IHTA if not agreed

FIRST-TIER TRIBUNAL

TAX CHAMBER

A. LEOLIN PRICE CBE QCAppellant

(Executor and Trustee of

the Estate of the late Hon. Mrs. Rosalind Helen Penrose Price CBE)

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (Inheritance Tax) Respondents

TRIBUNAL:JOHN WALTERS QC

ALEX MCLOUGHLIN

Sitting in public in Londonon 13July 2010

The Appellant appeared in person

Colin Ryder, for the Respondents

© CROWN COPYRIGHT 2010

1

DECISION

  1. Mr. A. Leolin Price CBE QC (“the Appellant”), who is the Executor and Trustee of the Estate of his late wife, the Hon. Mrs. Rosalind Helen Penrose Price CBE (“Mrs. Price), appeals against a Determination made under section 221 Inheritance Tax Act (“IHTA”) on 21 July 2009 in relation to the property known as 32 Hampstead Grove, London NW3 6SR (“the Property”). The Determination was as follows:

“In relation to –

(a)The deemed transfer of value on the death on 8 June 1999 of [Mrs. Price];

(b)The interest as tenant in common of [Mrs. Price] in the freehold of [the Property]

(c)The ownership of the remaining interest in the Property by [Mrs. Price’s] spouse [the Appellant].

That –

1 having regard to the provisions of sections 160 and 161 [IHTA] the value of the aggregate of [Mrs. Price’s] interest and [the Appellant’s] interest is equivalent to the value of the entire freehold of the Property with vacant possession; and

2 the value of [Mrs. Price’s] interest in the Property is the appropriate portion, ascertained in accordance with section 161(3), of that value.”

  1. The appeal thus concerns the way in which the value of Mrs. Price’s share of the Property is to be ascertained for the purposes of calculating inheritance tax on her death.
  2. A Statement of Agreed Facts was before us, and also a Statement of Evidence to be given by and for the Appellant. Mr. Ryder agreed that this Statement of Evidence could be taken as part of the Agreed Statement of Facts.
  3. The Agreed Facts were as follows:
  1. Mrs. Price died on 8 June 1999.
  2. Mrs. Price was survived by her husband (the Appellant) and their 4 adult children (“the Children”).
  3. The Appellant is the sole executor appointed by Mrs. Price’s Will and Probate of her Will was granted to him on 27 November 2003.
  4. Immediately before her death the freehold estate in the Property was held by the Appellant and Mrs. Price as trustees, and after her death by the Appellant as sole trustee, without any trust for sale.
  5. Immediately before her death Mrs. Price, as tenant in common, was absolutely entitled to an equal undivided beneficial half share of the Property. Upon her death that equal undivided half share as tenant in common became part of her free estate and her Will gave it to the Children equally.
  6. The Appellant, as tenant in common, at all relevant times before and after Mrs. Price’s death, has been absolutely entitled to the other equal undivided half share of the Property.
  7. Immediately before her death, Mrs. Price, as tenant in common of her undivided half share, did not have, and her estate and the Children as donees of that half share did not acquire, any beneficial interest in or over the Appellant’s beneficial half share of the Property nor any right to terminate the rights conferred on the owner or owners from time to time of the Appellant’s beneficial half share, nor any right to require the freehold estate to be sold.
  8. The price which the freehold of the Property might reasonably have been expected to fetch if it had been sold with vacant possession in the open market immediately before Mrs. Price’s death on 8 June 1999, would have been £1,500,000. (This was supported by a valuation by FPD Savills dated 25 August 1999, with our papers.)
  9. What could have been sold by Mrs. Price immediately before her death on 8 June 1999 was her absolute interest as tenant in common in her equal undivided beneficial half-share of the Property. There is no agreement between the parties about the price which a sale of that absolute interest at that time could reasonably have been expected to fetch in the open market [but see paragraphs 5 and 6 below].
  10. Immediately before Mrs. Price’s death on 8 June 1999, the freehold estate in the Property was subject to a Charge in favour of National Westminster Bank as security for a debt of £364,164.08.
  11. For any inheritance tax chargeable in respect of Mrs. Price’s death on 8 June 1999, the NIL RATE band was and is £231,000.00
  12. The total amount of the gifts in clauses 3 to 7 of the Will (falling within the Nil Rate Band of charge) is £27,500.00.
  13. Clause 8 of Mrs. Price’s Will as varied by the Deed of Variation dated 30 August 1999 gave to the Children her undivided half-share of the Property –

“... burdened and charged with one equal half share of all or any indebtedness charged on the [Property] at the date of my death and also burdened and in favour of my residuary estate charged with payment of the sum of £260,000”.

  1. One equal half share of the indebtedness so charged is £182,082.04.
  2. The residuary estate, with the benefit of the charges in Clause 8 of the Will as varied, is given to the Appellant. What is given to him is free from inheritance tax chargeable in respect of Mrs. Price’s death.
  1. By way of qualification to what is said at Agreed Fact (9) above, we note that in HMRC’s Statement of Case with our papers, it is stated as follows:

“There is no dispute between the Appellant and [HMRC] about the value of {Mrs. Price’s] interest in the Property or other associated values. The entirety of the Property is agreed at £1,500,000; and Mrs. Price’s and [the Appellant’s] half shares of the Property, valued independently of each other, are agreed at £637,500 each. The appeal is therefore not one that is appropriate to the Lands Tribunal (the Upper Tribunal (Lands Chamber)). The issue in dispute concerns how the inheritance tax legislation is to be applied to those values to arrive at a figure on which inheritance tax is to be levied.”

  1. However, in argument, while we were told that the figures of £1,500,00 and £675,000 were agreed, this was said to be subject to agreement on the way that the value of the freehold is affected by the charged debt. Further, the Appellant argued that the open market value of his and Mrs. Price’s half shares of the Property, valued independently of each other, would be less than £637,500, because vacant possession was not available (due to the existence of the other half share of the Property) and furthermore, a deduction had to be made in calculating the value to recognise the charged indebtedness.
  2. The Statement of Evidence referred to in paragraph 2 above is as follows:

“The freehold estate in [the Property] was until her death on 8 June 1999 held by me and my wife. Sale of the freehold had not at any time been considered, contemplated, proposed or discussed by us or by either of us. [The Property] was our matrimonial home. My wife never suggested selling it. If she had (and she never did) I would certainly not have agreed to the sale. If I had suggested sale (and I never did) I am equally sure that my wife would not have agreed. The reality for us both was that the question of a possible sale never arose; and luckily there was no financial need to consider selling. We did not at any time discuss selling it. Moving to a smaller London house or a flat was never suggested or considered. In discussions about our wills, it was assumed that the survivor would want to go on living there; but the half-share of the first-to-die would be given by Will to our children, so that those children could go on using the house, or deal with or dispose of that half-share as they might think fit; but the survivor would, of course, be able to continue using the house in right of her or his undivided half-share.”

  1. These facts being agreed (and found by us), the dispute between the parties is (or includes) one of interpretation of the relevant legislation and its application to the agreed facts. The relevant legislation is sections 160 and 161, IHTA. (Section numbers given below should be taken to refer to IHTA unless otherwise indicated.) These sections (so far as relevant to this appeal) provided as follows:

“160 Market value

Except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but the price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.

161 Related property

(1)Where the value of any property comprised in a person’s estate would be less that the appropriate portion of the value of the aggregate of that and any related property, it shall be the appropriate proportion of the value of that aggregate.

(2)For the purpose of this section, property is related to the property comprised in a person’s estate if-

(a)It is comprised in the estate of his spouse; ...

(3)The appropriate portion of the value of the aggregate mentioned in subsection (1) above is such portion thereof as would be attributable to the value of the first-mentioned property if the value of that aggregate were equal to the sums of the value of that and any related property, the value of each property being determined as if it did not form part of that aggregate.

...”

  1. Subject to what is said in paragraph 10 below, the parties agree that on the facts the Appellant’s absolute interest as tenant in common in his equal undivided beneficial half-share of the Property is “related to the property comprised in the estate of [Mrs. Price]”, for the purposes of section 161(2)(a), which, of course, included herabsolute interest as tenant in common in her equal undivided beneficial half-share of the Property.
  2. The qualification to this proposition is raised by the Appellant who submits that the wording of section 161(2)(a) is wide enough to include all the property in the estate of the Appellant, and not just the Appellant’s interest in his half-share of the Property. He does not deny, however, that the words of section 161(2)(a) cover the Appellant’s interest in his half-share of the Property and his main argument effectively accepts that the focus of the statutory words is on ‘the only relevant property in the [Appellant’s] estate ... which has some obvious or close “relationship” with [Mrs. Price’s] half share’ – see: paragraph 35 (and paragraph 14) of his extensive Grounds of Appeal, with our papers.
  3. The dispute at the heart of the appeal is as to the construction of the words “the value of the aggregate of that and any related property” where they appear in section 161(1).
  4. The Appellant’s case is that “the value of the aggregate of that and any related property” means the sum of the values of Mrs. Prices’s and the Appellant’s interests valued independently of each other. In this connection, he notes that neither of the two interests conferred on its owner any right to require the freehold of the Property to be offered for sale in the market.
  5. Mr. Ryder, for HMRC, submits that “the value of the aggregate of that and any related property” means the value of the totality of Mrs. Price’s and the Appellant’s interests treated as a single item of property, viz:the freehold of the Property.

The Appellant’s case in detail

  1. The Appellant’s main point is that the statutory expression “the value of the aggregate of that and any related property” does not imply any direction to value property other than the value of the property actually comprised in the deceased’s estate and (on the facts of this case) related property comprised in the estate of the deceased’s spouse. No ‘notional conversion’ or ‘transformation’ of the property to be valued is required by the statutory words. He contends that HMRC’s case requires the expression on its proper interpretation to direct a transformation of the two interests into ‘a very different form of property (the freehold)’ (paragraph 22 of the Appellant’s Grounds of Appeal).
  2. The Appellant draws a contrast in this regard with the position where the property is shares, stock, debentures and units of any other description of property. Property so described is dealt with by a special rule in section 161(4) as follows:

“(4) For the purposes of subsection (3) above the proportion which the value of a smaller number of shares of any class bears to the value of a greater number shall be taken to be that which the smaller number bears to the greater; and similarly with stock, debentures and units of any other description of property.”

  1. He submits that to treat undivided shares in a house or other real property as “units of any other description of property” would be to ignore the long established character of undivided shares of real property before and after the changes made by the Trustees of Land and Appointment of Trustees Act 1996. That long established character (formerly as a distinct freehold estate recognised by the common law, and today as an equally distinct equivalent equitable interest in land) excludes them, in his submission, from being “units” within section 161(4). He contrasted the position of real property held in a unit trust, where it may be that the units would fall within section 161(4), but this would be by reason of the character and rights conferred by the units, which are created by the trust.
  2. This point was, in his submission, supported by the fact that the Special Commissioner in Arkwright v IRC [2004] STC (SCD) 89 had rejected the Inland Revenue’s argument that beneficial shares as tenant in common of land were ‘units of any other description of property’ (ibid. [35] to [45]) and, on appeal to the High Court ([2004] STC 1323 at [9]), the Inland Revenue had accepted that section 161(4) had no such application and that the conclusions of the Special Commissioner in [35] to [45] of her preliminary decision were correct.
  3. The Appellant further submitted that nothing in the Arkwright decision, whether at Special Commissioner or at High Court level has any binding force against his submissions in the present case, because ‘the effect of the related property provisions of section 161 were agreed between the parties (save for the Inland Revenue’s criticisms in relation to section 161(4)’ (2004] STC 1323 at [20]).
  4. He draws attention to the use of the word “aggregate” in section 161(1) and points out that the same word is used in section 5(1), which provides as follows:

“(1) For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property.”

  1. In that context, the Appellant submits, the word “aggregate” (a noun as it is in section 161(1)) ‘does not have any unusual, complicated or sophisticated meaning and ... is equivalent to “total”, without importing any concept of merger or amalgamation or combination’ – paragraph 9 of his Grounds of Appeal.
  2. He refers to the principle of statutory interpretation that a word or phrase has the same meaning throughout a statute unless the contrary is shown, citing Bennion of Statutory Interpretation, 5th edition, section 373.
  3. The Appellant also draws attention to the expression “appropriate portion” in section 161(1) and section 161(3), which is not, and does not have the same meaning as, “appropriate proportion”.
  4. He contends that once it is accepted that section 161(4) has no application in a case such as the present, there is difficulty in interpreting ‘appropriate portion’ as that expression is used in section 161(3). There is no criterion or measure provided by the statute to assess what ‘portion’ of the value of the aggregate of any property comprised in a person’s estate and any related property is to be regarded as ‘appropriate’. He noted that HMRC in a Manual passage, reference IHTM0739, has adopted an interpretation of the related property provisions which treated ‘portion’ as if it were ‘proportion’. He submits that what is an ‘appropriate portion’ is not equivalent to ‘such portion as in the opinion of the Tribunal [or, perhaps, an authorised officer of the Revenue] is appropriate’.
  5. The Appellant submits that the Determination, even if otherwise correct, is wrong in that it does not give any allowance in arriving at the value of the ‘aggregate’ of the undivided shares, for the notional cost and expense of selling .
  6. He also submits that whatever value is attributed to Mrs. Price’s half share, that value must make allowance for the burdens on the disposition of it to the Children by Clause 8 of Mrs. Price’s Will as varied by the Deed of Variation dated 30 August 1999, namely one equal half share of the indebtedness charged on the Property at the date of Mrs. Price’s death (£182,082.04) together with the sum of £260,000 charged in favour of Mrs. Price’s residuary estate, which was given to the Appellant and is free from inheritance tax chargeable in respect of Mrs. Price’s death.
  7. The Appellant refers to section 162(4), which provides as follows:

“(4) A liability which is an incumbrance on any property shall, so far as possible, be taken to reduce the value of that property.”