Walton v Commissioners of Inland Revenue

For capital transfer tax, the asset to be valued must first be identified. Where a deceased partner owns an undivided interest in an agricultural tenancy as a partnership asset, the valuation is of that interest, not the whole tenancy or the value obtainable by surrendering it.

The open-market hypothesis assumes willing parties and a sale capable of completion, but operates in the real world. The actual landlord’s and surviving partner’s known intentions, restrictions, and likely purchaser behaviour may therefore affect value. Any special purchaser and premium are matters for the tribunal of fact. An appellate court hearing a case stated may interfere only for error of law; a fully reasoned valuation finding that is not perverse stands.

The executors of a deceased farmer disputed the Revenue’s capital transfer tax valuation of his interest in a farming partnership. The partnership asset included an annual agricultural tenancy of the farm. The Revenue valued the deceased’s share by reference to the value of the tenancy, including the potential vacant possession premium.

The Lands Tribunal held that the relevant property was the deceased’s undivided beneficial interest in the tenancy as a partnership asset. It rejected the Revenue’s approach and valued that interest at approximately £6,300. The Revenue appealed by case stated, raising questions about the proper open-market hypothesis, the relevance of the actual landlord and surviving partner, and special purchasers.

Disposition

Peter Gibson LJ delivered the leading judgment. Evans LJ entirely agreed with it and with the dismissal of the appeal. Henry LJ agreed with both judgments. The appeal was unanimously dismissed with costs. Leave to appeal to the House of Lords was refused.

1. Property to be valued. Under section 38(1) of the Finance Act 1975, the property must first be identified and then valued. The unchallenged finding was that the relevant property was the deceased’s undivided beneficial interest in the agricultural tenancy as a partnership asset, not the entire tenancy and not the tenancy combined with the freehold. The statutory sale must nevertheless be treated as capable of completion, with the purchaser taking subject to the existing restrictions.
2. Open-market hypothesis. An open market implies a hypothetical willing seller and willing buyer, but the sale is to be assessed in the real world. The valuer must consider likely purchasers, likely bids, known restrictions and relevant facts affecting demand. The valuation is a retrospective exercise in probabilities. The actual landlord did not have to be replaced by a hypothetical landlord. Evidence of the actual landlord’s intentions and willingness to co-operate could be considered where those matters would affect the market. The majority reasoning in Trocette Property Co. Ltd. v Greater London Council [1974] 28 P. & C.R. 408 was treated as determinative. I.R.C. v Gray [1994] S.T.C. 360 and Lynall v I.R.C. [1972] AC 680 supported the realistic market approach.
3. Special purchasers. Whether a special purchaser existed and what premium that purchaser would pay were questions of fact. The Lands Tribunal was entitled to find that the surviving partner and freeholders had no sufficient incentive, and that any future release of the vacant possession premium was too speculative and remote to affect the value. C.I.R. v Clay [1914] 3 KB 466 and Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 302 did not require a different result. Lloyd-Jones v Church Commissioners (1981) 261 E.G. 471 and Agricultural Mortgage Corporation v Woodward (1994) 70 P.& C.R. 53 turned on their particular legislation or facts and offered no guidance requiring a higher valuation.
4. Appellate review. Under section 3(4) of the Lands Tribunal Act 1949, the appeal was confined to errors of law. The Revenue could not challenge the Tribunal’s valuation findings merely because it considered the result too low. The findings were fully reasoned and were not perverse. Evans LJ added that the Revenue’s proposed valuation was inconsistent with the earlier valuation of the deceased’s freehold interest, which had assumed that the tenancy would not be surrendered.

• Court of Appeal (Civil Division): In [1995] EWCA Civ 61, unanimously dismissed the Revenue’s appeal with costs.
• Lands Tribunal: Rejected the Revenue’s valuation approach and valued the deceased’s interest in the tenancy at approximately £6,300. The appeal proceeded by case stated and was confined to errors of law under section 3(4) of the Lands Tribunal Act 1949.