HM Revenue & Customs v Bower (Executors of the Estate of) & Ors

For statutory open-market valuation, the assumed sale takes place in the real market for the property. The court must investigate who would realistically buy the asset and what price could reasonably be obtained. The statutory hypothesis assumes that a sale is capable of completion, but it does not create a market, invent purchasers or give value to an asset that is commercially unsaleable. A nominal value may therefore be appropriate where the evidence establishes that no real buyer would pay more. Valuation must be based on the evidence and parties must have an opportunity to address any proposed method of calculation.

Mrs Marjorie Bower transferred an estate planning bond to trustees. The transfer was potentially relevant for inheritance tax, and its value depended on deducting the value of her right to receive monthly payments during her lifetime from the price paid for the bond.

The Special Commissioner valued that right at £4,200. HM Revenue and Customs contended that, given Mrs Bower’s age and health, the right had only a nominal value of £250. The Special Commissioner considered that a speculative purchaser could be assumed and adopted his own valuation calculation. HMRC appealed to the High Court on a point of law.

1. The appeal was allowed. The statutory valuation hypothesis under section 160 of the Inheritance Tax Act 1984 assumes a sale in the open market, but the market itself is not hypothetical. It is necessary to investigate the real-world demand for the particular property and the likely price reasonably obtainable: [1994] STC 360 and [1996] STC 68.

2. The hypothetical vendor and purchaser are reasonable participants in the market for the asset. Although the whole world is notionally free to bid, the court must determine, as a matter of fact, what type of person would actually be in that market. The statutory hypothesis may overcome legal restrictions preventing a sale, but it does not justify inventing purchasers with characteristics not found in the real market.

3. The Special Commissioner was entitled to consider possible purchasers, including speculators, but was not entitled to assume their existence merely because the statutory hypothesis required a buyer. The assumption of a sale supplied no particular value. If the evidence established that the asset was commercially, as opposed to legally, unsaleable, the necessary consequence could be a nominal value.

4. The Special Commissioner also erred by devising a valuation method which had not been advanced by any party, had not been put to the witnesses or parties for comment, and was not based on the evidence. That procedure breached natural justice and independently demonstrated an error of law.

• High Court (Chancery Division): HMRC’s appeal from the Special Commissioner’s decision was allowed on a point of law.