Peter Palliser v HMRC

For inheritance-tax market valuation, hope value must be included where an open-market purchaser would pay for a realistic prospect of improving or extending the property. A potential which has not been secured by planning permission remains hope value rather than development value, but it is not excluded from the market-value assessment under Inheritance Tax Act 1984.

The valuation must distinguish improvements capable of being undertaken without planning risk from additional development dependent on permission. Comparable evidence and a subsequent open-market sale may assist, provided appropriate allowance is made for market movement and the particular property’s advantages, defects and development potential.

The deceased owned an 88.4% undivided share in the long leasehold interest in a London maisonette, together with a one-third freehold share. HMRC determined the interest’s value for inheritance-tax purposes at £1,829,880. The personal representative contended that it was worth £1,113,840.

The appeal was lodged with the First-tier Tribunal (Tax Chamber) and referred to the Upper Tribunal under Inheritance Tax Act 1984. The principal dispute was whether the statutory market value should include hope value for further reconfiguration and extension, and how the competing comparable evidence should be assessed.

1. The appeal was allowed in part. The Tribunal determined the value of the appellant’s undivided interest at £1,603,930.

2. Under section 160 of the Inheritance Tax Act 1984, market value is the price reasonably obtainable on an open-market sale at the valuation date. That price must include the value which the market would attribute to a realistic prospect of enlarging the usable floor space. The absence of a planning permission means that the prospective value is hope value rather than development value; it does not require the prospect to be ignored.

3. Inland Revenue Commissioners v Gray [1994] STC 360 did not assist the appellant. The property was to be valued in its actual physical condition, but that condition included its potential for improvement. The RICS Red Book did not alter the statutory valuation principles.

4. The evidence showed that the maisonette required substantial refurbishment and retained scope for a limited extension and reconfiguration. The Tribunal preferred an analytical square-foot approach, adjusted for relevant qualitative factors, to an unanalysed holistic approach. It gave significant weight to the property’s later sale after making a market-time adjustment.

5. The Tribunal assessed the refurbished value with extended floor space at £2.75 million and deducted £550,000 refurbishment costs. It assessed the additional development value at £368,000 and adopted 50% of that sum, £184,000, as hope value. The resulting whole-property market value was £2.016 million. Applying the 88.4% ownership share and the agreed 10% undivided-share discount produced £1,603,930. No order for costs was made.

• Upper Tribunal (Lands Chamber): determined the valuation appeal under Inheritance Tax Act 1984 and allowed it in part.

• First-tier Tribunal (Tax Chamber): the appellant lodged an appeal against HMRC’s notice of determination on 28 April 2017. The valuation dispute was referred to the Upper Tribunal under section 222 of the Inheritance Tax Act 1984.