Bozidar Zabavnik v The Commissioners for HMRC

For inheritance-tax purposes, market value is assessed by reference to the price reasonably obtainable in the real open market at the valuation date. The hypothetical transaction does not turn on the rental returns of the property alone. It must reflect all potential market demand, including owner-occupiers, and should ordinarily be determined from reliable comparable sales with appropriate adjustments for condition, size, tenure and occupation. Generalised house-price indices and broad economic observations have limited value where direct local transaction evidence is available. Valuation adjustments must be supported by the evidence and applied consistently with the characteristics of each property.

The appeal concerned the deemed disposal, for inheritance-tax purposes, of three freehold terraced houses owned by the deceased. HMRC determined their values under section 222 of the Inheritance Tax Act 1984 at £800,000, £800,000 and £820,000. The appellant contended that the aggregate value was substantially lower, relying principally on rental affordability, historical values, house-price indices and alleged market distortion.

The dispute was referred to the Upper Tribunal under section 222(4) of the Act. The central issue was the open-market value of each property at the valuation date.

1. Market-value basis. Section 160 of the Inheritance Tax Act 1984 requires assessment of the price which the property might reasonably be expected to fetch if sold in the open market at the valuation date. The assumed market is real, although the sale is hypothetical. It includes the demand of potential owner-occupiers as well as investors. Rental returns therefore did not establish the properties’ market values. The approach in Inland Revenue Commissioners v Gray [1994] STC 360 was applied.
2. Comparable evidence. The comparative method was appropriate. The most reliable evidence was provided by two nearby transactions whose authenticity was not in doubt and which were closest in time to the valuation date. The Tribunal accepted a base figure of £7,700 per m².
3. Adjustments. A 5% allowance for the tenancies at Nos. 29 and 76 was appropriate. The evidence did not justify the expert’s proposed size adjustments, and the refurbishment allowance had to reflect the different condition and configuration of the properties. The allowance for No. 29 was increased to £1,200 per m².
4. Determination. The freehold interests were valued at £830,000 for No. 29, £900,000 for No. 31 and £950,000 for No. 76. No order for costs was made because neither party had acted unreasonably and there were no exceptional circumstances.

1. First-tier Tribunal (Tax Chamber): The appellant appealed HMRC’s determination on 22 September 2019.
2. Upper Tribunal (Lands Chamber): The valuation dispute was referred under section 222(4) of the Inheritance Tax Act 1984. The Tribunal determined revised values of £830,000, £900,000 and £950,000.