Zyrieda Denning & Ors v The Commissioners for HMRC

For a trade-related property let at a market rent, the rent fully reflects the trading potential available under the lease. A premium paid for a fully equipped operational entity may reflect the lower business risk and transferable goodwill of an established operation. It does not thereby form part of the value of the leasehold interest in land.

The profits method can produce a composite value reflecting property and business aspects. Taxation of Chargeable Gains Act 1992, section 272, nevertheless requires the market value of the particular asset. Professional valuation guidance may assist on valuation practice, but cannot replace or supplement that statutory direction.

The appellants transferred the businesses operating two Aldershot care homes to companies under five-year leases at annual rents agreed to be market rents. The freeholds were retained. Tax appeals required the Upper Tribunal to determine the market values of the freehold and leasehold interests as at 22 March 2011.

The experts agreed the fair maintainable trade, operating profits, market rents, trade inventory and freehold values. They also agreed capital figures generated by the profits method, but disagreed about their character. The appellants contended that those figures represented business goodwill and that leases at market rent had nil value. HMRC contended that the figures represented premiums for the leasehold interests because trading potential was inherent in the land.

The central issue was whether the capitalised value remaining after market rent and trade inventory formed part of the leasehold interests or a separate business element.

1. The appeals were allowed. The Tribunal determined that the leasehold interests in both care homes had a value of nil. It accepted the agreed freehold values of £2.725 million for Manor Place and £2.060 million for Maple House.

2. Under section 272(1) of the Taxation of Chargeable Gains Act 1992, the task was to ascertain the open-market value of the particular leasehold interests. What comprises the land asset is a question of law, but the amount for which it would sell is a question of fact. RICS guidance could assist the valuation exercise, but could neither replace nor add to the statutory direction.

3. The Tribunal rejected HMRC’s submission that the experts’ agreed capital figures necessarily represented the value of the leasehold interests. Mr Ellis had not accepted HMRC’s refinement of that expression; the experts continued to differ about what the figures comprised.

4. The profits method used for a trade-related property can reflect both property and business aspects. The actual operator’s personal goodwill is excluded. However, the Tribunal held that trading potential is not exclusively reflected in the land interest. The RICS material permitted transferable goodwill available to a reasonably efficient operator to be reflected in a valuation of a trade-related property.

5. On the agreed facts, the market rent fully reflected the trading potential available to a tenant under each five-year lease. The additional premium reflected the business advantage of acquiring a fully equipped operational entity, including the reduced risk of not having to start from scratch. Although calculated from the tenant’s share of the divisible balance, it was not part of the value of the leasehold interest granted. The valuation exercise was therefore being used to ascertain market rent, rather than an additional market value for the lease.

• Upper Tribunal (Lands Chamber): On a statutory reference arising from appeals in the First-tier Tribunal (Tax Chamber), the Tribunal determined the disputed land values under Taxes Management Act 1970. It allowed the appeals by determining that both leasehold interests had nil value.
• First-tier Tribunal (Tax Chamber): Dr Denning appealed HMRC amendments to her tax return, and the company appellants appealed SDLT discovery assessments. The outcomes of those appeals were not stated in the judgment.