The Commissioners for HMRC v Zyrieda Denning & Ors.

For a trade-related property valued under RICS VPGA 4, the profits method values the relevant property interest, whether freehold or leasehold, by reference to the hypothetical trading potential of a reasonably efficient operator. Trading potential and the value of the business use are inherent in the property valuation and are not separate assets of transferable goodwill. Personal goodwill of the current operator is excluded. Market rent and capital value are distinct: the rent calculation under step 4(c) does not replace the capital valuation under step 4(a), which may be adapted to leasehold interests. A lease granted at market rent may therefore have capital value. The Upper Tribunal erred in law by disaggregating property value and transferable goodwill.

HMRC appealed to the Court of Appeal from the decision of the Upper Tribunal (Lands Chamber), reported at [2021] UKUT 0076 (LC). The dispute concerned the open-market valuation of two leasehold interests in care homes transferred to companies by their owner.

The experts had valued the interests using the profits method under RICS VPGA 4. The Upper Tribunal treated the agreed capital values as including transferable goodwill and held that the leasehold interests themselves were worth nil. The central issue was whether the profits method valued only the leasehold interests or also a separate asset of transferable goodwill.

Appeal allowed unanimously. The Court of Appeal held that the Upper Tribunal had made an error of law by separating the value of the leasehold interests from the value attributed to transferable goodwill. The Court remade the decision.

1. An appeal from the Upper Tribunal lay only on a point of law under the Tribunals, Courts and Enforcement Act 2007, section 13(1). The statutory market-value question under section 272(1) of the Taxation of Chargeable Gains Act 1992 was the price which the assets might reasonably be expected to fetch on an open-market sale.
2. VPGA 4 was guidance on valuing property, not on valuing a business as a separate asset. Its profits method used the hypothetical fair maintainable trade and fair maintainable operating profit of a reasonably efficient operator. The market value of the property and the value of the business use conducted from it were inextricably linked. The method therefore did not produce separate values for the property and transferable goodwill.
3. Step 4(c) addressed the assessment of market rent. It did not determine the capital value of a leasehold interest. Step 4(a), suitably adapted, could be used for a leasehold interest by capitalising rent-adjusted fair maintainable operating profit. A lease at market rent could still have capital value, particularly where the passing rent was at the lower end of the market range and the hypothetical operator’s profits exceeded the actual profits.
4. Goodwill attached to an actual business and had no independent existence apart from it, as illustrated by IRC v Muller’s Margarine Ltd [1901] AC 217. Any transferable goodwill attributed to a hypothetical business under the profits method was simply part of the property’s inherent qualities and trading potential. It was not a separate asset.
5. Balloon Promotions Ltd v Wilson [2006] STC (SCD) 167 was distinguishable because the valuation of the leasehold interests was not in issue in that case.

The open-market values were accordingly fixed at £730,000 for Manor Place and £542,500 for Maple House.

• Court of Appeal (Civil Division): HMRC’s appeal allowed and the Upper Tribunal’s decision re-made. [2022] EWCA Civ 909.
• Upper Tribunal (Lands Chamber): held that the leasehold interests had nil value because the agreed valuation included transferable goodwill. [2021] UKUT 0076 (LC).