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Replies to Queries - 3 - A valid valuation?

11 December 2002
Issue: 3887 / Categories:

Prior to 31 March 1982, my clients, a husband and wife partnership, purchased premises which were used for their business until both business and property were sold in October 2000. In the capital gains computations, a market value at 31 March 1982 of £40,000 was used for the whole property. However, the District Valuer has sought to discount the wife's half share by 15 per cent, because the property was owner-occupied and, in support, he is citing the case of Wight and Moss v Commissioners of Inland Revenue (Lands Tribunal 1982, 264 EG 935).

Prior to 31 March 1982, my clients, a husband and wife partnership, purchased premises which were used for their business until both business and property were sold in October 2000. In the capital gains computations, a market value at 31 March 1982 of £40,000 was used for the whole property. However, the District Valuer has sought to discount the wife's half share by 15 per cent, because the property was owner-occupied and, in support, he is citing the case of Wight and Moss v Commissioners of Inland Revenue (Lands Tribunal 1982, 264 EG 935).

The District Valuer states that statute requires the assumption of a hypothetical sale of the individual taxpayer's interest only at the date of valuation and this does not imply the sale of any other owner's interest at the same time. In this case, the hypothetical purchaser with a 50 per cent share would acquire it, subject to the remaining 50 per cent being owned by an unrelated party (i.e. the husband).

The Valuer considers that these principles have been generally accepted and tested.

Whilst we accept that this may be appropriate in some cases, Wight and Moss is an inheritance tax case and refers to two unrelated ladies who owned a property as tenants-in-common. I have contended (albeit unsuccessfully, so far) that this is not comparable with a husband and wife owning a property as joint tenants, where, unlike in Wight and Moss, the property would have passed on survivorship to the other.

My understanding is that the value at 31 March 1982 is intended to replace the original cost, i.e. £40,000.

Is this a new Revenue practice of discounting the 31 March 1982 value of all properties jointly owned by a husband and wife? Is it worth disputing the issue further and, if so, on what grounds?

(Query T16,126) - Half-Share.

 

The District Valuer has got this wrong in principle. The method of valuation proposed would have been applicable to a co-ownership situation governed by section 30, Law of Property Act 1925. Under this provision, the court had the right to refuse to order a sale on the application of one of the co-owners of what was then a trust for sale. The normal discount as at 31 March 1982 was 10 per cent but, for residential property where both co-owners were in occupation, the likelihood of the court refusing such an order was reflected in the widening of the discount to 15 per cent. Wight v Commissioners of Inland Revenue (1982) 264 EG 935 is the authority for that proposition and that proposition alone. The comments in the Valuation Office's Inheritance Tax Manual at paragraph 18.4-6 should, if necessary, be drawn to the District Valuer's attention.

However, where a partnership is involved, the right of each partner is not an aliquot proportion of each asset, but a 'chose in action', i.e. the right to ask the court to regulate the affairs of the partnership in accordance with the actual or implied terms of the partnership agreement: see Lingen v Simpson (1824) 1 Sim & St 600. The issue considered in Wight is not, therefore, relevant. For the purposes of valuation under section 160, Inheritance Tax Act 1984 (which is in similar terms to section 272, Taxation of Chargeable Gains Act 1992) one has, nonetheless, to look at the underlying assets: see Gray (Fox's Executor) v Commissioners of Inland Revenue [1994] STC 360. It has, furthermore, been held that no discount on the underlying percentage of the partner is appropriate: see Walton's Executor v Commissioners of Inland Revenue [1994] RVR 217. The Lands Tribunal's formulation was adopted in the hearing of that case in the Court of Appeal (see [1996] STC 68).

There remains the question of whether section 59(b), Taxation of Chargeable Gains Act 1992 permits the District Valuer to postulate a disposal by a partner of his aliquot share where a deemed disposal is postulated under section 35(2), Taxation of Chargeable Gains Act 1992. It is considered it does not. In terms, section 59(b) is only required, and can therefore only be in point, where an actual disposal has been made by the partnership itself.

The notional half shares of each of the husband and the wife in the partnership business property at issue in this case should, in consequence, be valued on an undiscounted basis. - JdeS.

 

If the District Valuer seeks to restrict the value of the wife's share of the 31 March 1982 value, why has he not made the same proposal with respect to the husband's share? Not only does he lack consistency but, as the querist remarks, he relies on a case concerning a fundamentally different asset.

Joint owners

Joint owners are just that, part owners of a single asset and, if one of them dies, the survivor(s) succeed automatically and rateably to his part. A joint owner cannot give, sell or pledge his part without an agreement by the co-owners to give effect to the deal. Nor can he bequeath it, unless their written agreement to recognise the bequest is attached to the will. An attempt to compromise his share for debt can only succeed with the co-operation of his co-owners, which is unlikely.

Tenants in common

Here, each co-owner has a percentage 'interest' in the property. The interest is a separate asset in its own right which, if its holder dies, passes as part of his estate. He can sell, give, bequeath or pledge it without reference to the co-owners, and it can be compromised in satisfaction of debt, e.g. by his trustee in bankruptcy.

White & Moss v Commissioners of Inland Revenue (264/935/82) concerned unrelated tenants in common, each of whom could sell her interest without reference to the other, making the Valuer's hypothesis tenable. But here the clients are joint owners, so neither can sell without the other's co-operation. As they are married, such a hypothesis is impossible. If they sold at all, they would require the buyer to treat for the whole - as they have in fact done. It is suggested that the above be repeated to the Valuer, with the reminder that no restriction was suggested in respect of the husband, an equal owner. Finally, the practitioner should decline absolutely to be interested in any discounting of the value. - Man of Kent.

Editorial note. The Valuation Office's instruction manuals are available on the Internet at www.vao.gov.uk (see 'our operational instructions' on the publications pages). Section 7.25 of the Capital Gains Tax Manual, Chapter 1a (Partnership Property) states that 'It should be noted that if the property is held as a partnership asset, the Inspector will request an entirety value because each partner's asset is taken to be a fraction of the entire asset held by the partnership'.

It has been mentioned that confusion can sometimes arise if the Inspector of Taxes has not advised the District Valuer that it is a partnership asset or interest that is to be valued, rather than an interest in property with no further explanation as to use, etc. It may therefore be worth asking the Inspector for a copy of his actual request to the Valuer.

Issue: 3887 / Categories:
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