England and Wales Lands Tribunal

 


Barrett v Commissioners for her Majesty's Revenue and Customs [2005] EWLands DET_42_2005 (24 November 2005)

DET/42/2005

LANDS TRIBUNAL ACT 1949

INHERITANCE TAX – house – comparables – allowance for lack of modern bathroom and kitchen, driveway and dispute with neighbour – market value of half-share in freehold interest determined at £133,875 – Inheritance Tax Act 1984, s160

IN THE MATTER of an APPEAL against a NOTICE OF DETERMINATION

BETWEEN JACQUELINE D P BARRETT Appellant

(personal representative of

Samuel Richard Arthur Barrett deceased)

and

COMMISSIONERS FOR HER Respondents

MAJESTY'S REVENUE AND CUSTOMS

Re: 60 Northumberland Road

New Barnet

Hertfordshire

Before: P H Clarke FRICS

Sitting at Procession House, London EC4

on 23 November 2005

The following case is referred to in this decision:

Inland Revenue Commissioners v Gray (Executor of Lady Fox deceased) [1994] RVR 129

The appellant in person

Mr P R Twiddy for the respondents

DECISION

1. This is an appeal heard under the simplified procedure against a determination for inheritance tax purposes in respect of a house in New Barnet, Hertfordshire.
2. The appellant, Miss Jacqueline D P Barrett, appeared in person and gave evidence. Mr P R Twiddy appeared for the respondent Commissioners and called Mr Mervyn Anthony Farnsworth MRICS, a principal valuer at the Westminster office of the District Valuer Services London, Valuation Office Agency. He was previously the officer in charge at Harrow valuation office.

Facts

3. Mr Samuel Richard Arthur Barrett was joint owner of the freehold interest in 60 Northumberland Road, New Barnet, Hertfordshire ("the subject-property"). He died on 19 July 2002. The other owner was Miss Barrett, the appellant. She is Mr Barrett's personal representative.
4. For inheritance tax purposes Mr Barrett's death resulted in a deemed disposal on 19 July 2002 of his interest in the subject-property. No agreement could be reached as to the value of Mr Barrett's half-share and on 17 March 2004 the Commissioners of Inland Revenue (now the Commissioners for Her Majesty's Revenue and Customs) determined the value of Mr Barrett's freehold interest as at 19 July 2002 to be £144,500. On 22 March 2004 Miss Barrett appealed on the grounds that the value determined does not appear to take into account the allowances made by the valuer for refurbishment and encumbrances as set out in correspondence and that no explanation has been received for this apparent discrepancy. On 6 April 2005 Miss Barrett served notice of reference on this Tribunal. The appeal was directed to be heard under the simplified procedure.
5. The subject-property is situated on the south side of Northumberland Road, close to the junction with Monks Avenue, in New Barnet. The surrounding area comprises typical inter-war suburban development. 60 Northumberland Road is a semi-detached house built in the 1930s of brick and pebble-dash construction with a tiled roof. The accommodation comprises an entrance porch, entrance room or hall, cloakroom, two living rooms and kitchen on the ground floor and three bedrooms and a bathroom on the first floor. Mr Farnsworth has calculated the effective floor area to be 107 sq m with a reduced covered area of 141 sq m. The house has gas fired central heating. At the side of the house, between the subject property and 58 Northumberland Road, is a driveway leading to two lock up garages at the rear of the houses. There is a car port across the driveway. Although nos 60 and 58 Northumberland Road each own approximately half the width of this driveway there is no physical division. The subject-property has front and rear gardens.
6. At the time of valuation, 19 July 2002, Mr Barrett and Miss Barrett were joint owners of the freehold interest in the subject-property. They were also occupiers. The freehold was subject to a deed of agreement dated 3 April 1973 between the then freehold owners of nos 58 and 60 Northumberland Road respectively, which expression included their respective successors in title or their executors, administrators and assigns. The agreement stated that the parties had applied to the Chief Land Registrar for registration of the terms of the agreement as appurtenant to their respective titles. This agreement relates to the driveway between the two houses and the two rear lock-up garages served by that driveway. The parties have agreed that:-

(i) the roof of the carport over the driveway and the dividing wall between the garages shall be party structures (with provisions for maintenance and repair);

(ii) the owners of no 60 shall have rights of access and of manoeuvring vehicles over part of the area between the two properties and to drain surface water from the car port roof into pipes, gutters, etc on no 58;

(iii) the owners of no 58 shall have rights of access over part of the area between the two properties.

Appellant's case

7. Miss Barrett seeks a determination of £122,400 as the value of Mr Barrett's half-share in the freehold interest in the subject-property as at 19 July 2002.
8. Miss Barrett accepted Mr Farnsworth's valuation of £360,000 for the subject property as if improved to the same standard as 62 Northumberland Road. From this figure she deducted £40,000 and a further 10%, based on figures used by a valuer in the VOA, Mr Emery, in April and May 2003. These allowances are for refurbishment and repair at the subject-property and for the problems of the restricted use of the shared driveway and nuisance from a neighbour (boundary dispute). These deductions produce a value of £288,000, giving a half-share value, with 15% discount for the joint ownership, of £122,400.
9. Miss Barrett included in her bundle of evidence a letter dated 20 September 2002 from Mr Paul A Willis, property sales manager of Barnard Marcus of Whetstone, giving a probate value of £305,000 for the subject-property. Mr Willis did not give evidence. She also included documentary evidence relating to her dispute with the owners of 58 Northumberland Road.
10. At the hearing Miss Barrett explained that, although she had adopted Mr Emery's deductions, she could justify them on the grounds that the subject-property was not well-maintained compared to 62 Northumberland Road. The driveway was less convenient and there is a longstanding dispute with the owners of no 58. The agreement of 3 April 1973 is unsatisfactory.

Respondents' case

11. Mr Farnsworth values the half-share of the freehold interest in the subject-property as at 19 July 2002 at £137,700.
12. He referred to three comparables, 62 and 66 Northumberland Road and 52 Monks Avenue, and adjusted the sale prices to the valuation date, producing figures of £360,000, £423,500 and £338,500 respectively. From his analysis of these sales he arrived at an unadjusted value of £360,000 for the subject-property from which he deducted 10% (£36,000) for lack of modern kitchen and bathroom (not more than £10,000) and for the dispute regarding shared access, producing a reduced value of £324,000. Developers would have been in the market at this figure; there was the possibility of alterations to provide a fourth bedroom and to partition the entrance hall to provide a study. Mr Farnsworth then made a 15% discount for the freehold share, reducing the value to £275,400 and producing a half-share value of £137,700.
13. At the hearing Mr Farnsworth said that his valuation took into account the dispute with the owners of no 58 (as if unresolved) but he thought it could be resolved.

Discussion

14. The only issue in this appeal is the value of Mr Barrett's half-share of the freehold interest in 60 Northumberland Road as at 19 July 2002. The Commissioners determined the value at £144,500; Mr Farnsworth, in his evidence on behalf of the respondent Commissioners, put the value at the slightly lower figure of £137,700; Miss Barrett seeks a determination of £122,400.
15. I look first at the relevant statutory provisions. All references are to the Inheritance Tax Act 1984. Sections 1 and 2 provide that inheritance tax shall be charged on the value transferred by a chargeable transfer, that is to say a transfer of value made by an individual which is not exempt. A transfer of value is a disposition whereby the value of a person's estate is reduced by the disposition. The difference between the value of the estate before and after the disposition is the value transferred by the transfer (section 3). Section 4(1) provides that on death inheritance tax is charged as if, immediately before the death, the deceased had made a transfer of value equal to the value of his estate. It is to be assumed that the late Mr Barrett sold his joint share in the freehold interest in 60 Northumberland Road immediately before he died on 19 July 2002. The issue is what was the value of that share?
16. Section 221 gives the Commissioners for Her Majesty's Revenue and Customs (formerly Commissioners of Inland Revenue) the power to give a notice of determination regarding certain matters where there has been a transfer of value. These include the date of the transfer, the value transferred, the value of any property to which the value transferred is wholly or partly attributable and the transferor (section 221(2)(a)(b) and (c)). Under this provision the Commissioners served notice on 17 March 2004, in respect of the deemed disposal on the death of Mr Barrett, determining the market value of his freehold interest in the subject-property at £144,500. Section 222 gives rights of appeal against a determination and Miss Barrett appealed on 22 March 2004. Where the appeal is on a question of value, subsections (4) and (4B)(a) of this section have the effect that the appeal is to the Lands Tribunal. Miss Barrett, as the appellant, has the burden of proof to show that the Commissioners' determination is wrong.
17. The hypothetical statutory sale on death refers to the value transferred which is defined in section 160 as follows:-

"……, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; ……"

18. Guidance as to meaning of the open market value is given by Hoffmann LJ in Inland Revenue Commissioners v Gray (Executor of Lady Fox deceased) [1994] RVR 129 at 136:-

"The only express guidance which [s160] offers on the circumstances in which the hypothetical sale must be supposed to have taken place is that it was 'in the open market'. But this deficiency has been amply remedied by the courts during the century since the provision first made its appearance for the purposes of estate duty in the Finance Act 1894. Certain things are necessarily entailed by the statutory hypothesis. ………

In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world would usually play no part in the calculation. The inquiry will often focus upon what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened."

19. Against this background I look at the evidence, considering first the correspondence referred to by Miss Barrett. Most of the letters in her bundle are to and from the Capital Taxes Office and different offices of the District Valuer. I do not find this evidence of assistance for two reasons. First, the correspondence with Mr Emery and then Mr Farnsworth, relates to matters which have been largely overtaken by Mr Farnsworth's evidence in this appeal. Mr Emery did not give evidence; his valuation has been replaced by the valuation prepared by Mr Farnsworth. Miss Barrett placed much reliance on the deductions made by Mr Emery for refurbishment and repair at the subject-property and the problems relating to the shared drive, but Mr Emery's deductions have not been adopted by Mr Farnsworth, who used a different valuation approach with a different deduction for these factors.
20. My second reason for finding this correspondence of no assistance is that much of it has the characteristic of negotiations directed to a settlement. Under the simplified procedure strict rules of evidence do not apply and I do not therefore find this evidence inadmissible, as would probably be the case with a hearing under the other procedures in this Tribunal, but I can give it no weight for the following reasons. It is evidence of explanation and negotiation, not objective evidence of value. As a matter of law evidence of negotiations prior to a hearing is usually inadmissible on grounds of public policy, namely that parties to a dispute should be encouraged to settled their differences without resort to litigation and should not be discouraged from so doing by the knowledge that what has been written or said during negotiations may be used to their prejudice in later proceedings. In this case it would be unsatisfactory for Mr Farnsworth to be prejudiced by anything written by Mr Emery in his attempts to explain his valuation and agree a settlement. Furthermore, this Tribunal does not exercise a function similar to that of an ombudsman and I cannot comment on, nor take into account in reaching my determination, the way in which valuations were prepared and negotiations conducted before this appeal. For these reasons I do not find this correspondence helpful and give it no weight. I turn now to the valuation evidence given at the hearing.
21. I propose to follow the approach used by both parties, namely to arrive at an unadjusted value for the subject-property by reference to the comparables, then to make a deduction for the particular condition of the property compared to the comparable houses and for the driveway and the dispute and finally to reduce the value by an agreed figure of 15% for joint ownership and by 50% to arrive at the half-share owned by Mr Barrett at the date of the hypothetical disposal on 19 July 2002.
22. I was referred to four comparables. 62 Northumberland Road forms the other semi-detached half of the two houses, nos 60 and 62. It was sold for £385,000 in about February 2003 with completion on the following 31 March. It is agreed that the price at 19 July 2002 would have been £360,000. 66 Northumberland Road was sold in about May 2002 for £415,000 with completion on the following 27 June. This comparable is not referred to by Miss Barrett. Mr Farnsworth adjusted the price to £423,500 as at 19 July 2002. The house is semi-detached. 38 Monks Avenue was only referred to by Miss Barrett although it would appear that Mr Farnsworth had at some time considered this comparable and adjusted the sale price of £335,000, with completion on 6 August 2002, to £328,000 as at 19 July 2002. I have no other information regarding this house. Both parties referred to 52 Monks Avenue which was sold for £332,000 in about August 2002 with completion on the following 30 September. It is agreed that the adjusted sale price as at 19 July 2002 was £328,500. Monks Avenue joins Northumberland Road opposite nos 40 and 52 Monks Avenue is to the north-west of the subject-property. The house is semi-detached.
23. By the hearing the parties had agreed that 62 Northumberland Road is the best comparable. The starting point for the valuation of the subject-property is an unadjusted value of £360,000, subject to a deduction for the differences between the two houses, including the lack of a modern kitchen and bathroom, the standard of maintenance, the driveway between nos 58 and 60 and the dispute regarding the use of this driveway.
24. As to the deduction for these factors, Miss Barrett made a total allowance of £70,200 (or 20%), which she expressed as £40,000 plus 10% of the reduced value. Mr Farnsworth made a deduction of 10% (£36,000). This deduction can only be a matter of opinion. The question is what allowance the hypothetical vendor and purchaser would have agreed on the assumed sale at 19 July 2002.
25. Miss Barrett's deductions are derived from letters in April and May 2003 from Mr Emery of the District Valuer's office who was then dealing with the matter and in correspondence with Miss Barrett. As I have explained, this evidence would normally be inadmissible. Mr Emery's valuations are not before the Tribunal and have not been adopted by Mr Farnsworth, who has used a slightly different approach with different comparables. It would appear that Mr Emery was comparing the three-bedroom subject-property with four-bedroom houses with higher values, thus needing greater deductions to relate them to the subject-property. It would be wrong to use Mr Emery's deductions in a different context.
26. Mr Farnsworth's deduction is £36,000 or 10% of the unadjusted value. He gave evidence that the comparables had more modern kitchens and bathrooms and a deduction should be made for this factor. He put this at no more than £10,000. I agree. This leaves £26,000 or 7.2%, for the driveway between the subject-property and no 58 and the long-standing dispute regarding the use of this area.
27. The driveway between nos 58 and 60 Northumberland Road leads from the road under a car port extending the full width between the two properties to two lock-up garages at the rear of the houses, one for each house. There is no physical boundary between the two properties. In this respect, the subject-property differs from the comparables which all have a clear physical division between the adjoining houses and the garages are approximately level with the front wall of each house not at the rear of the house. I regard the driveway layout at the subject-property to be a serious disadvantage compared to the comparables, particularly 62 Northumberland Road. Irrespective of the actual dispute, the physical arrangement has the potential for a dispute and merits a discount compared to the comparables. Miss Barrett has given evidence regarding a longstanding dispute with her neighbours and the unsatisfactory nature of the agreement dated 3 April 1973.
28. It is, of course, not for me to make any findings or to comment on this dispute. I am solely concerned with the effect on price on the hypothetical sale in July 2002. I would emphasise that, in accordance with the guidance given by Hoffman LJ in Gray, although the property, the locality and the market in the assumed sale are real (including the owners of no 58), the vendor and purchaser of the subject-property are hypothetical and largely anonymous persons. Although it can be assumed that the hypothetical vendor would disclose the existence of the dispute, it is unlikely that the hypothetical purchaser, fresh on the scene, would obtain the same detailed knowledge of it as is possessed by Miss Barrett. Furthermore, the hypothetical vendor would have been likely to play down the dispute in order to get the highest price. The question is therefore, with a limited knowledge of the dispute, what reduction would the hypothetical purchaser have been able to negotiate with the hypothetical vendor when agreeing a price? The answer can be no more than an informed opinion. Mr Farnsworth increased his overall deduction by £26,000 or 7.2% of the unadjusted price for the driveway and the dispute, giving a total deduction of 10%. Overall, I consider this to be too low. I increase it to 12½%. This covers the lack of a modern kitchen and bathroom, the better condition of the comparables, the unsatisfactory physical layout of the driveway between the subject-property and no 58 (which, as I have said, has the potential for a dispute) and the long-standing dispute between the owners of these two houses.
29. The parties have agreed the unadjusted price of the subject property at £360,000. This is then reduced by 12½% to £315,000. It is common ground that a 15% deduction should be made for a half-share, reducing the total figure to £267,750, and giving a price of £133,875 for the value of Mr Barrett's half-share in the subject-property as at 19 July 2002.
30. The appeal is allowed. I determine that the open market value under section 160 of the Inheritance Tax Act 1984 of Mr Barrett's half-share of the freehold interest in 60 Northumberland Road as at 19 July 2002 was £133,875.
31. Neither party asked for costs and I make no order as to costs.

Dated: 24 November 2005

(Signed) P H Clarke