England and Wales Lands Tribunal

 


St Clair-Ford(As Executor of the estate of Norman Peter Youlden deceased) v Revenue and Customs-Capital Taxes [2006] EWLands TMA_215_2005 (22 June 2006)

TMA/215/2005

LANDS TRIBUNAL ACT 1949

TAX – Inheritance Tax – valuation of undivided half-share in town centre retail investment property – discount for share – value determined at £175,000 – Inheritance Tax Act 1984, s160

IN THE MATTER of a NOTICE OF REFERENCE

BETWEEN JAMES ANSON ST CLAIR - FORD Appellant

(As Executor of the estate of NORMAN PETER YOULDEN deceased)

and

COLIN RYDER

H M REVENUE AND CUSTOMS – CAPITAL TAXES Respondent

Re: 23-25 High Street, Totnes, Devon, TQ9 5NP

Determination without an oral hearing under Rule 27, Lands Tribunal Rules 1996

The following cases are referred to in this decision:

Wight v Commissioners of the Inland Revenue (1982) 264 EG 935

Newman (Inspector of Taxes) v Hatt LT ref (TMA/207/2000)

Charkham v Commissioners of the Inland Revenue LT ref (DET/3-6/1995)

DECISION

1. This is an appeal pursuant to section 221(1), (4) and (4B) of the Inheritance Tax Act 1984, as amended, against a determination by H M Revenue and Customs – Capital Taxes ("HMRC"). Under those provisions, a person on whom a notice of determination has been served may appeal against it to the Lands Tribunal on any question as to the value of land. The notice of determination was served on Mr J St Clair-Ford on 23 August 2005 as executor in the estate of Norman Peter Youlden ("the deceased") who at the date of his death on 21 February 2003 had been the owner of a 50% moiety share in a retail shop premises known as 23-25 High Street, Totnes, Devon, TQ9 5NP ("the subject premises"). The determination valued the deceased's share at £175,000. That figure was derived from an assessed freehold investment value of the property of £390,000, less 50% for the half share, less 10% to reflect the fact that the share was undivided. In appealing against that determination, by a reference dated 25 November 2005, the executor contended that the figure should have been £121,500. This was derived from a freehold value of £288,300 at 50% less 15% to reflect the undivided share.
2. Upon the application of the parties, I made an order dated 8 May 2006 determining that the matter be dealt with by written representations under rule 27 of the Lands Tribunal Rules 1996 and have considered the expert reports of Peter Michael Blowers FRICS, a consultant with Goodman Mann Broomhall, Surveyors of London SW1 for the appellant and Paul Martin Scammell MRICS, Principal Valuer at the St Austell office of District Valuer Services, South West, of the Valuation Office Agency.

Facts

3. The valuers produced a statement of agreed facts and issues from which, together with the evidence, I find the following facts: The subject premises comprise a mid-terrace building, constructed in the 1930s of brick with part slate hung elevations under flat, asphalted roofs located fronting one of the two main shopping streets in the centre of Totnes, a market town in the South Hams area of south Devon. It consists of a ground floor retail unit having a sales area of 331.7m² with a rear office of 8.7m², together with first floor storage of 266.6 m², kitchen, office and cloakroom totalling 26.9m². There is a goods lift, together with a basement plant room. At the valuation date of 21 February 2003 the premises were the subject of a full repairing and insuring lease to Woolworths Plc for 5 years from 25 March 2001 at a passing rent of £31,000 pa which devalues to £229.37 per m² ITZA. Woolworths are understood to have occupied the premises since they were built. The rateable value of the subject premises was £30,000 at the relevant date.
4. The deceased owned a 50% undivided share in the freehold of the subject premises.

Issue

5. The sole issue in this appeal is the determination of the value, as defined by section 160 of the Inheritance Tax Act 1984, of the deceased's 50% share in the subject premises.

Appellant's case

6. Mr Blowers is a Chartered Surveyor who in a career spanning 50 years has specialised in the purchase, disposal and management of commercial property and has built up a number of investment portfolios. The description, accommodation, location and lease details of the subject premises being agreed, Mr Blowers said the only real points of contention between him and HMRC's valuer was their respective views as to Totnes as a retail centre, particularly in comparison with Bridgwater which was where Mr Blowers' main comparable was located, and thus the return on capital that an investor would expect to receive.
7. Referring to the Woolworths store at 8/20, Eastover, Bridgwater, which was sold by auction by Jones Lang LaSalle on 4 July 2001 for £655,000, representing a return of 8.86%, Mr Blowers said that Bridgwater was much larger than Totnes, with a population of over 100,000 and was a more important shopping location where many multiples were represented. It was also a modern store and there was a reasonable prospect of an upwards rent review 2 years after the sale date. He also referred to the sale by auction on 25 March 2004 of 31 Fore Street, Totnes, a grade II listed banking hall with two floors of self contained offices above, let in its entirety to Lloyds TSB at a then current rent of £49,500 pa with 7 years remaining on the lease, and a rent review imminent. In Mr Blowers' view, of the two principal shopping streets in Totnes, Fore Street was acknowledged to be superior to High Street in terms of trading position and Lloyds TSB was a better covenant than Woolworths. The bank premises also contained some redevelopment potential (converting the upper floors to residential) and a large car park at the rear. The sale price of £1.02 million, reflected a return of 4.85%.
8. Mr Blowers said that when Woolworths were offered a new 14 year lease of the subject premises in 2001, they declined on the grounds that future profitability of the store was unpredictable. They entered into a 5 year lease, which expires in 2006 (3 years after the valuation date) and there was a risk that they would not renew. It would be difficult, if that occurred, to re-let the whole premises as one unit, and there may well be a void whilst new occupiers were found. That needed to be reflected in the value which he calculated as:

Present rent	£31,000 pa
YP 3 years @ 9%	2.5
	£77,500
Reversion to	£31,000 pa
YP in perpetuity After 4 yrs @ 10%	6.8
	£210,800
	£288,300
Moiety	@ 50%£144,150
Deduct for undivided share 15%	£ 21,600
	£122,500
But say,	£121,500

9. Mr Blowers said that he allowed a 15% discount because the deceased's interest was an undivided share, and whilst he realised there were authorities that suggested 10% to be the norm, he thought those cases related to relatively minor interests. In this case, if the owner(s) of the other half share did not wish to sell/buy, it could create problems that should be reflected by an additional discount. He was aware of a Capital Taxes share valuation where a 40% share had warranted a 40% discount.
10. In a written response to Mr Scammell's report, Mr Blowers said that a large proportion of his comparables were post the valuation date, and that insufficient information was given for a meaningful analysis to be carried out. As to the other transactions involving Woolworths stores, he pointed out the majority of those were let on 25 year FRI leases, and the yields could therefore be expected to be lower.

Respondent's case

11. Mr Scammell is a Chartered Surveyor who qualified in 1986 and has spent his working life in the Valuation Office. He has undertaken valuation casework for HMRC and other government departments and agencies throughout Devon and Cornwall since 1998. He agreed that the highest zone A rental values were achieved in Fore Street, but an analysis of the rent paid on the subject premises, at £229 per m² in comparison with the records he had on agreed rents on 15 properties in the vicinity showed it to be the lowest in the "better" part of the High Street, east of the castle. Many of the lettings in the vicinity showed £290 - £300 per m² but as that information was extracted from returns for rating purposes, he was unable to give details of the properties. However, the rental information was used as the basis for the 2005 Rating List valuations, and there was no evidence, he said, that rental levels had fallen in the two main shopping streets since 2001. In his view, there was no reason to assume a reversionary rent less than that which was passing, but in the light of the short remaining term left on the lease, and there being no guarantee that Woolworths would renew, he valued the passing rent in perpetuity.
12. Considering the capitalisation yield, Mr Scammell said that due to the fact that many of the Totnes shops were occupied by local traders, there was a paucity of investment sales of retail premises in the town. He had therefore looked farther afield, including Newton Abbot and Teignmouth and had also considered investment sales of shop premises occupied by Woolworths throughout the southwest. As to the only two investment sales he was aware of in Totnes, he agreed Mr Blowers' analysis of the Lloyds TSB premises sale but stated that it was a post valuation date transaction, as was the sale of 12 Fore Street in October 2005. That was a ground floor shop with two flats on upper floors where, on a sale price of £580,000 and a rental income of £33,445 pa, the yield represented 5.77%. Yields, he said, had not changed between the valuation date and 2005 according to the VOA Property Market Report for the southwest. The Newton Abbot and Teignmouth transactions reflected yields of between 4.94% (sale in October 2005 of 5/11 Wellington Street, Teignmouth, let to Boots), to 7.55% (10/11 Wellington Street, newly refurbished and freshly let, sold as an investment in October 2001).
13. Regarding transactions of properties occupied by Woolworths, Mr Scammell said that the one in Bridgwater referred to by Mr Blowers was not a useful comparable. Overall, Bridgwater is a poor retail centre compared with nearby Taunton, and, more importantly, Eastover, where the premises are located, is severed from the main shopping area by the River Parrett, and has been in decline since Sainsbury's vacated a large unit there. Woolworths is the only remaining multiple in that street, rents have been falling and there are many vacant units. He then analysed investment sales of the Woolworths units in Camborne (6.97%), Falmouth (5.78%), Newquay (confidential, but yield in the range of 7 to 7.5%), Helston (5.43%) and Exmouth (6.1%). The Bridgwater yield, at 8.86% clearly reflected its poor location, and apart from Newquay, which was by far the largest store in the town, all the other yields were below 7%. On the basis of his analyses, Mr Scammell said that were it not for the relatively short unexpired term on the subject premises, and the albeit in his view slight risk of the tenant not renewing, the comparables would suggest an appropriate yield in the range of 6 to 6.5%. There was no evidence that Woolworths were withdrawing from smaller towns in the southwest and even if they did, tenant demand in Totnes is currently strong and there are few vacant shop units. In the light of all the information available, he considered an appropriate yield, in perpetuity, to be 8%.
14. Turning to the discount for half share, Mr Scammell said that the sale of undivided shares was unusual, but not unique, and the discount for a 50% share where a property was held in trust as an investment was customarily 10%. This reflected the lack of control over managing the property, and the potential for disagreement over the timing of any sale which could ultimately result in a part-owner applying to the courts under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 for an order that the entirety be sold. He referred to the Lands Tribunal case of Wight v Commissioners of the Inland Revenue (1982) 264 EG 935. The Member, W H Rees FRICS, in determining the value of a half share interest in a house that had been occupied by two ladies as tenants in common, and where the surviving co-owner would be the most likely purchaser, said (at 238H):

"It seems that the percentage of 10 [as sought by the valuer for the commissioners] is derived from the decision in Cust [Cust v Commissioners of Inland Revenue [1917] EGD 307] and that this percentage has become customary.

The finding in Cust related to an estate (which fell to be valued in 1913) comprising licenced premises, houses, shops, cottages, smallholdings, farms, gardens, stables and woodland. The position in the case of such a half share as has to be valued here is unusual in the sense that the purchaser would have the right to occupy the property jointly with the other owner and that is a factor which, in my judgment, on the evidence, is one which also points to a larger percentage than 10."

In the circumstances, he valued the percentage discount at 15.

15. Mr Scammell said that with the subject property, the interests were held purely as investments and the question, as in Cust, of the co-owner continuing to reside in the property did not arise. In Newman (Inspector of Taxes) v Hatt LT ref (TMA/207/2000) 10% was determined as appropriate in the case of a half share interest in a multi-tenanted house held as an investment. Higher discounts would apply in respect of minority interests – see Charkham v Commissioners of the Inland Revenue LT ref (DET/3-6/1995). Mr Scammell said that in that case, which concerned the valuation of minority shares in various retail and residential properties, discounts ranged from 15% on shop investments where there was little likelihood of management differences between co-owners, to 22.5% where management issues were deemed a potential problem. In his view, in the light of the cases he had cited, the instant case warranted a discount of 10% from the half share value. His valuation became:

Rent reserved	£31,000
YP in perpetuity @ 8%	12.5
	£387,500
Say	£390,000
50% share	£195,000
Less 10% allowance for share	£ 19,500
Value of individual half-share	£175,500
Say	£175,000

.

16. In response to Mr Blowers' report, Mr Scammell said that there was no evidence to justify an assumption that Woolworths would not renew the lease and even if they did vacate at the end of the term, there would be a ready market for the premises in what was an attractive (certainly more so than Bridgwater) location that attracted a good tourist trade. In his view the rent that had been fixed 2 years before the valuation date was below the premises' then full open market value, and at renewal a higher rent might be achievable. Nevertheless, he said that he had assumed the existing rent would continue by valuing the rent reserved in perpetuity at 8%.

Conclusions

17. I look first at the statutory provisions. Sections 1 and 2 of the Inheritance Tax Act 1984 provide that Inheritance Tax shall be charged on the value transferred by a chargeable transfer, that is a transfer of value made by an individual which is not exempt. Such a transfer is a disposition whereby the value of a person's estate is reduced by the disposition, and 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 Youlden sold his joint share in the freehold interest in 23-25 High Street, Totnes immediately before he died on 21 February 2003, and that is the valuation date for the purposes of this determination. Mr St Clair-Ford, as the deceased's representative, and the appellant, has the burden of proof to show that HMRC's determination is wrong.
18. There being a considerable amount of agreement between the parties, it seems to me that the only issues for me to determine in arriving at the value of the deceased's interest in the subject premises are the appropriate yield rate that could be expected to have been achieved if the premises had been sold in the open market as an investment at the relevant date, and the discount to be applied to reflect Mr Youlden's 50% undivided share.
19. Mr Blowers argued for a YP of 9% for the first 3 years to the end of the then current lease, with a reversion to perpetuity at 10% and relied principally upon two comparables, one in Totnes, and the Woolworths store in Bridgwater. Mr Scammell said that a YP of 8% in perpetuity was appropriate and provided an extensive list of comparables, although, due to the paucity of transactions in Totnes, he had had to look farther afield for his information. I was able to build up a clear picture of the level of returns being achieved on retail premises let to good covenants within the region from the evidence (principally that of Mr Scammell), and it shows investment sales ranging from 4.85% (Lloyds TSB, Totnes) to 8.86% for the Bridgwater Woolworths. There are a large number of transactions in the 5.5% to 7.5% range, and I accept Mr Scammell's statement that were it not for the uncertainty at the end of the existing lease, a yield of 6 to 6.5% would appear to be appropriate for the subject premises. Certainly not all his comparables were significantly after the valuation date, and two of the Woolworths transactions were in 2001. I have no evidence that yields over the period investigated moved in an upwards direction, and there is no reason, in my view, not to accept Mr Scammell's statement that the VOA Property Market Report for the southwest showed yields to be static between 2001 and 2005. In my judgment, an adjustment of the yield to 8% adequately reflects the question of uncertainty and allows for the fact that High Street is not the absolute prime location in the town. In the light of the two Totnes transactions referred to, and the evidence in general, I am not satisfied that there is any justification in adopting a higher percentage. I therefore determine the freehold open market value of the subject premises at Mr Scammell's figure of £390,000, 50% of which is £195,000.
20. Turning now to the question of the discount that should be applied to reflect the undivided share, I am satisfied on the evidence that 10% is indeed the customary discount applied to half-shares particularly where they are undivided and there is no likelihood that the surviving partner will remain in occupation (as in a residential property with tenants in common). There is evidence to suggest higher discounts for minority shares and where there may be other complications, but in the circumstances of this case, I have not been taken to any authority which suggests a departure from convention would be appropriate.
21. In the light of my findings, I conclude that the appellant has failed to prove that HMRC's determination was wrong, and confirm the value of the deceased's 50% share in the subject premises at £175,000 as at 21 February 2003.
22. The matter having been determined without a hearing under rule 27, I make no award as to costs, and this decision is therefore final.

DATED 22 June 2006

(Signed)

P R Francis FRICS