United Kingdom Special Commissioners of Income Tax Decisions

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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Bower & Anor v Revenue & Customs [2008] UKSPC SPC00665 (07 February 2008)
URL: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00665.html
Cite as: [2008] STI 369, [2008] STC (SCD) 582, [2008] UKSPC SPC00665, [2008] UKSPC SPC665, [2008] WTLR 987

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The Executors of the Estate of Mrs Marjorie Edna Bower (Deceased)Namely: Mr Cyril John Bower and Mr David Nicholas Chesterfield v Revenue & Customs [2008] UKSPC SPC00665 (07 February 2008)

Spc00665

Inheritance Tax - Valuation of the reserved rights to a life annuity in a policy taken out by a 90 year old insured lady - Appeal allowed in part

THE SPECIAL COMMISSIONERS

THE EXECUTORS OF THE ESTATE OF

MRS MARJORIE EDNA BOWER (DECEASED)

NAMELY: MR CYRIL JOHN BOWER AND

MR DAVID NICHOLAS CHESTERFIELD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 18 October 2007

Rex Bretton QC and Setu Kamal, counsel, for the Appellants

David Ewart QC, counsel, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

Introduction

1. This was a valuation appeal in relation to what value should be placed on the reserved rights to a life annuity under a policy or Estate Planning Bond taken out with Axa Isle of Man by Mrs. Bower, a lady of 90 years of age. Mrs. Bower paid the premium of £73,000 herself; the policy was issued to the trustees of a Trust previously declared by her; and her reserved rights under the Trust were simply to a 5% life annuity (equivalent to withdrawals of £304.16 per calendar month). Since Mrs. Bower died approximately 5 months after taking out the policy, in other words well within the period of 3 years of the gift of the balance of the rights under the policy, there was a chargeable transfer for Inheritance Tax purposes of the amount of the gift. It was common ground that the amount of the gift was £73,000 minus the value, determined in accordance with section 160 Inheritance Act 1984, of the reserved rights to the life annuity.
2. The only point in dispute was what value should be attributed to the reserved rights held by Mrs. Bower to the life annuity. The insurance company, Axa Isle of Man, gave a Certificate of Value of those rights of £7,800, accordingly indicating that the value of the gift was £62,500. This valuation was disputed by HMRC who initially contended that the rights had no value and that the amount of the gift was thus £73,000. In their Notice of Determination however the revised figure of £250 was given as the value of the reserved rights so that the gift was treated as £72,750.
3. The Executors of Mrs. Bower's Estate appealed against that valuation and determination. The appeal was not in form a test case but it very much appeared that it was treated as a test case by Axa Isle of Man.
4. It was incumbent on me not only to express my decision in relation to the various principles applied by the parties in arriving at their valuations, but also to value the retained rights. My decision is that the nominal value placed on the retained rights by HMRC was incorrect, and my valuation figure is far closer to that contended for by the Appellants.

The facts in more detail

5. The facts were simple and were not in dispute.
6. The Policy taken out by Mrs. Bower was issued on 19 December 2002, when Mrs. Bower was nearly 91 years of age. The policy was taken out after Axa Isle of Man had considered the report from Mrs. Bower's doctor, and then assessed her state of health, and life expectancy. It was decided that her medical reports justified loading her age, and treating her for life expectancy purposes, as if she was 103, with a life expectancy thus of between two and three years. Mrs. Bower paid the consideration of £73,000 given for the policy, known as an Estate Planning Bond, and the Bond was issued to the trustees of a Settlement. The Bond provided for the life annuity referred to in paragraph 1 above, and following the death of Mrs. Bower it was implicit that the remaining investments allocated to the policy after payment of the annuity would pass to the trustees of the settlement for distribution amongst the other beneficiaries. The settlement in question had been created by Mrs. Bower, and her sole interest under it was to the life annuity referred to above.
7. The terms of the policy provided that were the assets allocated to the policy by Axa Isle of Man at any time exhausted, and thus insufficient to pay the annuity the annuity would cease. Accordingly Axa Isle of Man were not at risk in relation to the policy.
8. It was accepted by HMRC that the 5% annual withdrawals under the policy, these being the sole entitlement of Mrs. Bower under the Trust, would be tax free and would occasion no liability for higher rate tax as "chargeable events" under the Income Tax provisions relating to insurance policies. It was also accepted that as Mrs. Bower's rights were clearly defined, there would be no question of her being treated as having made a gift with reservation of benefit for Inheritance Tax purposes such that the whole gift would be disregarded. It was also accepted that she was not to be treated as having a life interest in the whole of the settlement and treated as owning all the settled property for Inheritance Tax purposes.
9. Finally it was common ground that policies of broadly this nature, sometimes referred to as Discounted Gift Bonds, were taken out for Inheritance Tax purposes. Their purpose was to provide the life assured with an annuity, and to ensure that the gift of the balance of the rights under the policy, whilst treated as a potentially exempt transfer would at least be measured as the amount of the premium paid minus the value, at the time the policy was taken out, of the life assured's right to the life annuity. A Technical Note issued by HMRC on 17 May 2007 had made it clear that HMRC accepted the general validity of these policies, and had also emphasised that the vital points so far as they were concerned were that:-

•    the value of the reserved rights should be properly determined and full consideration given to the life expectancy of the life assured in arriving at that valuation; and that

•    ideally, and to save the need to raise sensitive questions following the death of the life assured, it was preferable for the life expectancy of the life assured to be determined when the policy was taken out, and recorded by the insurance company.

I should mention that the HMRC Technical Note also emphasised, and this indeed was its prime purpose, that in HMRC's view, when a policy was taken out by a person with an actual or adjusted age in excess of 90, the reserved rights under any Trust to a life annuity would be treated as having a nil or only nominal value. This was on the ground that genuine life assurance would not be available for the life of a person in excess of 90 years of age, and as any buyer of the annuity rights under a Discounted Gift Bond would wish to lay off the mortality risk by taking out life assurance in relation to the life of the annuitant, the absence of that cover would make the rights to the annuity effectively worthless.

The evidence

10. Evidence was given on behalf of the Appellants by Clive Roberts in relation to his role and opinion in assessing Mrs. Bower's medical condition; by Gavin Greenwell of Axa Isle of Man in relation to the calculations and procedures followed by Axa Isle of Man in valuing the reserved rights once Mrs. Bower's adjusted age had been set at 103, and by Steward Calder, a senior actuary, in relation to the proper procedures to be followed in valuing either a life annuity or the broad equivalent, namely a life interest in trust property. Expert evidence was also given by David Murray of Deloitte & Touche in relation to the appropriate way in which he considered that a life annuity granted to a person deemed to be 103, with an assumed life expectancy of between two and three years, should be valued.
11. It is unnecessary to record the full terms of the medical report sent to Axa by Mrs. Bower's doctor, but sufficient just to say that the report referred to a number of medical conditions from which she suffered, or in relation to which she had received treatment. Where relevant, summaries were given of the reports from specialists who had treated Mrs. Bower for the various conditions mentioned. None of the reports looked terribly life threatening to me in that the specialists usually concluded the reports with a reasonably reassuring summary. Notwithstanding this impression that I personally (and perhaps ignorantly) derived from the medical reports, and further questions and answers that the Axa team considered, Clive Roberts said that in his view the medical reports justified treating Mrs. Bower for life expectancy purposes as if she was 13 years older than she was, in other words as if she had been 103 and nearly 104 years of age. Axa then determined her life expectancy by ascertaining the average life expectancy of a 104 year old person in accordance with standard mortality tables, which indicated a life expectancy for Mrs. Bower of between 2 and 3 years. The value of the reserved rights to annuity were then calculated by taking the number of monthly policy withdrawals that Mrs. Bower could be assumed to draw, and discounting them to an equivalent present value by applying a 4.5% interest rate. The feature that a buyer of the right to the annuity would probably reduce the price paid for it to fund the buyer's medical and legal expenses of cross-checking the life expectancy of Mrs. Bower and dealing with the formal assignment of the policy rights was ignored, and a Certificate was given that the value of the reserved rights retained by Mrs. Bower was £7,800.
12. Expert evidence was given on behalf of the Respondents by Brian Watson of Foster & Cranfield.
13. I will refer to the various points made by David Murray and Brian Watson in summarising the contentions of the parties and in giving and explaining my decision.

The contentions on behalf of the Appellants

14. It was contended on behalf of the Appellants that:-

•    this was a simple case in which it was necessary to judge the price that the right to Mrs. Bower's annuity would fetch in a transaction between a willing seller and a willing buyer, each acting reasonably and naturally seeking to secure their best interests;

•    the notional transaction in which that price was to be ascertained was a transaction that had to be treated as occurring, and it was irrelevant to contend that the particular present owner of the annuity would not wish to sell it at all so that no sale would take place. A sale had to be assumed and the seller and buyer both had to be treated as "willing".

•    it was accepted that insurance companies would be very unlikely to issue a genuine term life assurance policy in respect of the life of a person with an age in excess of 90 years, and all the more so for a person with a weighted age treated as 103. It accordingly followed that even though purchasers of life interests in settlements generally laid off the mortality risk when buying a life interest by taking out reducing term life insurance cover in respect of the person whose life interest in settled property was purchased, such an approach would not be possible in this case.

•    notwithstanding the inability of a purchaser of the life annuity to lay off the mortality risk by taking out term life assurance on the life of Mrs. Bower and notwithstanding also the fact that there was no actual market and no market experience available for and in relation to the sale and purchase of annuities taken out by people of the age of 103 (or indeed 90), nevertheless one still had to judge what price was most likely to be paid in the transaction that had to be assumed to take place;

•    the criteria to apply in fixing the price in the case where the buyer could not be presumed to be able to purchase other similar annuity rights, so as to "pool" risk, were those given in his report by Mr. Murray, namely to assess a life expectancy for a 103 year old female life from available mortality tables; discount the purchase price and thus the value by a much higher interest rate of 15% p.a. to reflect the greater risk resulting from absence of life cover and absence of pooling, and then deduct presumed purchaser's costs of £500. This approach placed a minimum value of £6,277 on the annuity.

The contentions on behalf of the Respondents

15. It was contended on behalf of the Respondents that:-

•    there was very little actual experience of the secondary purchase of life annuities;

•    there was however considerable experience in relation to the valuation of life interests in settled property, both for the purposes of splitting settlement assets between the life tenant and remaindermen, and in simply valuing life interests with a view to their purchase by third parties;

•    Foster & Cranfield, since their formation in 1883, had been involved with the valuation and indeed purchase of life interests in settlements and it was their expert opinion that the buyer of a life interest would almost invariably wish to lay off the mortality risk by taking out term life insurance on the life of the life tenant. Having laid off the mortality risk the buyer would be likely to calculate the purchase price by deducting the cost of the life assurance, and deducting the fees associated with the purchase, and thereafter if the life interest was itself likely to carry an entitlement to a well-secured right to fixed or floating interest (rather for instance than the dividend return in respect of an unquoted company at the other extreme) the purchase price would be determined by calculating the assumed gross income attributable to the life interest up to the projected date of death covered by the life policy, and discounting it by some reasonably equivalent interest rate. Where interest was bought with capital, a further adjustment would have to be made for the lack of tax relief on the price paid and the feature that the income would be taxable;

•    it was accepted in this case that no adjustment for tax would have to be made because even in the hands of a purchaser it was accepted that the 5% withdrawals under the policy would be tax free;

•    all experience however suggested that it was extremely difficult to obtain term life cover in respect of a person over the age of 80, and virtually impossible to obtain it in respect of a person over the age of 90, let alone for a person at that age in questionable health, treated for life expectancy purposes as if they were 103 years of age;

•    the inability to obtain life cover would mean that no buyer would be prepared to pay anything significant for a life annuity taken out by a person with an age in excess of 90;

•    precedents suggesting that transactions had occurred in relation to life annuities for persons with an age in excess of 90 were irrelevant if they related to vast blocks of business being transferred from one insurance company to another, and were also irrelevant if the business transferred included some annuities for people aged 90 or more, blended with business involving life annuities payable for much younger lives as well;

•    in the present case the requirement was to value just the one purchase for which the purchaser had to assume that the mortality risk could not have been laid off by taking out life insurance, and there was no ground for supposing that the purchaser could spread the mortality risk by buying other annuities in respect of persons of similar, or indeed, any other ages;

•    any buyer would be cautious about accepting the medical judgment given by Axa Isle of Man, since Axa Isle of Man was commercially indifferent to when the life assured might die and indeed had an incentive (in the interests of saving Inheritance Tax for its clients) to exaggerate the life expectancy of the life assured and thus the value of the life interest;

•    a buyer would also observe that life expectancy tables became much less accurate as age increased and that the figures of life expectancy for 90 year olds were based on a mix of sparse information and extrapolation of figures for other age groups;

•    any buyer would reduce the price paid, having regard to the possible desire to incur the cost of further medical opinions and the legal costs of ensuring that the assignor owned the right to the life annuity, and that the annuity was validly assigned, such legal costs alone asserted to be in the order of £1000 using non-City lawyers, and £2000 using City lawyers; and

•    in the light of the inability to lay off the mortality risk and the costs to be taken into account, only a nominal price would be paid for the life annuity, £250 being a realistic figure.

My decision

16. A curious feature of this case was that whilst the contended valuations ranged from £250 to £7,800, in other words from a negligible figure, to a figure roughly based on discounting the annuity that would be payable up until Mrs. Bower's indicated likely date of death, there was no dispute about the facts and little dispute either as to the legal principles to be applied. Both parties quoted me the passage of Hoffman LJ's judgment in IRC v. Gray [1994] STC 360 at pages 371-372 and the passage from Peter Gibson LJ's judgment in Walton v. IRC [1996] STC68 at pages 85-86. Since I think that these passages both record the fairly well-known legal principles to be applied in determining "the price which property might reasonably be expected to fetch if sold in the open market", and since I believe that there was no real dispute between the parties in relation to the steps in, and the principles to be applied in, determining the open market value of an asset at a particular time, I will simply proceed to give my decision on a step-by-step basis.
17. I accept firstly that we must presume that the property is sold. The fact that a 90 year old who had just taken out a life annuity, whilst divesting herself of other property (manifestly so that the annuity receipts would fund her living expenses) would never sell the annuity or else would be such an unwilling seller that she would only sell at a very high price, are both irrelevant. I must postulate a notional seller who knows that the annuity will lapse on the death of Mrs. Bower, but otherwise I think that the notional willing seller is simply trying to sell the annuity for the maximum price obtainable. One could postulate the sale of the annuity by someone who had already purchased it as an investor, or speculator, but this is unnecessary. The notional seller is simply someone willing to sell at the best price reasonably obtainable.
18. The next obvious proposition is that the property to be valued is Mrs. Bower's life annuity. It is not a massive block of business being sold by one insurance company to another, either with pooled mortality risk or with a great spread of ages of annuitants. The property to be sold is simply one right to annuity that will lapse on the death of the actual person, Mrs. Bower. Considerable reference was made by David Murray in his Witness Statement to examples of blocks of business being sold, and to the readiness of buyers to include annuities payable to 90 year olds in such transactions, but save for the possibility that those examples might point to factors that would be equally applicable to the facts of this one simple case, those examples and precedents seem to me to be of no relevance. As it is, I have not found precedents that involve blocks of business or pooling of risk to be of any relevance or assistance. I accept that for his part, Mr. Bretton placed little or no reliance on such precedents.
19. In searching around for candidate buyers of the annuity, I think that I must next pay regard to the realities of the situation. I must thus proceed on the basis that no buyer would be able to lay off the mortality risk by taking out term life assurance. I assume that the cheapest and ideal form of life assurance would be a policy that would progressively reduce its cover as annuity payments were received, and it would terminate on the date by which the purchaser would have recovered his costs (purchase price, life assurance premium cost and all fees). Doubtless those characteristics would best suit the purchaser's requirements, but I entirely accept the evidence on behalf of the Respondents that if a buyer had wished to lay off the mortality risk with such a policy, he would have been unable to find a company that would write that policy or indeed any remotely equivalent policy.
20. I note that a buyer might wish to pool the mortality risk that he was forced to bear and he would observe that he might do this by buying other annuities, payable to people with broadly similar ages to Mrs. Bower. The reality of the situation however is that just as Mrs. Bower's annuity is only to be treated as being for sale in order to respect the statutory notion of there being a sale between a willing seller and willing buyer, whereas in actual fact she would not have considered selling it, it seems to me to follow that any buyer would have no realistic expectation of being able to buy even one other annuity. The prospect of the buyer being able to reduce risk by pooling risk in this suggested way is accordingly zero. Even thus if the statutory notion enabled me to take into account other transactions that the buyer might undertake, and I am not sure that it necessarily would, there would be no practical chance at all of any buyer buying other annuities from other 90 year olds.
21. I conclude at this point that the notional sale that I must consider will have to be one involving the sale and purchase of the one life annuity that will terminate on the death of Mrs. Bower; that both parties accepted that even in the hands of the buyer the annuity receipts would remain tax free; that the buyer would be unable to lay off or mitigate the mortality risk either by insurance or by pooling this assumed purchase with others. There are other factors that I should take into account however.
22. First I accept the argument on behalf of HMRC that buyers might be cautious of adopting the life expectancy conclusions adopted by Axa Isle of Man. I consider that Axa Isle of Man approached the valuation with a view to providing a reliable valuation of the annuity for Inheritance Tax purposes, but it is nevertheless the case that Axa Isle of Man would have been in no different position had it indicated a likelihood that Mrs. Bower would die after one week or only when achieving the age of 120. Furthermore its commercial exposure would have been largely unaffected by whichever of those two scenarios might have come to pass, save that in the one case it would doubtless have earned more profit from having managed the investments for a longer period of time.
23. Whilst the buyer might have been sceptical as to whether Axa Isle of Man's judgment of Mrs. Bower's life expectancy was as cautious as it might have been had they been genuinely on risk as an insurer, I cannot say that the medical judgment on the part of the company and its experts was dubious. A very substantial loading was placed on Mrs. Bower's assumed life expectancy and I have already said that, as an ignorant observer, none of the conclusions on the various medical conditions by the specialists who had treated Mrs. Bower struck me as being too worrying. Accordingly I place little weight on this factor.
24. A buyer might well also have observed that life expectancy tables were very unreliable for people in the age group over 90. Whilst this would increase risk, improvements in general health, care and medical treatment would also mean that as against statistics complied some time ago, life expectancy had generally increased.
25. I also accept the argument on behalf of HMRC, which was implicitly accepted by the Appellants, namely that any buyer would reduce the purchase price to be given for the annuity in order to provide for the expenses of purchase. Whether those would include the cost of any further medical opinions or whether they would just include legal expenses is obviously debateable, and might be affected by the price that I eventually consider to be realistic.
26. Whilst all of these considerations have some bearing on the valuation, it is still fair to summarise that the crucial factor in this case is the experience of Foster & Cranfield to the effect that in valuing life interests in settled property, purchasers almost invariably wish to lay off the mortality risk by taking out genuine term life assurance, and that, I accept and the Appellants accepted, will not be possible in the present case. The key question thus is whether that means that there would be no potential buyers of the relevant annuity for any figure in excess of the nominal figure that HMRC has suggested, namely £250.
27. In answering this question, I must first decide whether in any way the notion of a sale "in the open market" somehow contemplates that the sale must take place in some sort of conventional market manner, so that if sales of life interests almost always involve investors who insist on laying off the mortality risk, and thereafter make a few interest rate and discounting calculations, do I have to postulate how such investors, with those preconceptions, would approach the different proposition in the present case, without considering other possible purchasers. The answer to this, it seems to me, is that the notion of the sale being in the open market involves no such connotation. Sales of shares in private companies invariably assume a buyer just looking at the circumstances of the particular company, and not being in any particular category of buyers. It thus seems realistic in this case to say that the buyer need not necessarily be of the risk-averse category who would lay off the mortality risk, and then run fairly conventional discounting calculations, but might more appropriately be a speculator. The question then for me is whether I consider that speculators would have been tempted to buy the annuity in this case for more than £250.
28. That question seems relatively simple to me because if I must judge whether speculators might have paid more than £250 for the annuity in this case, the first person who I believe would have been a willing purchaser at the increased price of say £300 is myself, someone who has virtually never placed a bet on anything in his life, and someone who is fairly risk-averse. However, offered the possibility of buying this life annuity for £300, anyone would have made the simple calculations that had Mrs. Bower lived for one month until January 20, one would have made a profit of £4.16, and that were she to live for the projected 30 months, one would make a profit of £8,820. The resultant risk/reward ratio would seem to have been extraordinarily attractive. Many would take the view, with only £300 at risk, that there was no real need to worry about further medical advice, and I would have been perfectly comfortable to write out an assignment and ask Mrs. Bower to sign it in the presence of a witness without bothering, with only £300 at risk, to seek legal advice. I would then have given Axa Isle of Man notice of the assignment and hoped that she would survive for a long time. As it was of course, she died when only four annuity payments would have been received, so that I would have been unfortunate to recover my outlay and only make a profit of slightly more than 300%.
29. This case only relates to the annuity taken out by a lady in somewhat poor health such that she was deemed, for life expectancy purposes, to be 103, rather than 90. According to the Technical Note on Discounted Gift Schemes, issued by HMRC on 1 May 2007 referred to in paragraph 9 above, it seems that HMRC's case would have been broadly the same had Mrs. Bower been in good health or average health for a person of her age, such that her age was left at 90 for life expectancy purposes. HMRC would still have been suggesting that only a nominal value should be placed on the right to the annuity when her life expectancy (I believe on that assumption, of 4½ years) would have suggested that the assignee might expect to receive 54 monthly payments, producing in total £16,424.64.
30. The examples in the two previous paragraphs are only meant to indicate that it seems to me to be inconceivable that speculators would have refused to buy Mrs. Bower's annuity at a low price. In further support of that I observe that many people are prepared to risk very significant amounts of money on bets of the most extraordinary nature. I note that a purchaser of the annuity in the present case would have lacked the supposed excitement of placing bets in some other circumstances, and I also accept that Ladbrokes and others that offer the facility to bet on some of the most extraordinary future possibilities will hardly run a book in betting on the value of Mrs. Bower's life annuity. However I still consider it inconceivable that a willing seller of the annuity would have been unable to find a willing buyer ready to pay a reasonably sensible price for the annuity. I now need to consider at what price I consider it reasonable to suppose that a willing speculator would have been prepared to buy and a willing seller prepared to sell.
31. In my view Mr. Murray came closest to providing the most realistic figure when he ignored the possibility of the purchaser reducing risk by buying other annuities instead and simply concentrated on the riskier example of buying this one annuity. I find the mathematical complications of discounting each presumed annuity receipt for life expectancy risk, and discounting by the very high interest rate of 15% still however to be somewhat unrealistic. I consider that a person risking his capital, and hoping to close out the speculation within a two- to three- year period would worry less about the implicit interest rate and would just wish to calculate the discount in the purchase price as a simple reduction to reflect all the various risks. The price could thus be driven down because of the unreliability of the medical evidence, the sparse information about life expectancies, the manifest lottery of betting on the life of a 90 year old lady in somewhat poor health, and the feature that the presumed buyer might expect little competition. Certainly the buyer could assume that risk-averse buyers would be excluded from the market.
32. After re-summarising his calculation that indicated a value of Mrs. Bower's life annuity of £6,277 (referred to in the final bullet point of paragraph 14 above) Mr. Murray referred, almost in a "throw-away" line, to the possibility that the right figure might conceivably be half-way between HMRC's £250, and the figure that he was suggesting. There was no discussion about this suggestion, but at least this remark indicated the reality of a negotiation between two figures, and was not, like HMRC's approach, based on the assertion that an annuity, which might realistically be expected (on average life expectancy) to produce over £16,000 (see paragraph 28 above) was virtually worthless merely because the normal limited band of purchasers of life interests in settlements would find the purchase realities in this case inconsistent with their particular approach to valuation and risk.
33. I have two observations on Mr. Murray's "half way between the two" remark, and I accept of course that it was only made as an observation to make a point about negotiation. Firstly it would not be right to take the high risk into account twice. In other words, Mr. Murray's valuation of £6,277 has already been driven down by risk from the ceiling value of £7,800, and it would seem to be double counting to take a figure that has already sought to reflect high risk, and then to "halve the difference". Secondly, the notion of halving the difference does not seem right to me anyway. If the figure of £7,800 had been calculated to show the maximum return that the buyer might secure if Mrs. Bower lived longer than expected, then halving the difference between the real ceiling figure and HMRC's fairly derisory figure might sound fair. But the figure of £7,800 is not the maximum possible return but is a figure that already reflected a 13-year loading to age in calculating life expectancy, and the use of genuine (even if unreliable) life expectancy figures, followed by reasonable discounting for time. By contrast, as I have sought to demonstrate in paragraphs 27 and 28, HMRC's figure is the one that seems to me to be "at or beyond the extreme". Moreover it is based not so much on trying to judge what would be paid in a transaction between a willing buyer and seller, but simply on the proposition that the normal purchasers would find the purchase inconsistent with their normal business method, and therefore the annuity purchased by a 90 year old would suddenly become worthless, even in a postulated sale between willing seller and willing buyer.
34. There was absolutely no debate in the hearing as to how a price to be paid by a speculator might be calculated, and in other cases I can well imagine that the parties might contend that the calculation that I am about to give could be improved.
35. My calculation, and valuation, is to reduce the ceiling calculation of £7,800 by one-third and then to reduce the resultant figure by £1000 to reflect likely expenses. That gives me a purchase price of £4,200.
36. I justify the one-third reduction on the following basis. The period between purchase and hoped for pay back seems to me to be too short to deal with the risks by just adjusting the interest rate. I accept that discounting for 2 ½ years at some interest rate could equally produce a figure of £5,200, but I still consider that the speculator would just seek to reduce the price paid by an amount to reflect the mortality risk, the inaccuracy of life expectancy tables, the possible lack of competing purchasers, the possible doubts about medical opinions, and the discounting for time. I think that a reduction of one third is reasonable, and I consider that halving the difference between a figure of £7,800 and a figure that I do consider to be wrong on any test (and almost capable of being ridiculed in the way that I suggested in paragraph 28 above) would be excessive. The figure that I have deducted for legal expenses is one given in the expert evidence produced for HMRC, and I thus accept it. I consider that Mr. Murray's £500 was unrealistically low.
37. Whilst I believe that the way in which I have approached this decision has been correct, I repeat that I regard the decision about actual valuation from paragraph 34 to 36 to be little more than uninformed, but hopefully realistic, guesswork, and even if both parties were to accept the remainder of this decision, I do not suggest that the calculation that I have made should be treated as indicative of valuation in other cases. Much would depend on the facts and figures of course, and my approach of simply reducing the price by a one-third deduction from a ceiling figure might be much less tempting with a longer life expectancy.

HOWARD M NOWLAN

SPECIAL COMMISSIONER

RELEASED: 7 February 2008

SC 3070/2007