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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> HM Revenue & Customs v Bower (Executors of the Estate of) & Ors  EWHC 3105 (Ch) (05 November 2008)
Cite as:  BTC 8106,  STI 188,  STC 510, 79 TC 544,  EWHC 3105 (Ch),  WTLR 619
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London WC2A 2LL
B e f o r e :
|COMMISSIONERS FOR HER MAJESTY'S|
|REVENUE AND CUSTOMS||Claimant|
|THE EXECUTORS OF THE ESTATE OF|
|MARJORIE EDNA BOWER & OTHERS||Defendants|
PO Box 1336, Kingston-Upon-Thames KT1 1QT
Tel No: 020 8974 7300 Fax No: 020 8974 7301
Email Address: Tape@merrillcorp.com
(Official Shorthand Writers to the Court)
MR R BRETTON QC appeared on behalf of the Defendants.
Crown Copyright ©
MR JUSTICE LEWISON:
"Except as otherwise provided by this Act, 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, but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time."
"The only express guidance which s 38 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. The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale. The question is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date (see IRC v Crossman  AC 26). Furthermore, the hypothesis must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market (see Duke of Buccleuch v IRC  1 AC 506 at 525). To this extent, but only to this extent, the express terms of the statute may introduce an element of artificiality into the hypothesis."
I pause there to note that in relation to IRC v Crossman what Hoffman LJ says is that the property must be assumed to have been capable of sale, i.e. there is no legal restriction which prevents its sale. He does not say that it must be assumed to have had a particular value. Hoffman LJ goes on:
"In all other respects, the theme which runs through the authorities is that we assume 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 enquiries 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 will usually play no part in the calculation. The enquiry 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."
"The statute assumes a sale. That means that however improbable it is that there would ever be a sale of the property in the real world, for example because of restrictions attached to the property, nevertheless the sale must be treated as capable of being completed, the purchaser then holding the property subject to the same restrictions (see IRC v Crossman  AC 26). It also means that the vendor, if he is offered the best price reasonably obtainable in the market, cannot be assumed to say that he will not sell because the price is too low as inadequately reflecting some feature of the property nor can the purchaser be assumed to say that he will not buy because the price is too high. Because the market is the open market, the whole world is to be assumed to be free to bid. But the valuer will inquire into what sort of person will be in the market for the property in question and what price the possible purchaser would be likely to pay."
"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."
"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."
"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."
In paragraph 37 he described his figure as being "little more than uninformed, but hopefully realistic, guesswork". Thus, the Special Commissioner himself acknowledged that there had been no evidence before him about how a price payable by a speculator might be calculated. Nevertheless, he went on to produce what he described as "my calculation and valuation". The Special Commissioner's method of calculation and valuation is not one that had been put forward by anyone and not put by him to any of the witnesses or parties for comment. This in itself was a breach of the rules of natural justice. But more important for present purposes is that it was not based on the evidence before the Special Commissioner. It flowed from the Special Commissioner's erroneous conclusion that he was required or entitled to populate the real market in which the hypothetical sale took place with hypothetical speculators who did not share the characteristics of real buyers.