Practice note 1: valuation of interests encumbered by tenancy or licence - the nature of the encumbrance - law as at 31 March 1982

The Valuation Office Agency's (VOA) technical manual used to assess Capital Gains and other taxes.

1) The quantum of the valuation of an interest often depends materially upon whether or not, in a hypothetical sale, it could be offered with vacant possession.

2) For Revenue valuations, the material date is often a time when in fact someone was in occupation of the subject property, so the valuer cannot point to the fact of vacancy to prove that VP would have been available.

3) In the vast majority of cases there is no difficulty over the question, there being either an obviously encumbering tenancy or an owner-occupier who could clearly give VP and who does not contest it. These are the black and white cases.

4) However, there are occasions when the contrast is not so sharp and the shading between these extremes needs to be considered.

5) Anyone occupying a property in any way has some named status. The significance lies in the way and ease by which that status can be terminated without purchase, and whether the hypothetical vendor could have been expected to have obtained VP as part of the preparations for sale. One of the first things to remember is that the Revenue valuation hypothesis includes the assumption that all preliminary arrangements have been made for the sale (Duke of Buccleuch v IRC (CA)) and these would include the removal by the hypothetical vendor of any persons who could legitimately be removed without notice and without having to purchase their interest to do so. The preliminary arrangements for sale would not however extend to the extinguishment of a tenancy held by, for example, a company of which the taxpayer was a controlling shareholder (see Henderson (HMIT) v Karmels Executors (1984)).

6) Even where removal without purchase of the encumbering interest cannot be expected, there are shadings of status from the ephemeral through to more than lifelong statutory protection and it will be for the valuer to consider how the hypothetical purchaser, taking the interest subject to such encumbrance, would view the possibility of gaining early VP and how one would discount the VP value for this in making the bid.

7) The purpose of the following notes is first to help a valuer to identify the nature of such an encumbering interest and then to examine its effect as an encumbrance. The first step is to consult the Flowchart. In the boxes are the questions and the paragraph numbers containing the relevant advice. The following notes are not intended to be read as a narrative but to be used only in conjunction with the flowchart. The notes refer to the state and case law as it existed on 31 March 1982 as this is the most common valuation date in CGT cases. For an up to date summary of the law reference should be made to Practice Note 3 in the Inheritance Tax Manual.

8) These notes are not intended to be comprehensive, and it will still be necessary to refer to the relevant Acts. Furthermore it must be appreciated that instances will arise where expert legal advice is necessary; any such difficulties should be referred to CEO DVS HMRC Section if they materially affect valuation.

Flowchart