Practice Note 1: appendix C - Lynall v Commissioners of Inland Revenue (1972) AC680

The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.

Appeal Against Principle Value for Estate Duty

The appeal raised points of principle regarding the valuation of shares in a private company and whether unpublished information (accounts for the previous year) were relevant in arriving at the open market value.

By s.7(5) FA 1894: “The principle value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased.”

Following the death on 21May 1962 of Mrs Lynall estate duty became payable on 67,980 ordinary shares in a private company. The shares were a minority holding. The company ‘Linread Ltd’ had a successful profit record, a strong liquid position, a high dividend cover and a very satisfactory cash flow. The value of the shares would have been increased if a public issue was likely. The accounts for the year to 31 July 1962 when drawn up, showed a substantial increase in profits. The accounts for the previous year had been drawn up and audited prior to Mrs Lynall’s death but were not passed until the meeting on 7June 1962. The chairman’s speech was not circulated prior to the meeting and there was no evidence that it was in existence at the date of death.

Private documents of the directors (“category B documents”) were in existence at the date of death, indicating that a flotation of part of the capital was under consideration. One of the directors, however, if questioned at the date of death by a prospective purchaser as to the likelihood of a public issue would have said that it was doubtful and remote. It was common ground that the accounts of 31 July 1961, were to be taken into account.

The Revenue valued the shares under s.7(5) FA 1894 at £4 per share. The executors had appealed, contending that the true value was £2 per share. After discovery of documents (including those referred to as “category B documents”) the Revenue redetermined the value at £5.50 a share.

Expert evidence was given on behalf of the Crown that where substantial blocks of shares in private companies were in the market, it was the invariable practice among boards of directors to answer reasonable questions put by the purchaser or his advisers.

Plowman J held that, in arriving at the open market value under s.7 (5) FA 1894, the court should only have regard to published information and information which the directors would in fact have given in answer to reasonable questions: accordingly, he held that since the directors would not in fact have disclosed the category B documents they were not admissible, and on that basis he assessed the value of the shares at £3.50 a share.

On appeal, the Court of Appeal reversed that decision and held that in the circumstances the category B documents were admissible, and accordingly increased the valuation to £4.50 a share.

The executors appealed to the House of Lords. On the hearing of the appeal, the executors put forward a contention that was not open to them in the courts below viz that Inland Revenue Commissioners v Crossman (1937) AC 26 was wrongly decided and that, by reason of the restriction contained in the company’s articles of association the deemed price of the shares in the hypothetical sale which had to be made under s.7 (5) FA 1894 and, therefore, the principal value as defined in that section, could only be £1 a share.

The House of Lords in allowing the executor’s appeal held:

1. that Crossman’s case was rightly decided in that s.7(5) FA 1894 was merely machinery for estimating value and that, accordingly, the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provisions of the articles of association, including those relating to the alienation and transfer of shares in the company; but

2. that in the circumstances confidential information of the nature contained in the category B documents ought not to be regarded as available to a hypothetical purchaser under s.7(5) FA 1894, and that, accordingly, the value of the shares was to be assessed at £3.50 a share.

The Decision of the Court of Appeal (1970) Ch 138 (1969) was reversed.

Note

The unpublished information in ‘Lynall’ fell into two main categories. First, the accounts for the year to July 1961 which were complete and had been audited at the date of death. Second, what were referred to as the “category B” documents. These included monthly management accounts for the then current year (to July 1962) and documents relating to the possible flotation of the company. It was common ground in the High Court that the 1961 accounts were to be taken into account. In the House of Lords the issue did not really arise, since the contest was between two figures found by the Judge on the footing that the category B documents were or were not to be taken into account. However it is probable that their Lordships would have considered the 1961 accounts admissible if that had been in issue.

Per Lord Donovan. “I concur in the view that confidential information ought not to be regarded as available to a hypothetical purchaser under section 7(5) of the Finance Act 1894: though I would think it right not to treat as confidential information for this purpose accounts of the company already prepared and awaiting presentation to the shareholders. I have in mind the accounts of the present company for the year to July 31 1961”.