SVM113050 - The Statutory Open Market: Case Law - Nature of transaction and available information

The sale is a hypothetical transaction. It is assumed that the relevant property is sold on the relevant day, and the question to be determined is the price at which it would have sold (Duke of Buccleuch v IRC [1967] 1 AC 506 at 543 per Lord Guest).

Holt [1953] 32 ATC 402

Danckwerts J said:

“I must enter into a dim world peopled by the indeterminate spirits of fictitious or unborn sales. It is necessary to assume the prophetic vision of a prospective purchaser at the moment of the death of the deceased, and firmly to reject the wisdom which might be provided by the knowledge of subsequent events.”

In the same case, he also said:

“I have to imagine the price which the property would fetch if sold in the open market. This does not mean that a sale by auction (which would be improbable in the case of shares in a company) is to be assumed, but simply that a market is to be assumed from which no buyer is excluded: see Inland Revenue Comrs v Clay, Inland Revenue Comrs v Buchanan, per Swinfen Eady LJ ([1914] 3 KB 475). At the same time, the court must assume a prudent buyer who would make full inquiries and have access to accounts and other information which would be likely to be available to him: see Findlay’s Trustees v Inland Revenue”.

Findlay’s Trustees v Inland Revenue

Lord Fleming said:

“the purchaser is a person of reasonable prudence, who has informed himself with regard to all the relevant facts such as the history of the business, its present position, its future prospects and the general conditions of the industry; and also that he has access to the accounts of the business for a number of years”.

Prudence suggests a wide degree of investigation and considerable degree of caution on the part of the buyer.

IRC v Gray [1994] STC 360

Lord Hoffman said:

“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 [1937] 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 [1967] 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.

In all other respects, the theme which runs through the authorities is that one assumes 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 inquiries 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 inquiry will often focus on 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.

It is often said that the hypothetical vendor and purchaser must be assumed to have been ‘willing’, but I doubt whether this adds anything to the assumption that they must have behaved as one would reasonably expect of prudent parties who had in fact agreed a sale on the relevant date. It certainly does not mean that having calculated the price which the property might reasonably have been expected to fetch in the way I have described, one then asks whether the hypothetical parties would have been pleased or disappointed with the result; for example, by reference to what the property might have been worth at a different time or in different circumstances. Such considerations are irrelevant.”

Walton v Commissioners of Inland Revenue [1996] STC 68

This case emphasised again that the statutory open market price should have regard to the actual circumstances prevailing at the date of valuation. Gibson LJ referred to the Gray case above in which it was confirmed that the willing buyer:

“reflects reality in that he embodies whatever was actually the demand for that property at that time…….the open market does not require…..that the landlord should be hypothetical….. the statute requires one to assume a sale but it should be assumed to take place in the real world…….it is not necessary for the operation of the statutory hypothesis of a sale in the open market of an interest in a tenancy that the landlord should be treated as a hypothetical person, and it is a question of fact……whether the attributes of the actual landlord would be taken into account in the market.”

This case is important in that it provides confirmation that while the “sale in the open market” is a hypothetical one it must have regard to the actual circumstances and facts.

Stephen Anthony Solomon Marks v The Commissioners for Her Majesty’s Revenue and Customs [2011] UKFTT 221 (TC)

HMRC’s approach to the valuation of assets for the purposes of capital gains tax is, and always has been, to value those assets exactly as they were at the date of valuation. This approach was confirmed both by the FTT

In the above case the issue was the valuation for CGT of the appellant’s shares in two groups of companies one of which he was the founder. The two groups were run as one company and it made no commercial sense to view the two groups separately. The appellant was the sole shareholder and director of both groups and both were put together for the flotation on the Unlisted Securities Market in October 1983 immediately prior to which one company took over the other on a share for share exchange. However as at 31st March 1982 there were two assets and the FTT concluded:

“…the Appellant held two separate assets on 31st March 1982, which on their deemed disposal on that date are to be valued separately. The cases on death duties under which related assets can be grouped together in order to obtain a better price for both ….in our view have no application to capital gains tax. While death duties are computed on the value of the estate as a whole, for which one has to split the assets into saleable parcels, capital gains tax is computed on the disposal of each asset separately.”

Roger Dyer and Jean Dyer v The Commissioners for HM Revenue and Customs: [2016] UKUT 0381 (TCC)

This case involved a negligible value claim under S24(2) TCGA 1992 on shares in a company run by just one director who was the sole designer generating income for the company. The director had no formal employment or service contract and the articles of association did not bind this individual to the company. Furthermore, there was no written agreement with the company for use of the Intellectual Property, nor any payment by the company for its use. The director emigrated to the US without notice and the company ceased trading a few months afterwards. A negligible value claim was subsequently made on the company’s shares purchased by family members a few months earlier. HMRC did not dispute the taxpayers’ contention that the purchased shares were of negligible value following the director’s departure. Its position was that the shares had no value when they had been acquired.

The decision of the tribunal was that there was no evidence of a legal relationship between the director and the company regarding her services or the use of her IP rights. The tribunal held that in their absence, the hypothetical purchaser would not have proceeded with a purchase of the shares. The tribunal concluded that in these circumstances the shares held by the taxpayers’ were worthless at the time of their acquisition. The decision in this case went in favour of HMRC at the FTT and was upheld at the UTT following a further appeal by the taxpayers.

Spring Capital Ltd v HMRC [2015] UKFTT 66 (TC)

This case has on occasion been cited in support of taking a different approach to the guidance provided by the above decisions. The issue in this case was the valuation of trade/goodwill in a company involved in the purchase & distribution of seafood. The business in essence acted as a “middle man” and was wholly reliant on the know-how, involvement & contacts of the two proprietors (who were brothers). Neither brother had an employment contract (with the business transferred) nor were there any non-competition contracts in place.

The tribunal did in fact rule on a separate point on this case, determining that the claimed transactions did not in fact take place. However, in his closing remarks, Judge Brannan commented that he would have agreed with the parties’ valuation, on the basis that the brothers would have stayed with the business after the sale and so the goodwill should be valued on the basis of the continuing use of the brothers’ know-how, IP and contacts.

HMRC’s views do not concur with Judge Brannan’s remarks in this case which are not only obiter dicta but, as a First Tier Tribunal decision, they are without precedent setting value. HMRC also observe that his remarks rely upon authorities which concerned the correct valuation basis for inheritance tax purposes rather than capital gains tax purposes.

It follows that, for capital gains tax, HMRC will continue to value each asset exactly as it existed at the valuation date and will defend that line before the Tax Tribunals as necessary.

See also SVM114010 et seq for additional guidance on Information Standards.

Additional Guidance: SVM150000