[2010] UKFTT 474 (TC)

TC00736

Appeal number TC/2009/14361

INHERITANCE TAX – Related property provisions – what is the proper construction of the words “the appropriate portion of the value of the aggregate of that and any related property” in section 161(1) IHTA? – Appellant contending that the concept of the aggregate of two properties cannot connote their transformation into a different description of property – HMRC contending that the aggregation required the deceased’s undivided half share in a property to be taken together with her spouse’s identical undivided half share, with the result that the freehold of the property with vacant possession was the subject of the required valuation – section 161(3) IHTA which provides the meaning of “the appropriate portion” also construed – held following IRC v Gray that ‘the value of the aggregate’ was to be taken to be the price which the two items of property would fetch in the open market if offered for sale at the same time – held further that no deduction from the value was to be made on account of the notional costs of selling or the liabilities charged on the property- HMRC’s Determination upheld in principle – further valuation points to be referred to the Upper Tribunal pursuant to section 222(4A) IHTA if not agreed

FIRST-TIER TRIBUNAL
TAX CHAMBER
	A. LEOLIN PRICE CBE QC	Appellant
          (Executor and Trustee of 
     the Estate of the late Hon. Mrs. Rosalind Helen Penrose Price CBE)
	
	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Inheritance Tax)	Respondents

				TRIBUNAL: 	JOHN WALTERS QC
						ALEX MCLOUGHLIN
												
Sitting in public in London on 13 July 2010

The Appellant appeared in person 
Colin Ryder, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Mr. A. Leolin Price CBE QC (“the Appellant”), who is the Executor and Trustee of the Estate of his late wife, the Hon. Mrs. Rosalind Helen Penrose Price CBE (“Mrs. Price), appeals against a Determination made under section 221 Inheritance Tax Act (“IHTA”) on 21 July 2009 in relation to the property known as 32 Hampstead Grove, London NW3 6SR (“the Property”).  The Determination was  as follows:
 “In relation to –
(a)	The deemed transfer of value on the death on 8 June 1999 of [Mrs. Price];
(b)	The interest as tenant in common of [Mrs. Price] in the freehold of [the Property]
(c)	The ownership of the remaining interest in the Property by [Mrs. Price’s] spouse [the Appellant].
That –
1   having regard to the provisions of sections 160 and 161 [IHTA] the value of the aggregate of [Mrs. Price’s] interest and [the Appellant’s] interest is equivalent to the value of the entire freehold of the Property with vacant possession; and
2  the value of [Mrs. Price’s] interest in the Property is the appropriate portion, ascertained in accordance with section 161(3), of that value.”
2.	The appeal thus concerns the way in which the value of Mrs. Price’s share of the Property is to be ascertained for the purposes of calculating inheritance tax on her death. 
3.	A Statement of Agreed Facts was before us, and also a Statement of Evidence to be given by and for the Appellant.  Mr. Ryder agreed that this Statement of Evidence could be taken as part of the Agreed Statement of Facts. 
4.	The Agreed Facts were as follows:
1.	Mrs. Price died on 8 June 1999.
2.	Mrs. Price was survived by her husband (the Appellant) and their 4 adult children (“the Children”).
3.	The Appellant is the sole executor appointed by Mrs. Price’s Will and Probate of her Will was granted to him on 27 November 2003.
4.	Immediately before her death the freehold estate in the Property was held by the Appellant and Mrs. Price as trustees, and after her death by the Appellant as sole trustee, without any trust for sale.
5.	Immediately before her death Mrs. Price, as tenant in common, was absolutely entitled to an equal undivided beneficial half share of the Property.  Upon her death that equal undivided half share as tenant in common became part of her free estate and her Will gave it to the Children equally.
6.	The Appellant, as tenant in common, at all relevant times before and after Mrs. Price’s death, has been absolutely entitled to the other equal undivided half share of the Property.
7.	Immediately before her death, Mrs. Price, as tenant in common of her undivided half share, did not have, and her estate and the Children as donees of that half share did not acquire, any beneficial interest in or over the Appellant’s beneficial half share of the Property nor any right to terminate the rights conferred on the owner or owners from time to time of the Appellant’s beneficial half share, nor any right to require the freehold estate to be sold.
8.	The price which the freehold of the Property might reasonably have been expected to fetch if it had been sold with vacant possession in the open market immediately before Mrs. Price’s death on 8 June 1999, would have been £1,500,000.  (This was supported by a valuation by FPD Savills dated 25 August 1999, with our papers.)
9.	What could have been sold by Mrs. Price immediately before her death on 8 June 1999 was her absolute interest as tenant in common in her equal undivided beneficial half-share of the Property.  There is no agreement between the parties about the price which a sale of that absolute interest at that time could reasonably have been expected to fetch in the open market [but see paragraphs 5 and 6 below]. 
10.	Immediately before Mrs. Price’s death on 8 June 1999, the freehold estate in the Property was subject to a Charge in favour of National Westminster Bank as security for a debt of £364,164.08.
11.	For any inheritance tax chargeable in respect of Mrs. Price’s death on 8 June 1999, the NIL RATE band was and is £231,000.00
12.	The total amount of the gifts in clauses 3 to 7 of the Will (falling within the Nil Rate Band of charge) is £27,500.00.
13.	Clause 8 of Mrs. Price’s Will as varied by the Deed of Variation dated 30 August 1999 gave to the Children her undivided half-share of the Property –
“... burdened and charged with one equal half share of all or any indebtedness charged on the [Property] at the date of my death and also burdened and in favour of my residuary estate charged with payment of the sum of £260,000”.
14.	One equal half share of the indebtedness so charged is £182,082.04.
15.	The residuary estate, with the benefit of the charges in Clause 8 of the Will as varied, is given to the Appellant.  What is given to him is free from inheritance tax chargeable in respect of Mrs. Price’s death.
5.	By way of qualification to what is said at Agreed Fact (9) above, we note that in HMRC’s Statement of Case with our papers, it is stated as follows:
“There is no dispute between the Appellant and [HMRC] about the value of {Mrs. Price’s] interest in the Property or other associated values.  The entirety of the Property is agreed at £1,500,000; and Mrs. Price’s and [the Appellant’s] half shares of the Property, valued independently of each other, are agreed at £637,500 each.  The appeal is therefore not one that is appropriate to the Lands Tribunal (the Upper Tribunal (Lands Chamber)).  The issue in dispute concerns how the inheritance tax legislation is to be applied to those values to arrive at a figure on which inheritance tax is to be levied.”
6.	However, in argument, while we were told that the figures of £1,500,00 and £675,000 were agreed, this was said to be subject to agreement on the way that the value of the freehold is affected by the charged debt.  Further, the Appellant argued that the open market value of his and Mrs. Price’s half shares of the Property, valued independently of each other, would be less than £637,500, because vacant possession was not available (due to the existence of the other half share of the Property) and furthermore, a deduction had to be made in calculating the value to recognise the charged indebtedness. 
7.	The Statement of Evidence referred to in paragraph 2 above is as follows:
“The freehold estate in [the Property] was until her death on 8 June 1999 held by me and my wife.  Sale of the freehold had not at any time been considered, contemplated, proposed or discussed by us or by either of us.  [The Property] was our matrimonial home.  My wife never suggested selling it.  If she had (and she never did) I would certainly not have agreed to the sale.  If I had suggested sale (and I never did) I am equally sure that my wife would not have agreed.  The reality for us both was that the question of a possible sale never arose; and luckily there was no financial need to consider selling.  We did not at any time discuss selling it.  Moving to a smaller London house or a flat was never suggested or considered.  In discussions about our wills, it was assumed that the survivor would want to go on living there; but the half-share of the first-to-die would be given by Will to our children, so that those children could go on using the house, or deal with or dispose of that half-share as they might think fit; but the survivor would, of course, be able to continue using the house in right of her or his undivided half-share.”
8.	 These facts being agreed (and found by us), the dispute between the parties is (or includes) one of interpretation of the relevant legislation and its application to the agreed facts.  The relevant legislation is sections 160 and 161, IHTA.  (Section numbers given below should be taken to refer to IHTA unless otherwise indicated.) These sections (so far as relevant to this appeal) provided as follows:
“160 Market value
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 the 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.
161 Related property
(1)	Where the value of any property comprised in a person’s estate would be less that the appropriate portion of the value of the aggregate of that and any related property, it shall be the appropriate proportion of the value of that aggregate.
(2)	For the purpose of this section, property is related to the property comprised in a person’s estate if-
(a)	It is comprised in the estate of his spouse; ... 

(3)	The appropriate portion of the value of the aggregate mentioned in subsection (1) above is such portion thereof as would be attributable to the value of the first-mentioned property if the value of that aggregate were equal to the sums of the value of that and any related property, the value of each property being determined as if it did not form part of that aggregate.
...”
9.	Subject to what is said in paragraph 10 below, the parties agree that on the facts the Appellant’s absolute interest as tenant in common in his equal undivided beneficial half-share of the Property is “related to the property comprised in the estate of [Mrs. Price]”, for the purposes of section 161(2)(a), which, of course, included her absolute interest as tenant in common in her equal undivided beneficial half-share of the Property.
10.	The qualification to this proposition is raised by the Appellant who submits that the wording of section 161(2)(a) is wide enough to include all the property in the estate of the Appellant, and not just the Appellant’s interest in his half-share of the Property.  He does not deny, however, that the words of section 161(2)(a) cover the Appellant’s interest in his half-share of the Property and his main argument effectively accepts that the focus of the statutory words is on ‘the only relevant property in the [Appellant’s] estate ... which has some obvious or close “relationship” with [Mrs. Price’s] half share’ – see: paragraph 35 (and paragraph 14) of his extensive Grounds of Appeal, with our papers.
11.	 The dispute at the heart of the appeal is as to the construction of the words “the value of the aggregate of that and any related property” where they appear in section 161(1).
12.	The Appellant’s case is that “the value of the aggregate of that and any related property” means the sum of the values of Mrs. Prices’s and the Appellant’s interests valued independently of each other.  In this connection, he notes that neither of the two interests conferred on its owner any right to require the freehold of the Property to be offered for sale in the market.
13.	Mr. Ryder, for HMRC, submits that “the value of the aggregate of that and any related property” means the value of the totality of Mrs. Price’s and the Appellant’s interests treated as a single item of property, viz: the freehold of the Property.
The Appellant’s case in detail
14.	The Appellant’s main point is that the statutory expression “the value of the aggregate of that and any related property” does not imply any direction to value property other than the value of the property actually comprised in the deceased’s estate and (on the facts of this case) related property comprised in the estate of the deceased’s spouse.  No ‘notional conversion’ or ‘transformation’ of the property to be valued is required by the statutory words.  He contends that HMRC’s case requires the expression on its proper interpretation to direct a transformation of the two interests into ‘a very different form of property (the freehold)’ (paragraph 22 of the Appellant’s Grounds of Appeal).
15.	The Appellant draws a contrast in this regard with the position where the property is shares, stock, debentures and units of any other description of property.  Property so described is dealt with by a special rule in section 161(4) as follows:
“(4) For the purposes of subsection (3) above the proportion which the value of a smaller number of shares of any class bears to the value of a greater number shall be taken to be that which the smaller number bears to the greater; and similarly with stock, debentures and units of any other description of property.”
16.	He submits that to treat undivided shares in a house or other real property as “units of any other description of property” would be to ignore the long established character of undivided shares of real property before and after the changes made by the Trustees of Land and Appointment of Trustees Act 1996.  That long established character (formerly as a distinct freehold estate recognised by the common law, and today as an equally distinct equivalent equitable interest in land) excludes them, in his submission, from being “units” within section 161(4).  He contrasted the position of real property held in a unit trust, where it may be that the units would fall within section 161(4), but this would be by reason of the character and rights conferred by the units, which are created by the trust.
17.	This point was, in his submission, supported by the fact that the Special Commissioner in Arkwright v IRC [2004] STC (SCD) 89 had rejected the Inland Revenue’s argument that beneficial shares as tenant in common of land were ‘units of any other description of property’ (ibid. [35] to [45]) and, on appeal to the High Court ([2004] STC 1323 at [9]), the Inland Revenue had accepted that section 161(4) had no such application and that the conclusions of the Special Commissioner in [35] to [45] of her preliminary decision were correct.
18.	The Appellant further submitted that nothing in the Arkwright decision, whether at Special Commissioner or at High Court level has any binding force against his submissions in the present case, because ‘the effect of the related property provisions of section 161 were agreed between the parties (save for the Inland Revenue’s criticisms in relation to section 161(4)’ (2004] STC 1323 at [20]).   
19.	He draws attention to the use of the word “aggregate” in section 161(1) and points out that the same word is used in section 5(1), which provides as follows:
“(1) For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property.”
20.	In that context, the Appellant submits, the word “aggregate” (a noun as it is in section 161(1)) ‘does not have any unusual, complicated or sophisticated meaning and ... is equivalent to “total”, without importing any concept of merger or amalgamation or combination’ –  paragraph 9 of his Grounds of Appeal.
21.	He refers to the principle of statutory interpretation that a word or phrase has the same meaning throughout a statute unless the contrary is shown, citing Bennion of Statutory Interpretation, 5th edition, section 373. 
22.	The Appellant also draws attention to the expression “appropriate portion” in section 161(1) and section 161(3), which is not, and does not have the same meaning as, “appropriate proportion”.
23.	He contends that once it is accepted that section 161(4) has no application in a case such as the present, there is difficulty in interpreting ‘appropriate portion’ as that expression is used in section 161(3).  There is no criterion or measure provided by the statute to assess what ‘portion’ of the value of the aggregate of any property comprised in a person’s estate and any related property is to be regarded as ‘appropriate’.  He noted that HMRC in a Manual passage, reference IHTM0739, has adopted an interpretation of the related property provisions which treated ‘portion’ as if it were ‘proportion’.  He submits that what is an ‘appropriate portion’ is not equivalent to ‘such portion as in the opinion of the Tribunal [or, perhaps, an authorised officer of the Revenue] is appropriate’.
24.	The Appellant submits that the Determination, even if otherwise correct, is wrong in that it does not give any allowance in arriving at the value of the ‘aggregate’ of the undivided shares, for the notional cost and expense of selling .
25.	 He also submits that whatever value is attributed to Mrs. Price’s half share, that value must make allowance for the burdens on the disposition of it to the Children by Clause 8 of Mrs. Price’s Will as varied by the Deed of Variation dated 30 August 1999, namely one equal half share of the indebtedness charged on the Property at the date of  Mrs. Price’s death  (£182,082.04) together with the sum of £260,000 charged in favour of Mrs. Price’s residuary estate, which was  given to the Appellant and is free from inheritance tax chargeable in respect of Mrs. Price’s death.
26.	The Appellant refers to section 162(4), which provides as follows:
“(4) A liability which is an incumbrance on any property shall, so far as possible, be taken to reduce the value of that property.”
27.	He submits that the debt in favour of National Westminster Bank of £364,164.08, which was charged on the Property at the time of Mrs. Price’s death falls to be taken into account ‘whether or not under section 162(4)’ to reduce the notional sale value of the freehold, always assuming, contrary to his main submission, that that is the correct approach under section 161(1).
28.	The Appellant submits that Mrs. Price’s undivided half share in the Property, taking into account its character and incidents in accordance with the Trusts of Land and Appointment of New Trustees Act 1996 requires a discount of at least 15% from an arithmetical half of the freehold value (should that be the correct approach, contrary to the Appellant’s main submission).  This is in accordance with what he says is HMRC’s normal practice (as stated in the Valuation Office Agency Inheritance tax manual Chapter 1B, Practice Note 2, paragraph 9.5) and also with the valuation evidence from FPD Savills, referred to above.
HMRC’s case in detail
29.	Mr. Ryder referred us to section 222(4) and submitted that any valuation issues ought to be transferred by the Tribunal to the Upper Tribunal (Lands Chamber).
30.	He also referred us to paragraphs [8], [12] and [21] of Gloster J’s decision in Arkwright and submitted in reliance on that decision that while we have jurisdiction to deal with the Appellant’s appeal against the two conclusions in the Notice of Determination (see paragraph [1] above), we must refer any question as to the value of Mrs. Price’s interest for inheritance tax purposes, about which there is room for debate and as to which there is a requirement for evidence, to the Upper Tribunal (Lands Chamber).  We note that Mr. Ryder’s submission in this regard is at variance with what was stated at paragraph 5 of  HMRC’s Statement of Case dated 11 January 2010, which was that in the light of agreement between the parties as to values the appeal was not one that is appropriate to the Upper Tribunal (Lands Chamber).
31.	On the key question of the interpretation of the expression ‘the value of the aggregate of that and any related property’, where those words appear in section 161(1), HMRC’s submissions are that the correct interpretation is clear from the words used in the statute.
32.	HMRC submit that the steps to be taken to apply section 161 are as follows:
1.	Ascertain “the value of any property comprised in a person’s estate”;
2.	Ascertain “the value of the aggregate of that and any related property”;
3.	Ascertain the ‘appropriate portion’ of the value ascertained at (2).  This is achieved by reference to section 161(3) and is the proportion the value which the property comprised in the estate bears to the sums of the values of that and any related property, each of them valued independently of the other; and
4.	Compare the values ascertained at (1) and (3) above, and if the value of the former is less than the value of the latter, the value to be used for calculating the inheritance tax is the latter value.
33.	HMRC submit that ‘the value of the aggregate of that and any related property’ at step (2) above is ascertained by aggregating the property and valuing the aggregated property as a single item.  In the instant case, the aggregate of Mrs. Price’s beneficial half share with the Appellant’s beneficial half share is the same as the whole of the freehold interest subsisting in the Property. 
34.	They further contend that since the values of Mrs. Price’s and the Appellant’s interests, valued independently of each other, were identical, the appropriate portion is one half of the value of the entire freehold.  They say that the result of that calculation is £750,000 (subject to deduction of a share of the mortgage debt).
35.	 Criticising the Appellant’s approach, HMRC submit that the words used in section 161(1) – ‘the appropriate portion of the value of the aggregate of that and any related property’ – clearly indicate that the property is to be aggregated before valuation.
36.	They go on to say that the words used in section 161(3) – the meaning of ‘the appropriate portion’ – “merely modify the meaning of ‘aggregate’ by treating the value of the aggregate [for the purposes of providing a meaning for ‘the appropriate portion’] as if it were equal to the sums of the value of the property and related property valued independently of each other” (citation from HMRC’s Statement of Case, paragraph 13(ii)).
37.	HMRC further submitted in their Statement of Case (paragraph 13(iii)), that the Appellant’s interpretation would deprive section 161 of application in most if not all cases, because the value of the property and the appropriate portion of the value of the aggregate would (on that interpretation) be the same.
38.	  In argument, Mr. Ryder accepted that the Appellant’s argument does not deprive the provisions of any purpose, but he submitted that HMRC’s proposed interpretation covers all eventualities (including the present case).  
39.	HMRC, noting that they had tried and failed to establish in Arkwright that section 161(4) applied to the valuation of jointly owned land, referred me to the Special Commissioner’s conclusion, at paragraph [46] of her Decision, describing it as a ‘succinct summary of the provision ... consistent with their interpretation”.  The conclusion was as follows:
“One has to return to s.161(3) and to value the aggregate; to value each share separately and establish a ration; to apply that ratio to the aggregate; and, if the value of the deceased’s share of the aggregate is greater than the value of his separate share, the value of his share is taken to be his part of the aggregate.”
40.	Mr. Ryder submitted that section 161 derives from the Finance Act 1975, which introduced capital transfer tax, as an accompaniment to the provision of a generally unlimited exemption for gifts to the spouse, which was brought in for the first time.  He said that the extension of the spouse exemption carried the risk that there would be attempts to shelter value from the incidence of tax, by arranging for such value to adhere to gifts to the spouse.  This was the context in which the related property provisions were introduced – to tax ‘the appropriate portion’ of the greater open market value achieved when two spouses’ interests are valued together (as compared to the smaller value achieved if they were valued separately).
41.	He submitted that the exercise of valuing the two spouses’ interests together is the ascertainment of the ‘best price’ which a hypothetical purchaser would pay on a sale of both interests, offered for sale together at the same time.  In such a case, the hypothetical purchaser would in practice be acquiring a property which he could sell on with vacant possession.  
42.	Mr. Ryder referred us to IRC v Gray (surviving executor of Lady Fox deceased) [1994] STC 360 for support for his proposition that section 161(1) can require a valuation of two properties taken together.  He commented that section 161(1) required a valuation of the aggregate of properties, not an aggregation of the values of properties. 
43.	He submitted that the final words of section 161(3) – “the value of each property being determined as if it did not form part of that aggregate” – was strongly supportive of HMRC’s case that the primary valuation required by section 161(1) was a valuation of the property comprised in the deceased’s estate and any related property as a single aggregated unit.
44.	Mr. Ryder referred me to a recent decision of the Lands Tribunal (P.R. Francis, FRICS) in Brenda Constance Tapp v HMRC in which he had himself been involved on HMRC’s behalf.  In that decision, the Tribunal refused to allow a deduction from the valuation under section 160 in respect of estate agents’ fees and conveyancing fees on the hypothetical sale.  The Tribunal refused the deduction on the basis that the ‘price’ mentioned in section 160 was “both by convention, and in accordance with the principles detailed in the RICS Appraisal and Valuation Manual (the Red Book) ... the price that a purchaser would pay; it is the figure that would appear in the Land Registry records, and does not make any allowance for deductions, compulsory or otherwise”.  The Tribunal further stated that its decision was supported by Duke of Buccleuch v IRC [1967] 1 AC 506, where Lord Reid stated, in relation to the estate duty equivalent of section 160 IHTA that:
“the [1894] Finance Act permits no deduction from the price fetched of the expenses involved in the sale”.
45.	 He cited A-G v Jameson (1) [1905] 2 IR 218 for the proposition that the price envisaged by the statute was the price which a purchaser would pay for the right “to stand in [the deceased’s] shoes”:
“The price was what the shares were worth to [the deceased] at his death – in other words, it was what a man of means would be willing to pay for the transmigration into himself of the property which passed from [the deceased] when he died” (ibid.  at p.230)
46.	 In relation to the Appellant’s submission that even on the view that the valuation of Mrs. Price’s undivided half share in the Property is based on an arithmetical half of the freehold value, a discount of at least 15%  should be given to reflect the nature of her interest (referred to at the hearing as the “Nellie Wighton discount”), Mr. Ryder submitted that such a discount is appropriate when the interest being valued is an undivided share in property, but not where, as here on his submission, the valuation is of a freehold, the result of aggregating two undivided shares in property.
47.	In relation to the Appellant’s submission that a reduction should be made to reflect the one equal half share of the indebtedness charged on the Property at the date of Mrs. Price’s death (£182,082.04) together with the sum of £260,000 charged in favour of Mrs. Price’s residuary estate, which was  given to the Appellant and is free from inheritance tax chargeable in respect of Mrs. Price’s death, Mr. Ryder cited sections 5(3) and (5), as follows:
“(3) In determining the value of a person’s estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act.
(5) Except in the case of a liability imposed by law, a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money’s worth.”
48. Mr. Ryder submitted that the scheme of IHTA was that property is valued and then liabilities are taken into account as a separate step.  When a liability was an incumbrance on any property, it was, so far as possible, to be taken to reduce the value of that property (section 162(4)).  He submitted that the Appellant’s approach involved double counting (in terms of deduction in the inheritance tax computation) for liabilities (which was denied by the Appellant).
Discussion and Decision
49.	We note that the legislation in relation to appeals against determinations, which was force at the time the appeal was made (31 July 2009) was relevantly as follows:
Section 222: Appeals against determinations
(1)	A person on whom a notice [if determination] under section 221 above has been served may, within thirty days of the service, appeal against any determination specified in it by notice in writing given to the Board and specifying the grounds of appeal.
(2)	Sections 223D, 223G and 223H provide for notification of the appeal to the tribunal.
(3)	...
(4)	An appeal on any question as to the value of land in the United Kingdom may be notified to the appropriate tribunal.
(4ZA) The appeal may be notified under subsection ... (4) only if it could be notified to the tribunal under section 223D, 223G or 223H.
(4A) If and so far as the question in dispute on any appeal under this section which has been notified to the tribunal ... is a question as to the value of land in the United Kingdom, the question shall be determined on a reference to the appropriate tribunal.
(4B) In this section “the appropriate tribunal” means-
(a)	Where the land is in England or Wales, the Upper Tribunal.
Section 223H: Notifying appeal to tribunal after review offered but not accepted
(1) This section applies if-
(a)	HMRC have offered to review the matter in question (see section 223C), and
(b)	The appellant has not accepted the offer.
(2) The appellant may notify the appeal to the tribunal within the acceptance period.
(3) But if the acceptance period has ended, the appellant may notify the appeal to the tribunal only if the tribunal gives permission.
(4) If the appellant notifies the appeal to the tribunal, the tribunal is to determine the matter in question.
(5) ...
(6) In this section “acceptance period” has the same meaning as in section 223C.
Section 223C: HMRC offer review
(8) In this section “acceptance period” means the period of 30 days beginning with the date of the document by which HMRC notify the appellant of the offer to review the matter in question.”
50.	Mr. Ryder wrote to the Appellant on 24 August 2009 thanking him for his notice of appeal, which he had sent to HMRC on 31 July 2009.  Mr. Ryder informed the Appellant that the arrangements for having matters considered by the tribunals had recently changed and that it now fell to an appellant to ask the Tribunal Service to arrange for the appeal to be heard by the appropriate tribunal.  He added:
“The new arrangements include the facility for an appellant to ask HMRC to conduct a review of its decision (in this case the Notice of Determination).  The detailed legislation can be found in sections 223A to 223I of the [IHTA].”
51.	On 21 September 2009, the Appellant sent the Tribunal’s “Notice of Appeal” form to the Tribunal Service, noting that he had already sent a Notice of Appeal to HMRC on 31 July 2009.
52.	We construe Mr. Ryder’s letter of 24 August 2009 and the Appellant’s subsequent submission on 21 September 2009 of a Notice of Appeal to the Tribunal as an offer by HMRC to review the matter and the non-acceptance by the Appellant of that offer within the ‘acceptance period’, ie. within 30 days of the offer. This series of events gives the Tribunal jurisdiction to determine the matter pursuant to section 223H(4).  
53.	However we are also mindful of the Tribunal’s obligation to refer to the Upper Tribunal pursuant to section 222(4A) any question as to the value of the Property which requires to be decided so that the Tribunal can determine the matter in question in the appeal.
54.	Turning to the substantive dispute, the central issue is whether the Appellant is right in his submission that the expression “the value of the aggregate of [any property comprised in a person’s estate] and any related property [ie. property comprised in the estate of his spouse]”, where it appears in section 161(1), connotes a valuation of the total of the two properties each taken separately as a unit, or whether the valuation should be of a different item of property formed by the aggregation of the two properties mentioned, and involving their “notional conversion” or “transformation”.
55.	The Appellant’s argument is based on the meaning of ‘aggregate’ which is simply the ‘bringing together’ or ‘total’ as, he says, the word is used in section 5(1).  He also refers in support of his argument to the terms of section 161(4), which, he says, provides for the method of valuation for which HMRC argue, but only in the case of the valuation of shares, stock, debentures and units of any other description of property, which language does not include interests in land such as those in the present case.  He further supports his argument by reference to the statutory words “appropriate portion of” introducing the crucial phrase in section 161(1), asking rhetorically, how, if the valuation is of a species of property which does not in fact exist in the circumstances and section 161(4) does not apply, any portion of the resultant value can be determined to be ‘appropriate’.
56.	 HMRC’s argument in reply was that the words in section 161(1) naturally bear the meaning that the value which is required is the value of both properties taken together either forming a new property for valuation purposes or not, as the circumstances indicate.  This approach was supported by the Special Commissioner’s comment at [46] of her decision in Arkwright (which recapitulated what she had said in [38], see paragraph 39 above.
57.	 The Appellant is correct in observing that in Arkwright the parties agreed that this was the effect of section 161(1) – see [39] of the Special Commissioner’s Decision. 
58.	We do not rely on the Special Commissioner’s analysis in Arkwright, but examine further the context of section 161(1) in the scheme of IHTA.  The related property provisions in section 161 are supplementary to section 160, which is the provision establishing that the open market value of property is the norm for valuation for inheritance tax purposes.
59.	Section 161 is effectively a special case exception to the norm established by section 160, but in the light of section 160, section 161 must be construed by reference to the concept of ‘the price which the property might reasonably be expected to fetch if sold in the open market’ (section 160).
60.	There is, therefore, a notional sale implicit in the hypothesis established by the related property provisions.  
61.	IRC v Gray was not concerned with the related property provisions, but with how the valuation exercise predicated by section 38 Finance Act 1975 (now section 160 IHTA) was to be applied when the deceased herself held two assets (a freehold of an estate subject to a tenancy to a farming partnership, and her 92.5% interest in the partnership which held the tenancy). 
62.	It thus approached essentially the same problem which the Appellant’s submissions address.  When there are two properties to be valued at the same time, are they to be taken together, but individually, or as amalgamated for the purposes of valuation (if amalgamation would produce a different value)?
63.	Hoffmann LJ (as he then was) said:
“Section 38 [now section 160 IHTA] requires one to consider what a particular item of property would have fetched if sold on the open market.  The Buccleuch principle may require one to suppose that it was sold alone, split into parts or together with something else.  But [Counsel for the executor] says the process must be one of valuation, not the attribution of part of the value of something else.  In this case he says that the notice of determination did not value any actual item of property.  It proceeded by a ‘notional lotting’ of the freehold interest with an item of property which had never had a separate existence, namely Lady Fox’s interest in the partnership’s tenancy to the exclusion of her interest in the other partnership assets, and then attributed part of the value of this imaginary asset to the freehold. {Counsel for the executor] says that this exercise is far removed from the practical and common sense conduct of the hypothetical seller postulated by Lord Wilberforce in Buccleuch.  The tribunal agreed.  It said that ‘if it was permissible to lot the freehold interest and the share in the partnership together as being a single unit of property, then s.38 [s.160] requires that that single unit be valued as a single unit and that apportionment is neither permissible not appropriate’.
I do not think this fairly reflects what the notice of determination was doing.  The only assumption it makes about how the hypothetical sale would have been conducted is that the freehold and Lady Fox’s entire interest in the partnership would have been sold together.  I shall return in due course to whether such an assumption could be justified under the Buccleuch principle [he held that it could be], but there is no doubt that it involves the aggregation of two assets which each had a real existence at the relevant date.  Since the two assets are supposed to have been sold together because this would realise a greater price than selling them separately, the value of each asset must necessarily be an apportioned part of the price which would have been realised for both.  ...
In my judgment, therefore, the exercise performed by the notice was in accordance with s.38 [s.160].” (ibid. pp. 375-376)
64.	The Court of Appeal thus decided (Waite and Neill LJJ agreed with Hoffmann LJ) that it was right to value two assets held in the same estate on the basis that they would achieve a greater price if offered together for sale in the open market than if they were offered separately, even though that would, of necessity, require an apportionment of the price fetched by the aggregate of the assets in ascertaining the price paid for each.
65.	We consider that this reasoning applies equally to the question of what is the valuation called for by the related property provisions in section 161.  
66.	Where section 161 applies, the two items of property which are to be valued (on the facts of this case comprised in the estate of Mrs. Price and the estate of the Appellant respectively) are to be valued on the basis that they are offered for sale together and at the same time.  If a greater price would be achieved ‘in real life’ on such a sale, as compared to the price which would be achieved if the items had been offered for sale individually, and such a sale would not have required undue effort or expense (which was not suggested by the Appellant), then that greater price must be attributed to the two items by application of the formula contained in section 161(3) (compare IRC v Gray at p.378f/g).
67.	Although we accept that the Appellant’s approach would not deprive section 161 of all application, we consider that the purpose of the provision is wider than the Appellant would accept and that it is there, as Mr. Ryder submitted, to counter attempts to shelter value from the incidence of inheritance tax, by arranging for such value to adhere to gifts to a spouse, or to property already owned by a spouse. Consideration of this wider purpose adds support for the interpretation of section 161 which we have adopted.
68.	We do not consider that the distinction drawn by the Appellant between the ‘appropriate portion’ and the ‘appropriate proportion’ advances the matter.  What is required to be identified, using the formula set out in section 161(3), is the ‘appropriate portion’, or part, of the value of the aggregate of the property comprised in the deceased’s estate and the related property, estimated on what those properties would fetch if offered together on the open market, which is ‘appropriate’ or, we would say, fair and reasonable, to be attributed to the property comprised in the deceased’s estate,
69.	We hold that the valuation required ought not to make any allowance for the notional costs and expenses of selling in the hypothetical sale. The statutory language ‘the price which the property might reasonably be expected to fetch’ does not permit such notional costs or expenses to be taken into account.  Nor do we discern any purpose pursuant to which they might be taken into account.  The legislature seems, unsurprisingly to us, not have thought it appropriate to reduce the tax base for expenses which have not in fact been incurred.
70.	Likewise, we hold that the valuation required (in terms of the price notionally fetched) ought not to make any allowance for debts or other liabilities charged on the property being valued. There is nothing which suggests to us that in the statutory hypothetical sale of property which is so charged, the notional purchaser is expected himself to discharge the debts or other liabilities.  On the contrary, we consider that the natural assumption would be that the vendor would discharge such debts or other liabilities out of the price fetched in the sale.
71.	Debts and other liabilities are relieved for inheritance tax purposes by separate provision, namely section 5, and, in the case of liabilities which are an incumbrance on any property, they are, so far as possible to taken to reduce the value of the property pursuant to section 162(4).
72.	For these reasons we uphold the Determination in principle.
73.	The remaining points in dispute are, we consider, strictly speaking, questions ‘as to the value of land in the United Kingdom’ which must be determined on a reference to the Upper Tribunal (Lands Chamber) pursuant to section 222(4A).
74.	Those points are:
I.	Whether the valuation which we have held to be called for, namely, a valuation of Mrs. Price’s interest in the Property and the Appellant’s interest in the Property on the basis that both were offered for sale at the same time, is ‘equivalent to the value of the entire freehold of the Property with vacant possession’ as the determination states;
II.	What is the appropriate portion of that valuation which it is fair and reasonable to attribute to Mrs. Price’s interest in the property;
III.	Whether 15% or any other (and, if so, what) deduction should be made in valuing Mrs. Price’s share in the Property.
75.	We hope that the parties will be able to agree these valuation points in the light of this Decision and without the need for a reference to the Upper Tribunal.  Nevertheless, for completeness, and in case such agreement is impossible, we will direct a reference to the Upper Tribunal (see: the Directions accompanying this Decision).
 Right to apply for permission to appeal
76. This document contains full findings of fact and reasons for my decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Rules.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

                             JOHN WALTERS QC

JUDGE OF THE FIRST-TIER TRIBUNAL
RELEASE DATE: 7 October 2010