ANNE L PISSARIDOU (HM Revenue and Customs – Capital Taxes) (Formerly Inland Revenue – Capital Taxes) v MRS ENID MERIOL AMELIA ROSSER (Personal representative of Phillips, deceased) TMA/40/2005

UPPER TRIBUNAL

LANDS CHAMBER

TMA/40/2005

Case No TMA/40/2005

Between

ANNE L PISSARIDOU (HM Revenue and Customs – Capital Taxes) (Formerly Inland Revenue – Capital Taxes)Applicant

MRS ENID MERIOL AMELIA ROSSER (Personal representative of Phillips, deceased)Respondent

Before

P R Francis FRICS

P R Twiddy for Applicant

Assistant Director for Applicant

HM Revenue for Applicant

Customs – Capital Taxes for Applicant

A J Rosser for Respondent

Venue Cardiff County Court, 2 Park Street, Cardiff, CF1 1ET

Date 1 September 2005

Hearing 19 August 2005

Property: Buildings and land, Cwm Farm, Cwm Lane,, Rogerstone, Newport, South Wales, NP10 9GQ

Catchwords: TAX – Inheritance Tax – valuation of barn, outbuildings and land in agricultural use – prospect of planning permission for residential use – valuation – held agreed value if planning consent had been obtained reduced by one-third to reflect time trouble and risk – freehold value determined at £80,000 – Inheritance Tax Act 1984 s222(4)

[1]This is a reference to determine the open market value of the freehold interest in a barn, outbuildings and land at Cwm Farm, Cwm Lane, Rogerstone, Newport, South Wales (“the subject property”) pursuant to an application dated 17 March 2005 made under s222(4) of the Inheritance Tax Act 1984 (“the 1984 Act) by Ms A M Pissaridou, HM Customs and Revenue – Capital Taxes, Nottingham. The application followed a Notice of Determination under s221 of the 1984 Act dated 20 September 2004 in relation to the deemed disposal of the subject property, for inheritance tax purposes, on the death of Mr Olive Amelia Phillips (“the deceased”) on 6 June 2001. The open market value was assessed at £80,000, this being disputed by Mrs Enid M A Rosser (“the respondent taxpayer”). Mrs Rosser contends that the property had no additional value to the agricultural value, which is agreed at £40,000. The reference was heard under the Simplified Procedure (Rule 28, Lands Tribunal Rules 1996).

[2]Mr P R Twiddy, assistant director, HMRC – Capital Taxes, appeared for the applicant and called Mr Martyn J Williams FRICS, District Valuer, Wales. Mr Alan J Rosser (husband of the respondent taxpayer) appeared on her behalf with the permission of the Tribunal. Facts

[3]The parties produced a brief statement of agreed facts from which, together with the evidence and my inspection of the subject property and one of Mr Williams’ comparables on 18 August 2005, I find the following facts.

[4]The deceased and her late husband lived and farmed at Cwm Farm, an agricultural holding comprising farmhouse, barn, outbuildings and approximately 41 acres of land from 1932 having initially been tenants of the Tredegar Estate, subsequently purchasing the freehold in 1958 following the estate’s dissolution. In July 1989, they transferred 39 acres of the land to Mrs Rosser (Mrs Phillips’ daughter) and her husband who proceeded to farm it in conjunction with their own property, Trychywmad Farm, near Pontypool. The farmhouse and grounds together with barn, a small group of outbuildings and approximately 2 acres of land were retained by Mr and Mrs Phillips although the buildings were used by the respondent and her husband in connection with their farming activities.

[5]Mr Phillips died in April 2001, followed shortly thereafter by Mrs Phillips who died on 6 June 2001, that date being the valuation date for the purposes of this determination. Mrs Rosser is the sole beneficiary to Mrs Phillips’ estate. Following accord between the respondent taxpayer and the District Valuer as to the most appropriate lotting for inheritance tax calculation purposes, the value of the farmhouse and grounds has been agreed. It is the remainder of the estate that is the subject of this reference. It comprises a traditionally constructed (stone with corrugated asbestos sheet covered roof) period barn (circa 1730) with, at each end, adjoining buildings of similar construction. One is a tractor shed with loft above and the other a hay store/fattening shed for stock, again with loft over. These buildings lie on the south side of the entrance drive, which also serves Cwm Farmhouse, and on the north side 2 is another set of stone and brick buildings under pan-tiled roofs used as storage and a workshop. To the rear of the main barn and its adjacent buildings, and with access to it, is a paddock of about 2 acres.

[6]Special Commissioner Michael Tyldesley in Rosser v Inland Revenue Commissioners [2003] IRC STC (SCD) 311 determined whether or not the barn, outbuildings and the two acres of land were eligible for agricultural relief pursuant to s116 of the 1984 Act where the question of eligibility of the farmhouse and grounds was also in issue. His decision said (at para 61):

“61. The decision on the issue for determination on this appeal is that: ‘In relation to the deemed disposal for the purposes of inheritance tax on the death on 6 June 2001 of Mrs Amelia Olive Phillips (the Deceased) That the Deceased’s house at Cwm Farm, Cwm Lane, Rogerstone, Gwent was not having regard to the provisions of s115(2) of the Inheritance Tax Act 1984 eligible for agricultural relief under s116 of the 1984 Act. That the Deceased’s barn at Cwm Farm, Cwm Lane, Rogerstone, Gwent was having regard to the provisions of ss115(2) and 117 Inheritance Tax Act 1984 eligible for agricultural relief under s116 of the 1984 Act”

There was no dispute as to the 2 acres, where it was agreed that they were also eligible for relief. Statutory Provisions

[7]Under the provisions of the 1984 Act Capital Transfer Tax [renamed Inheritance Tax in 1986] is charged on a transfer of value equal to the value of a persons estate. The relevant sections in the instant case are:

[3]Transfers of value (1) Subject to the following provisions of this Part of the Act, a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.

[4]Transfers on death (1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death.

[5]Meaning of estate (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. 3

[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 at 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. Issue

[8]The sole issue for my consideration in determining the value of the subject property as at the date of death is whether or not there was a realistic likelihood of planning permission being obtained for the conversion of the barn to a single residential unit. Applicant’s case

[9]Mr Twiddy outlined the relevant tax regime, and stressed that, under s160, the basis of valuation is what would have been paid for the subject property, in the open market, by a willing purchaser from a willing seller - see Lynall v Inland Revenue Commissioners

(1972) AC 680

. In that judgment Morris LJ had made a succinct statement of the approach to a hypothetical open market. He said, referring to and accepting the decision in Inland Revenue Commissioners v Crossman

[1937] AC 26

, at 696 G-H:

“…it was for the learned judge on the appeal from the commissioners to decide what price the shares would have fetched if sold in the open market at the time of the death of the deceased. In his careful judgment the learned judge summarised the evidence, which he had heard. It became common ground that the price to be decided upon was that which would have been paid by (a) by a hypothetical willing purchaser (b) to a hypothetical willing vendor (c) in the open market (d) on May 21 1962 [the date of death].”

[10]Whether or not the respondent taxpayer had any intention of actually selling the barn is, Mr Twiddy said, irrelevant to the consideration of its value at the date of death. There is no requirement for the property to be actually sold. The applicant’s case is that whilst it is accepted that no planning permission for conversion to residential use had either been sought or obtained, the open market value would reflect the hope that such consent would, if applied for, be forthcoming. This principal, he said, had been demonstrated in the case of Prosser v Commissioners of Inland Revenue (2000, unreported: Lands Tribunal ref DET/1/2000) where it was held that there was a 50% chance of planning permission being obtained for the construction of an additional dwelling in part of the garden of a house.

[11]Mr Twiddy said that following the Special Commissioner’s decision, it was common ground that the barn was agricultural property at the date of Mrs Phillips’ death, and the value on that basis had been agreed at £40,000. The dispute is over the question of whether or not 4 there is any difference between the agricultural value, upon which no tax is payable, and the open market value, tax being payable at 40% on the difference.

[12]Mr Williams is a chartered surveyor, and is has been employed since July 2001 as District Valuer for the whole of Wales. He has over 30 years experience in the Valuation Office and considerable knowledge of valuations for Inheritance Tax purposes. He is also familiar with the property market in the locality having been based at the Newport valuation office for a number of years, and also living in the area.

[13]He said he had inspected the subject property in the company of Mr John Jenkins FRICS FAAV of Newland Rennie Wilkins, Chartered Surveyors, the estate’s former surveyors, in May 2002. Following an exchange of information and some discussions, Mr Williams said he wrote to Mr Jenkins on 13 June 2002 confirming the values that they had discussed – namely the open market value of the subject property at £80,000 and the open market value of the former farmhouse and grounds at £200,000. Mr Jenkins had responded on 18 June 2002 confirming his clients’ agreement to those figures, and accordingly the agreed values were reported to the Capital Taxes Office. Mr Williams said he was told on 4 June 2003 of the Special Commissioner’s decision determining that whilst the former farmhouse was not agricultural property within the meaning of s115(2) of the 1984 Act, the barn and 2 acres was. Discussions were therefore re-opened with Mr Jenkins on the basis that whilst the market value of the subject property had been agreed, the agricultural value had not. Agreement was eventually reached at a figure of £38,000 as evidenced by Mr Jenkins' letter of 2 January 2004. However, on 20 January 2004, Mr Jenkins wrote to Mr Williams enclosing a copy of a letter he had received from Mr Rosser indicating that whilst he would be prepared to agree a figure of £40,000 as both the agricultural and market value, following legal advice he withdrew the previous agreement at £80,000 on the premise that this was a functioning agricultural holding, the buildings were not redundant and development was not an issue.

[14]Mr Williams said that the discussions he had initially had with Mr Jenkins were on the basis that they agreed there was a prospect of planning permission being obtained, and that the value eventually agreed reflected the time trouble and risk in the exercise of applying for and obtaining planning permission. It was his view, on the strength of his investigations and the available comparable evidence, that if planning permission for conversion of the barn to a single residential dwelling had been obtained prior to the property being offered to the market, its value at the relevant date would have been £120,000. The figure of £80,000 reflected a deduction of 331/3% for risk. The investigations to which Mr Williams referred included a visit in late May or early June 2002 to the planning office and the oral enquiries that he had made. He said he had been told (although accepted this had not been confirmed in writing) that there would be no objection, in principle, to the conversion of the barn provided the policy in the Newport Unitary Development Plan 1996 on “Conversions in the Countryside” was complied with.

[15]In his view, there was nothing in those requirements that could not be met. The property was located in a fringe urban area with much of the adjacent and nearby land given over to the keeping of horses. Indeed, Cwm Lane, to which the property and the 2 acres of land have a frontage, forms the boundary to residential development in Rogerstone. There was also a large block of land near to remainder of the respondent’s Cwm Farm landholding that had been 5 converted into a golf course. The nearest historic farm buildings at the former Yn-ys-fro Farm had already been converted into residential use as long ago as 1987. That farm was, he said, even further into the urban fringe and the planning permission, a copy of which he produced, had no unusual or onerous conditions. It was proof that the council was in the habit of granting permissions for conversion of former agricultural buildings in accordance with their adopted policies. In summary, Mr Williams said that in the scenario that was under consideration in respect of this valuation, the hypothetical vendor would certainly consider ways in which he could maximise value before putting the property on the market, and any hypothetical purchaser would have to pay a price, if planning permission had not firstly been obtained, that reflected the hope value of achieving it.

[16]In response to a question from me, Mr Williams accepted that the planning permission for Yn-ys-fro Farm was obtained before the adoption of the UDP, but the point was that there was a policy for granting such permissions and, as he had said, there was nothing in the UDP policies that were in force at the valuation date that would prevent the subject property from complying. Mr Rosser said that when he made his own enquiries to the planning office, they said they had no recollection of Mr Williams’s call (or any contact from Mr Jenkins) and that it was their normal policy to confirm their responses to such enquiries in writing. Mr Williams replied to the effect that he most certainly had contacted the planning office, but had not sought a written response as, at the time, the matter was not thought to be contentious. Respondent taxpayer’s case

[17]Mr Rosser accepted, in connection with his former agents negotiations, that he had not contested the valuation of £80,000 as he did not, at the time, think he would be liable for tax. He had thought that the whole of the value would attract agricultural relief, and it was only following the Special Commissioner’s determination that he came to realise the implications of the difference between agricultural and open market values. As a result, he said he made his own enquiries of Newport City Council, visiting a Mr Guy Watkins and Mr Emyr Davies who were planning assistants. They were, he said, quite adamant that an application for planning consent for conversion to residential use would not be looked upon favourably. Indeed Mr Davies had confirmed this opinion in writing on 18 November 2004. In that letter, Mr Davies said that the barn is situated in open countryside, within a Site of Special Scientific Interest. It is also used as part of a farm and, in his opinion, any proposal to convert it into residential use at the current time would be against Policy H8 of the Unitary Development Plan (Second Proposed Changes). Access to the site, he said, is also very poor and any intensification of its use could only worsen the situation, again contrary to policy H8. Mr Rosser said that it had subsequently been acknowledged that the statement regarding the SSSI was incorrect, the property in fact lying in a Special Landscape Area in accordance with UDP policies SP5 and 6.

[18]There was, Mr Rosser said, no prospect of obtaining planning permission. For the barn to be considered, it had to be obsolete – outdated, derelict or in excess of the needs of the surrounding farmland. It had been maintained in first class condition and was still fully in use in connection the land. There was no mains drainage, and the access onto Cwm Lane, where there were regularly serious accidents, was very poor. Any development would be in the worst interests of farming, a rural and agricultural ambience being required if farming is to succeed. Also, the barn provided a wildlife habitat, particularly for owls and swallows. 6

[19]Mr Rosser referred to Mr Twiddy’s response to his wife’s letter of 25 September 2004 asking if it was the Revenue’s practice to assess all barns as if they possessed development value. Mr Twiddy had confirmed in his letter of 1 October 2004 that the question of whether there might be potential for development was always considered, but in many instances there was no such additional value. However, he said that he had been advised in this case that there was a real prospect of the barn being converted. Mr Rosser said that it was obvious that the District Valuer, who advised the tax office, had failed to carry out adequate research as to the conditions, which must be satisfied before planning consent for change of use would be forthcoming.

[20]In respect of the statement in Mr Davies’s letter of 18 November 2004, Mr Twiddy pointed out to Mr Rosser that at the date of death, the barn was not part of the farm, but for the Revenue’s purposes in carrying out a valuation for tax purposes it was, along with its two acres of land, an independent agricultural unit. Conclusions

[21]As to what the District Valuer is required to assume under the provisions of s160 of the 1984 Act, Mr Twiddy provided a quotation to the respondent in his letter of 1 October 2004 that, I think, sums up the situation even more clearly than was set out in Lynall. In Inland Revenue Commissioners v Gray

[1994] STC 60

Hoffman LJ (now Lord Hoffman) said, at 372:

“…in all other respects the theme that 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 open market value 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”

. Mr Twiddy said that, in short, this provides the authority for the Revenue’s valuer to consider whether a property would have a higher value if used for a different purpose than its current use.

[22]I am satisfied that Mr Williams took the right approach to his valuation, and that in the prevailing circumstances during his discussions with Mr Jenkins, the respondent’s former valuer, an oral enquiry of the planning office was quite sufficient. He, as a locally based valuer, would have been conversant with the policies in the UDP and in my judgment, from the evidence I have heard, he was right to conclude that the subject property could comply with the 7 requirements of policy H8 “Conversions in the Countryside”. The policy as applicable in June 2001, stated: Conversions in the Countryside H8 Beyond the defined settlement boundaries, proposals for the conversion or rehabilitation of buildings to residential use will require a full planning application and will be permitted if they meet the following criteria: i) The buildings should have architectural or historic merit and the proposal should not involve the re-use or adaptation of a modern agricultural building or other modern non-residential building; ii) A detailed structural survey has been carried out and shows the building to be structurally sound and capable of conversion without adversely affecting the structure or requiring the substantial reconstruction of the external walls or significant extensions to the building; iii) Any alterations should not have an adverse effect in terms of the integrity of the external structure, including external cladding, external openings, skyline, silhouette, roof planes and the immediate landscape of the building; iv) Internal spatial character should be respected; v) The proposed use is not detrimental to the character or appearance of the surrounding area or group value of adjoining buildings and does not require the provision of unsightly infrastructure; vi) The proposed use should not generate traffic of a magnitude or type that might cause additional traffic hazards; vii) There is strict control over the curtilage and setting of the buildings in terms of amenity space, vehicular access and parking; viii) Archaeological interests should be safeguarded according to the policies of this plan; ix) The interests of protected wildlife species inhabiting the structure are safeguarded; x) The proposed use should not conflict with agricultural interests in the area.

[23]The “Second Proposed Changes” to policy H8 as referred to by Mr Rosser did not come into being until May 2003, and it is therefore those set out above that are applicable in this case. In any event, Mr Twiddy said that the proposed changes made no material difference to the overall requirements of the policy and I tend to agree with him, although the intention to introduce a new criteria that states “The applicant has made every reasonable attempt to secure suitable business re-use, and the application is supported by a statement of the efforts that have been made” goes to the respondent’s contentions about buildings needing first to be redundant. That was not the case in 2001.

[24]In all respects, I consider that the subject property would have complied with the criteria. Little if any additional traffic would be generated by the conversion to a single residential unit and the matter of drainage could be overcome by the installation of a private system or, as Mr Rosser conceded as a possibility, linking in to the system serving the adjacent former 8 farmhouse. I found the barn, its adjacent buildings (which could easily be converted into garaging), and its immediate environs to be most attractive, and in my view the property lends itself ideally to such conversion.

[25]Mr Twiddy provided further support for the possibility of a successful planning application in the evidence relating to the conversion of a former barn at Yn-ys-fro Farm. This is within less than a mile of the subject property, and is approached over a long, narrow lane that also serves as access to Welsh Water reservoirs. In terms of accessibility, it is, in my view, no less hazardous than Cwm Farm. It is well outside the developed area of Rogerstone and, as Mr Twiddy said, is further into the urban fringe. Whilst it was accepted that the same criteria did not apply in 1987 as in June 2001, I find the fact that permission was granted on a barn in that location at a time when pressure for residential development was less than it was at the valuation date (in terms of the generally identified need for additional housing) to be very persuasive.

[26]There is no doubt whatsoever in my mind that the subject property held potential for conversion to a single residential dwelling at the valuation date, but the fact that no application had been made has to be taken into account in arriving at an appropriate value. Mr Twiddy said that he had taken the value as two-thirds of the figure that would have applied if planning permission had been forthcoming to reflect time, trouble and, of course, risk. This basis had been adopted, as he had pointed out, in Prosser. In response to a question from me at the commencement of the hearing, Mr Rosser said that, if I were to find for the Revenue and conclude that there was a real prospect of success in achieving planning consent, then he agreed with Mr Twiddy’s figure of £80,000.

[27]It is clear from the above that I have, indeed, been persuaded by the applicant’s arguments and I therefore determine that the value of the freehold interest in the subject property at 6 June 2001 was £80,000. The matter having been heard under the Simplified Procedure and there being, in my opinion, no exceptional circumstances to warrant otherwise, I make no order for costs. DATED 1 September 2005 (Signed) P R Francis FRICS 9