Oates and another v Revenue and Customs Commissioners

Capital gains tax – Relief – Apportionment – Taxation of Chargeable Gains Act 1992 – Sale of house and commercial land – House element of sale attracting relief from capital gains tax by virtue of section 222 of 1992 Act – Apportionment of sale price between house and commercial land under section 54(2) – Whether respondents erring by deducting existing use value of house from total sale price – Appeal allowed. The appellants incurred a liability to capital gains tax on the sale of a house and adjoining commercial land in Brierley, near Barnsley, for development in June 2006. An issue arose as to how the sale price of £725,000 should be apportioned between the house and the land, under section 52(4) of the Taxation of Chargeable Gains Act 1992, for the purpose of assessing the amount of tax payable; the element attributable to the house would attract the relief for disposals of residences and associated gardens or grounds under section 222 of the Act. The property sold had a total site area of 1.54 acres, of which 0.17 acres comprised the plot occupied by the house, a three-bedroom farmhouse in a poor state of repair, and the rest of which was taken up by the commercial land, on which stood several derelict buildings. In October 2008, the purchaser of the site had obtained conditional approval for a planning application to demolish all the buildings, including the existing house, and build 28 new homes. The respondents decided that the appropriate apportionment between the domestic and commercial elements of the property was £170,000 for the house and £555,000 for the commercial land. In doing so, they adopted the valuation approach that they regarded as supporting the highest valuation of the house; this involved considering the matter from the point of view of the vendor, having regard to evidence of comparable sales in the vicinity, rather than taking the viewpoint of the purchaser, who would regard all the land as being of equal value and apportion it by area. The appellants appealed. They contended that the correct apportionment was £325,000 for the house and £400,000 for the land, which was how the sales had been legally recorded with the purchaser. They did not make representations at the appeal hearing although they had previously submitted a brief expert’s report on valuation. Held: The appeal was allowed. The expert’s report submitted on behalf of the appellants was inadequate for the purpose since it lacked the content required to comply with CPR 35 and its associated practice directions, referred to no comparable evidence and provided no methodology as to how the value of £325,000 had been arrived at. The respondents’ expert report, on the other hand, was researched thoroughly and drew on a number of relevant comparable transactions of properties very close to the site. That report had correctly rejected an apportionment purely by acreage. Although section 52(4) of the 1992 Act did not lay down any particular method of “just and reasonable” apportionment, assistance was derived from the Valuation Office Agency’s “Capital Gains and Other Taxes Manual” and from the case law, which indicated that it was necessary to have regard to the relative values of the constituent parts, in terms of the contribution that each part made to the sum to be apportioned, and that it was not appropriate merely to apportion by area unless there was evidence that the land was of equal value throughout: Salts v Battersby (1910) 2 KB 155 applied. The respondents’ expert valuation was nonetheless erroneous and inconsistent so far as it used the existing use value of the house, having regard to comparables, but not the existing use value of the land. The respondents’ valuation simply deducted the existing use value of the house from the sale price and treated the balance as the value of the bare land. That was incorrect since the relative values of the portions had to be based on their individual market values, ignoring development value, at the date of sale: Bostock v Totham (HMIT) [1997] STC 764; [1997] PLSCS 80 considered. There was a house with a value of £170,000, ignoring development prospects. The remainder of the appeal site was bare land with dilapidated industrial buildings, and its existing use value, disregarding any development potential, had also to be assessed. In accordance with the VOA manual, it was first necessary to find the constituent values of the parts and, if these did not equal the whole value, namely the open-market value or sale price, then marriage value should be allowed for using the formula set out in the manual. In the absence of evidence from the parties on the existing use value of the commercial land, it was necessary to reach a valuation figure from the description of the land and the rateable values and sizes of the derelict buildings on it, and from the evidence as to the £170,000 value of the house. Taking those matters into account, the existing use value of the land could not have been more than £209,210 at the date of disposal. Adopting the formula in the VOA manual (see section 8.6.1), the figure to be apportioned to the house could not be less than the sum of £325,000 for which the appellants contended. Although that formula was less than satisfactory, a similar result was obtained by applying a conventional marriage value calculation, in which, assuming that each party could not realise their share in the development value of their combined interests without co-operating, the marriage value was normally split equally between the parties. It followed that a just and reasonable apportionment of the proceeds of sale, for the purposes of applying section 222 of the 1992 Act, was £325,000 for the house and £400,000 for the commercial land. The appellants did not appear and were not represented; Isabella Tafur (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.   Sally Dobson, barrister   Click here to read full transcript: Oates and another v Revenue and Customs Commissioners