UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2014] UKUT 409 (LC)
UTLC Case Number: TMA/79/2013
	
	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

TAX – capital gains tax – apportionment – “just and reasonable” – marriage value – existing use value of constituent parts – formula in VOA manual – alternative marriage value approach - appeal allowed – Section 222, Taxation of Chargeable Gains Act 1992

IN THE MATTER OF A NOTICE OF REFERENCE OF APPEALS
 UNDER SECTION 31(1) OF THE TAXES MANAGEMENT ACT 1970

BETWEEN              
(1) MR RAYMOND OATES
 (2) MRS DOREEN OATES	 Appellants

	and

	HER MAJESTY’S REVENUE AND CUSTOMS	  Respondent

Re: 23 Church Street,
	Brierley,
	Barnsley
	S72 9HT

Before: P D McCrea FRICS

Sitting at: 43-45 Bedford Square, London, WC1B 3AS
on 
10 September 2014

The appellants did not appear and were not represented
Isabella Tafur, instructed by HMRC Solicitors’ office, for the Respondent

© CROWN COPYRIGHT 2014

The following cases are referred to in this decision:
Salts v Battersby (1910) 2 KB 155 
Bostock v Totham (HMIT) (1997) STC 764

DECISION
Introduction
1.	These are appeals under section 31(1) of the Taxes Management Act 1970 by Mr Raymond Oates and Mrs Doreen Oates (“the appellants”) who are mother and son.  They are appealing against the determination by Her Majesty’s Revenue and Customs (“the respondent”) of the apportionment of the sale proceeds of 23 Church Street, Brierley, Barnsley, S72 9HT (“the house”) together with adjoining commercial land and buildings (“the land”).  The house and land (which together I refer to as “the appeal site”) were sold for development for £725,000 on 9 June 2006, which is the date of valuation for the purposes of the assessment to tax.  The respondent apportions £170,000 to the house and £555,000 to the land.  The appellants submit that the correct apportionment should be £325,000 for the house and £400,000 for the land.
2.	The apportionment is relevant to the amount of Capital Gains Tax payable by the appellants because of the relief applicable to the disposal of residences and associated gardens or grounds pursuant to section 222 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”).
3.	The appellants did not appear at the hearing, nor did any representative or expert witness on their behalf.  They had previously submitted  a brief report from Mr John A Green BSc (Hons) MRICS and Mr R P Dixon of Wm. Sykes & Son, valuers, estate agents and auctioneers of Holmfirth, but that report was untested.
4.	Ms Isabella Tafur of counsel appeared for the respondent and called Mr Keith A Clarke MSc MRICS, Senior Valuer in the Sheffield office of the Valuation Office Agency, as an expert valuation witness.
Facts
5.	I derive the following facts from the evidence and the statement of agreed facts submitted by the parties.
6.	The appeal site had a total site area of 1.54 acres.  It is situated in Brierley which is a village approximately 5 miles north east of Barnsley town centre.
7.	The house, known as 23 Church Street, stood on a plot on the front left-hand side of the site, with its gable end fronting Church Street.  It was a three-bedroomed stone farmhouse with an attached barn in a poor state of repair.  On the ground floor there was a sitting room, living room, kitchen, pantry, two porches and a w.c.  On the first floor there were three bedrooms and a bathroom.  It had a gross external floor area of 208.9m2, and stood on a plot having a site area of 0.17 acres.
8.	Adjoining the house, also with frontage to Church Street, was an industrial yard area upon which there was a building that was formerly used as an ice-cream factory.  To the rear of the yard, perpendicular to Church Street, ran a narrow strip of land upon which there was a further building but also allowing access to the rear, which led to a relatively large rear site, described as scrub/agricultural land, upon which there was a third building.  There was no vehicular access to this rear land other than across the front yard and along the strip.
9.	The land, comprising the yard, access strip and rear land, had a site area of 1.37 acres.  The commercial buildings, which were in various states of dereliction, had the following 2005 rateable values and gross internal areas, up until their demolition:
23 Church Street – factory and premises, £4,750 RV, 223.10 m2.  
Mrs D Oates r/o 23 Church Street – factory and premises, £4,600 RV, 165.40 m2.  
Workshop r/o 23 Church Street – workshop and premises, £5,500 RV, 222.10 m2.
10.	At the date of apportionment, a planning application had been made by the Richard Ryder Partnership for the demolition of all of the buildings on the whole site (including the existing house) and the erection of 28 new homes.  The application was approved conditionally on 31 October 2006.
Issue
11.	The issue between the parties is how the sale price of £725,000 should be apportioned between the house and the land, for the reasons stated in paragraph 2.  
Legislative framework
12.	Section 222 of the 1992 Act is applicable to:
“(1)…..a gain accruing to an individual so far as attributable to the disposal of, or of an interest in—
(a)     a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
(b)     land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.
…..
(10)     Apportionments of consideration shall be made wherever required by this section… and, in particular, where a person disposes of a dwelling-house only part of which is his only or main residence.”

13.	Section 52(4) provides some, very limited, guidance on the nature of the apportionment:

	“For the purposes of any computation of the gain any necessary apportionments shall be made of any consideration or of any expenditure and the method of apportionment adopted shall, subject to the express provisions of this Chapter, be . . . just and reasonable.”
14.	These appeals are brought under section 31 of the Taxes Management Act 1970 and falls within the jurisdiction of this Tribunal under section 46D(3)(a) of that Act. 
The case for the appellants
15.	The appellants did not attend the hearing and were not represented. In writing, they contended that the correct apportionment of the sale proceeds should be £325,000 for the house and £400,000 for the land.  This was how the sales had been legally recorded with the purchaser and as willing sellers they considered that the house would command a greater value, largely for emotional reasons, than the other areas such as the former ice cream factory and scrub and waste land. 
16.	The appellants had previously submitted a report dated 23 April 2014 from Wm Sykes & Son, valuers, estate agents and auctioneers.  That report was exceedingly brief and incompatible with the Tribunal’s requirements. It valued the house at £325,000, ignoring any possible increase in the value arising from a ransom of the adjoining land.  The report described the property as including a large yard area amounting to approximately half an acre. No comparable evidence was submitted.
Case for the respondent
Mr Keith Clarke
17.	Mr Clarke is a Chartered Surveyor and is Senior Valuer in the Sheffield Valuation Office Agency.  He has more than six years’ experience in valuation of residential, commercial and agricultural property for taxation purposes and most of his post-qualification work has been in undertaking taxation valuations.  He has dealt with approximately ten other cases relating to apportionment under section 222 of the 1992 Act.  In his expert report, Mr Clarke stated that the apportionment under section 52(4) of the 1992 Act should be on a “just and reasonable” basis.  No particular just and reasonable method was laid down in the legislation but the object was to arrive at a contribution that each part made to the whole.  Mr Clarke relied on a number of principles in assessing his apportionment:
•	Any apportionment should take account of the value of the different assets or parts of the property.  It would not, for example, be appropriate to apportion a sale price on the basis of site or floor areas unless the different parts were of equal value per unit of site/floor area (Salts v Battersby (1910) 2KBJ 155).
•	Any apportionment should take account of the value of each part.  It would not, for example, be appropriate to value just one part in isolation and deduct that from the total price as that would not involve any element of apportionment. (Bostock v Totham (HMIT) (1997) STC 764).
•	The aim should be to arrive at the contribution each part, in reality, makes to the total value.  It would not, for example, be appropriate to adopt values in some hypothetical isolation if the valuation assumptions would distort the relative values and do not reflect the reality.
•	The valuations of the different parts should be on a consistent basis and follow a consistent methodology.
•	The apportionment should be considered through the eyes of all of the parties who have influenced the price paid: the vendor, the purchaser and other potential purchasers in the market. It would not, for example, be reasonable to look at an apportionment purely from the particular point of view of the actual purchaser.
18.	Mr Clarke considered the apportionment using a number of approaches.  First, from the viewpoint of the purchaser, he considered that the development land all looked to be of equal value and accordingly could be apportioned on an area basis, which arrived at £80,000 for the house and £645,000 for the land.  
19.	Secondly, he also considered the apportionment from the viewpoint of the vendor, by whom the house and land would not be considered to all be of equal value. Following Salts v Battersby he considered the respective parts of the apportionment.  In valuing the house, Mr Clarke considered a number of comparable sales in the immediate vicinity including 68 Church Street (sold for £195,000 in June 2007), 68A Church Street (sold for £160,000 in February 2006); 46 Church Street (sold for £220,000 in July 2006); 44 Church Street (sold for £225,000 in March 2006); 14 Church Drive (sold for £165,000 in November 2004); 74 Church Street (sold for £165,000 in January 2005) and finally 24/26 Barnsley Road (sold for £320,000 in March 2007).  
20.	He considered that 68 Church Street was the most comparable transaction, as it was of similar age and in very close proximity to the house, but in better condition.
21.	Whilst he had not been able to inspect the appeal site, from his records he considered the house to be a basic farm house with an unconverted barn at the side.  On the assumption that the property was structurally sound but required modernisation, he expected a market value for the house to be in the region of £170,000.
22.	From the vendor’s aspect, the values could be viewed as the market value for the house with any additional value representing the development value of the site.  On this approach he considered the apportionment should be £170,000 for the house and £555,000 for the land.  
23.	A third approach was to assess how each individual part contributed to the value of the whole.  On this basis, using the value of the house of £170,000 and calculating the land at £645,000 (i.e. 1.37 acres at £470,000 per acre in line with the purchase price), Mr Clarke reduced each pro-rata to arrive at an apportionment of the purchase price of £151,000 for the house and £574,000 for the land.  
24.	In conclusion, he restated that there was no methodology in the statute; merely that it must be just and reasonable.  Of his alternatives, the approach that would support the highest value of the house would be to consider the valuation from the point of view of the vendor having regard to comparable evidence.  Having reviewed all of the valuations Mr Clarke was of the opinion that it was just and reasonable to apportion the sale price on the basis of £170,000 being the market value of the house and £555,000 being the value of the land and buildings.
25.	In commenting on the appellants’ contentions, Mr Clarke rejected any form of ransom value calculation, on the basis that the plot on which the house sat did not restrict access to the rear and that it would not be just and reasonable to apportion any ransom value as the apportionment was for the sale of the land as a whole.  He also rejected the appellants’ value based upon family sentiment which he said did not provide any basis on which to support the valuation. 
26.	In the absence of any appearance by the appellant or their representative, I explored Mr Clarke’s valuation methodology at some length with him.  He did not agree that an alternative method of valuation should be to calculate the marriage value that the development produced over and above the market value of the constituent parts.  He did not consider this appropriate when one party as vendor owned all of the land.
Submissions from Counsel
27.	On behalf of the respondent, Ms Tafur submitted that the appellants had produced a wholly unacceptable expert’s report.  It did not state the qualifications of the experts, nor a declaration in compliance with RICS practice statement, part 35 of the Civil Procedure Rules or the practice directions to part 35.  Nor did it state the substance of the instructions received nor the context or findings of the inspection that was said to have taken place in 2006.  The experts’ report had been contradicted by the subsequent statement of agreed facts in which it had been agreed that the house and associated garden comprised 0.17 acres as opposed to the reports stated 0.5 acres.  Nor did the report carry out an apportionment but it simply gave a value for the house and garden.  Ms Tafur submitted that I should accord no weight or extremely limited weight to the report.
28.	Ms Tafur also referred to the VOA’s Capital Gains & Other Taxes Manual (Section 8 – Part 1: Private Residence Relief), Part 6 of which stated that a ransom value should not be attributed for apportionment purposes as it could only arise if the land being valued was a separate entity in different ownership from the rest of the site and that such an assumption would not result in a just and reasonable apportionment.
Discussion
29.	I begin by dealing with the expert’s report on behalf of the appellant.  The report was brief, at less than two pages. It stated that the experienced valuers, one of whom was a Chartered Surveyor, were aware of the “requirement of Part 35, this practice direction and the protocol for instruction of experts to give evidence in civil claims”. However the report was singularly lacking in the content required by those documents or by the Tribunal. In addition, no comparable evidence was referred to and no methodology provided as to how the value of £325,000 had been arrived at.  I accept Ms Tafur’s criticism of the report and have placed no weight upon it.

30.	In the absence of any further evidence or submissions on behalf of the taxpayer, an analysis of Mr Clarke’s report and methodology was fundamental to my decision.

31.	As regards Mr Clarke’s valuation of the house, this was researched thoroughly and drew upon a number of relevant comparable transactions of properties very close to the appeal site.  I accept his method and comparables and have adopted his market value of £170,000.  

32.	Section 8 – Part 1: Private Residence Relief  of the VOA’s Capital Gains and Other Taxes Manual states:
“8.61 Interpretation of "Just and Reasonable" Method
No particular "just and reasonable" method of apportionment is laid down, but the object should be to arrive at the contribution which each part makes to the sum to be apportioned, whether that sum is open market value as determined by the DV, or actual sale consideration in an arms length transaction. Apportionment by area will only be appropriate where value is evenly spread throughout the land, as was stated obiter in Salts v Battersby 2KB..155 (1910). This case dealt with the method of apportioning rent and Darling J stated that the correct approach was by value, not area:
"It seems to me to be clear from the authorities that what you have to regard is not the bare acreage of the severed portions of the land demised, but their relative values.... You find the same principle running through them all.... The county court judge was of opinion that the proper way to apportion the rent was to have regard to the yardage and the yardage alone. Therein I think he was wrong. If it be shown that the land is of equal value throughout, no doubt the apportionment must be on the basis of yardage. But yardage cannot be a sufficient test of the relative value by itself; and here, so far from there being evidence that the land was of equal value throughout, the evidence was the other way...."
Therefore it will normally be necessary to find the constituent values of the parts following the provisions set out … below. It should be recognised that the values of the parts may sometimes in total not equal the value of the whole, due to the presence of marriage value. In such cases it will be necessary to apportion thus:-

Open market value or sale price to be apportioned	x	constituent value of part 
sum of constituent values
of all parts”	

33.	Following Salts, Mr Clarke was correct to reject a pure apportionment on pro-rata acreage, which would have resulted in an apportionment of £80,000 for the house and £645,000 for the land.

34.	However, in my judgement his adopted apportionment, of £170,000 for the house and £555,000 for the land was also incorrect.  Salts makes clear that it is necessary to have regard to the relative values of the portions, not their area. This must be on the basis of their individual market values ignoring development value, at the date of sale.  In the present appeal, there was a house with a value, ignoring development prospects (which for convenience I shall call its existing use value) of £170,000.  The remainder of the appeal site was bare land with dilapidated industrial buildings. The appeal site cannot therefore be considered to have equal existing use value throughout.

35.	Mr Clarke’s apportionment is, in my judgement, inconsistent because it uses the existing use value of the house, having regard to comparables, but not the existing use value of the land.  It simply deducts the existing use value of the house from the sale price and treats the balance as the value of the bare land.  That, in my view, cannot be right, and it incorrectly depresses the apportionment that should be attributed to the house.  It is also at odds with Mr Clarke’s stated principle from Bostock, as he has simply valued the house and deducted that from the sale price to arrive at the apportionment for the land.

36.	His figures would also suggest that the existing use value of the house, at £170,000, was considerable higher than its proportion of the development value, on a site area basis, of £80,000 using one of his methods, or £151,000 on another.

37.	The VOA manual indicates that it is necessary to find the constituent values of the parts, and if these do not equal the whole then marriage value should be allowed for using the formula above.  It is therefore not entirely clear why, in answer to a question from me, Mr Clarke rejected the proposition that the apportionment should be carried out on that basis.  

38.	The appellants suggest £325,000 as the appropriate apportionment for the house. Adopting the formula from the VOA manual, that would indicate a value in the order of £209,210 for the land.  The calculation, allowing for rounding, would be:

£725,000   x 	_______£170,000______   = £325,000
     £209,210 + £170,000 

39.	For the amount to be apportioned to the house to be less than the appellants contend for, the value of the land would have to exceed £209,210 or thereabouts. 

40.	Mr Clarke did not consider that he could provide evidence of the market value of the land ignoring development value. In the light of a lack of evidence from the appellant or the respondent on the existing use value of the land, it is necessary for me to consider what the likely value of the land would be in order for the appeal to succeed in whole or part.  

41.	The land was largely back land, much of which had a relatively narrow access. It had three buildings, in various states of dereliction, and whose rateable values totalled £14,850 in the 2005 list.  The land was described as “scrub and waste” by the appellant’s representatives.  

42.	In the absence of evidence from either the appellant or respondent on the land value disregarding any development potential, from the description of the land and the rateable values and sizes of the derelict buildings upon it, and from the evidence that the house was worth £170,000, I am satisfied that 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, the appeal would therefore succeed because the figure to be apportioned to the house could not be less than the £325,000 for which the appellants contend.

43.	The formula in the VOA manual is, in my judgement, less than satisfactory.  In a conventional marriage value calculation, the concept that each party cannot realise their share in the development value of their combined interests without co-operating is normally reflected in the marriage value being split equally between the parties.  Adopting this basis, the appeal would also succeed, and in fact would be more likely to succeed because the marriage value, being split equally between the two portions, would result in the existing use value of the rear land having to exceed £245,000 or thereabouts, viz:

		House share = £170,000 + £310,000 = £325,000
               2

		Land share  = £245,000 + £310,000 =  £400,000
						2

44.	Accordingly, whilst I do not consider that the formula in the VOA manual is satisfactory, either on that formula or on my alternative basis, I am satisfied that the existing use value of the site would not reach the level of value required by that formula to cause the appeal not to succeed in entirety.

45.	The appeals therefore succeed, and I determine that a just and reasonable  apportionment of the proceeds of sale for the purposes of section 222 of the Taxation of Chargeable Gains Act 1992 is:

23 Church Street: 	£325,000
Adjoining land:	£400,000

46.	The hearing took place under the Tribunal’s simplified procedure, where costs are only awarded in exceptional circumstances.  Neither party suggested that there were any such circumstances and I therefore make no order as to costs.

							P D McCrea FRICS

							16th September 2014