[1999] STC (SCD) 1, [1998] S.T.I. 1607 (Sp. Comm.)
Ward and others (executors of Cook, deceased) v Inland Revenue
Commissioners
SPECIAL COMMISSIONER: D A ****RLEY
5 October, 4 November 1998
Inheritance tax =96 Valuation =96 Value of deceased's estate =96 Building
society accounts =96 Deceased holding accounts in building society =96
Building society resolving to convert into public limited company =96
Deceased entitled under transfer do***ent to specified shares in
public limited company =96 Deceased dying before company floated on
stock exchange =96 Whether value of deceased's interest in building
society should be enhanced to reflect anticipated benefit of
conversion of society into public limited company.
The deceased had a number of accounts with the Woolwich Building
Society (the Woolwich). On 11 January 1996 the Woolwich announced that
it proposed to convert the society into a public limited company with
the approval of the members. In January 1997 the Woolwich distributed
a copy of the transfer do***ent giving full details of the proposed
conversion of the Woolwich into a public limited company authorised
under the Banking Act 1987 and listed on the London Stock Exchange. On
11 February 1997 at a special general meeting the resolution to
convert was carried. On 10 May 1997 the deceased died. The Building
Societies Commission subsequently approved the conversion. On 7 July
1997 flotation of the Woolwich took place. Under the transfer do***ent
the deceased was entitled to 450 'free shares' in Woolwich plc and an
'additional variable distribution' which brought her entitlement to
2,414 shares, and, under that do***ent, since the deceased had died
before the flotation, the first-named executor under her will was
entitled to the shares as part of her estate. The Revenue determined
in relation to a transfer of value deemed to have taken place on the
deceased's death on 10 May 1997, inter alia, that the value of the
deceased's interest in the Woolwich, in the light of the accounts
which she held in the society, was enhanced by =A34,250 to reflect the
anticipated benefit of the conversion of the Woolwich into a public
limited company. The executors appealed contending that the deceased's
rights under the transfer do***ent could not be valued, since all she
had was a mere hope that she would obtain shares in Woolwich plc,
which could not be marketed. The executors submitted: (i) that
approval by the Building Societies Commission might not have been
forthcoming; (ii) that the conversion might have been halted by an
economic depression; (iii) that an application for judicial review
might have been made on the ground that the way in which the shares
were to be allotted was not fair; and (iv) that the stock exchange
might not have agreed to list the shares in Woolwich plc.
Held =96The deceased was deemed for inheritance tax purposes to have
made a transfer of value immediately before her death, and the value
transferred thereby was assumed to have been equal to the value of the
deceased's estate, being the aggregate of all the property to which
she was beneficially entitled. It was therefore necessary to identify
the 'value' of an estate at a particular time. 'Value' meant market
value, which was the price which the property might reasonably be
expected to fetch if sold in the open market at that time. Property
might be difficult to market, but it was still property. In the
instant case the deceased held rights under the transfer do***ent
which transcended the mere hope that she would obtain shares in
Woolwich plc. The rights conferred on the deceased by the transfer
do***ent were therefore part of the property to which she was
entitled, they were part of her estate, and as such they fell to be
valued in calculating the value transferred by the transfer of value
which the deceased was deemed to have made
[1999] STC (SCD) 1 at 2
immediately before her death. In the absence of any other valuation
apart from that of the Revenue, the value of the deceased's rights was
that contained in the Revenue's determination (see p 3 e=96h and p 4 e,
post). Dicta of Nicholls LJ in Alexander v IRC [1991] STC 112 at 125
applied.
Accordingly, the executors' appeal would be dismissed.
Note
For the principles of valuation, see Simon's Direct Tax Service I8.201=96
209; Foster's Inheritance Tax H2.01=9609.
Cases referred to in decision
Alexander v IRC [1991] STC 112, 64 TC 59, CA.
IRC v Crossman [1937] AC 26, [1936] 1 All ER 762, HL.
Malcolm John Wray Ward appeared on behalf of the executors.
Peter Twiddy, of the Capital Taxes Office, for the Revenue.
DECISION
1. (1) This is an appeal against a determination by the Inland Revenue
Commissioners in relation to a transfer of value deemed to have taken
place on the death of Gwendolen Olivia Cook (the deceased) on 10 May
1997.
(2) The commissioners determined that, firstly, the estate of the
deceased included three accounts with Woolwich Building Society (the
society) totalling =A351,204 and, secondly, the value of the deceased's
interest in the society, having regard to those accounts, was enhanced
by =A34,250 to reflect the anticipated benefit of the conversion of the
society into a public limited company.
(3) The deceased's executors take issue with the second determination.
As a matter of fact, the first determination is correct.
2. The relevant statutory provisions are succinct. Section 1 of the
Inheritance Tax Act 1984 (the 1984 Act) provides that inheritance tax
shall be charged on the value transferred by a chargeable transfer.
Section 4 provides that 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. And a person's estate is the
aggregate of all the property to which he is beneficially entitled
(see s 5(1)). 'Property' includes rights and interests of any
description (see s 272). And the value at any time of any property
shall be the price which the property might reasonably be expected to
fetch if sold in the open market at that time (see s 160).
3. The commissioners' second determination is more intelligible if it
is elucidated by facts which lead up to it.
(1) On 11 January 1996 the society announced its intention to seek the
approval of members to converting itself into a public limited company
listed on the London Stock Exchange. The chairman, Sir Brian Jenkins
GBE, MA, FCA, wrote on the same day to members (of which the deceased
was one) outlining the proposals and the advantages of conversion.
Towards the end of his two-page letter he wrote:
'Conversion and flotation are subject to a number of conditions,
including the separate approvals of those investing and borrowing
members eligible to vote, confirmation by the Building Societies
Commission and authorisation of the Woolwich as a bank by the Bank of
England.'
(2) In January 1997 the society sent out, under cover of a letter, a
copy of the transfer do***ent giving full details of the proposed
conversion of the society into a public limited company authorised
under the Banking Act 1987 and listed on the London Stock Exchange.
[1999] STC (SCD) 1 at 3
A special general meeting was to be held on 11 February 1997 at which
members were to vote on the proposed conversion. The meeting duly took
place and the resolution to convert was carried. Following that, the
Building Societies Commission was open to representations being made
to it no later than 17 March 1997 and its confirmation hearing was due
to take place on 16 April 1997. The confirmation was given at an
unspecified date but after the deceased's death on 10 May 1997.
Flotation was expected on 7 July 1997 and did in fact take place on
that day.
(3) Under the terms of the transfer do***ent the deceased was entitled
to 450 'free shares' in Woolwich plc and an 'additional variable
distribution' which brought up her total entitlement to 2,414 shares.
Under the transfer do***ent, the deceased having died before
flotation, the first named executor under her will was entitled to the
shares as part of her estate (see ss 5.1.1 and 5.5.1 of the transfer
do***ent). The estimated trading price of the shares, if listed on the
London Stock Exchange on 20 December 1996 would have been in the range
175p to 200p per share (see the opinion of J Henry Schroder & Co Ltd
and BZW Securities Ltd at p 72 of the transfer do***ent).
4. Malcolm John Wray Ward, an executor under the deceased's will,
appeared in person. He contended that the deceased had nothing which
could be marketed. Her rights under the transfer do***ent could not be
valued. All she had was a mere hope that she would obtain shares in
Woolwich plc. The approval by the Building Societies Commission was
not a mere formality; it might not have been forthcoming. There could
have been an economic depression and the conversion would have been
halted. There could have been, but in fact there was not, an
application made for judicial review since, so it was said, the way
shares were allotted was not wholly fair. Moreover, the Stock Exchange
might not agree to list shares in Woolwich plc. All that the deceased
or her estate possessed was the valueless hope of acquiring new
shares.
5. (1) I am not persuaded by these contentions. One bears in mind that
the deceased is deemed to have made a transfer of value immediately
before her death and that the value transferred thereby had been equal
to the value of the deceased's estate, being the aggregate of all the
property to which she was beneficially entitled. With due respect to
the executor it does not seem to me to be relevant, even if true, that
the deceased owned nothing (under the transfer do***ent) which could
be marketed. Property may be difficult to market, but it is still
property and, in the deceased's case, it would form part of her
estate. In my opinion the deceased held rights under the transfer
do***ent which transcended the mere hope that she would obtain shares
in Woolwich plc. Accordingly, I hold that the rights conferred on the
deceased by the transfer do***ent were part of the property to which
she was entitled, they were part of her estate and as such they fall
to be valued in calculating the value transferred by the transfer of
value the deceased is deemed to have made immediately before her
death.
(2)(a) In Alexander v IRC [1991] STC 112 at 125 Nicholls LJ concludes
his summary of the scheme of inheritance tax as follows:
'(3) Thus, the legislation makes it necessary to identify the
=93value=94 of an estate at a particular time. In short, value means
market value: =93the price which the property might reasonably be
expected to fetch if sold in the open market at that time=94 (see [s
160]). This mode of valuation involves a notional sale =85 the section
is doing no more than prescribe the basis on which the valuation shall
be made. The notional sale does not change the subject matter of the
valuation. What is being valued is property belonging to the
transferor, and it is being valued as at a time when he still owned
it. The notional sale is designed merely to identify the sum which a
purchaser in the open market might reasonably be expected to pay to be
placed, in respect of that property,
[1999] STC (SCD) 1 at 4
in the same position as the transferor. This interpretation of [s
160] accords with the decision of the House of Lords in IRC v Crossman
[1937] AC 26 regarding the comparable valuation provisions in the
estate duty legislation (see s 7(5) of the Finance Act 1894). As
Viscount Hailsham LC said (at 42=9643), the notional sale is =93merely a
statutory direction as to the method by which the value is to be
ascertained=94.'
(b) The executor has submitted no valuation as such. He merely asserts
that the deceased's hope was valueless and he points to possible
impediments in the way of hope being rewarded.
(c) For the Crown, a value of =A34,250 is given for the 2,414 shares
arrived at as follows:
Expected share price at completion
(per transfer do***ent) 187=B75p
Expected increase by completion x 1=B71
206=B725p
Margin to reflect fluctuation (fall) x 0=B79
185=B7625p
Number of shares x 2,414
=A34,481=B700
Discount for 2 months delay (@[EMAIL PROTECTED]
10% pa) x 0=B79842
=A34,410=B700
less purchaser's costs say =A3160=B700
=A34,250=B700
The executor made no comment on this valuation in reply to the Crown's
case or otherwise.
(d) I reject the executors' valuation of nil. There being no other
valuation apart from the Crown's, I uphold the commissioners'
determination and dismiss the appeal.
Douglas Johnston Barrister.
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