Ward and others (executors of Cook, deceased) v Inland Revenue Commissioners
SPECIAL COMMISSIONER: D A SHIRLEY
5 October, 4 November 1998Inheritance tax ? Valuation ? Value of deceased's estate ? Building society accounts ? Deceased holding accounts in building society ? Building society resolving to convert into public limited company ? Deceased entitled under transfer document to specified shares in public limited company ? Deceased dying before company floated on stock exchange ? 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 document 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 document 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 document, 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 £4,250 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 document 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 ?The 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 document which transcended the mere hope that she would obtain shares in Woolwich plc. The rights conferred on the deceased by the transfer document 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 2immediately 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?h 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?
209; Foster's Inheritance Tax H2.01?09.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) 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
(2) The commissioners determined that, firstly, the estate of the deceased included three accounts with Woolwich Building Society (the society) totalling £51,204 and, secondly, the value of the deceased's interest in the society, having regard to those accounts, was enhanced by £4,250 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.
- 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).
- The commissi '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 document 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 3A 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 document 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 document, 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 document). 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 document).
- 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 document 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.
- (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 document) 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 document 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 document 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 ?value? of an estate at a particular time. In short, value means market value: ?the price which the property might reasonably be expected to fetch if sold in the open market at that time? (see [s
160]). This mode of valuation involves a notional sale ? 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 4in 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?43), the notional sale is ?merely a statutory direction as to the method by which the value is to be ascertained?.'(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 £4,250 is given for the 2,414 shares arrived at as follows:
Expected share price at completion (per transfer document) 187·5p Expected increase by completion x 1·1
206·25p Margin to reflect fluctuation (fall) x 0·9 185·625p Number of shares x 2,414 £4,481·00 Discount for 2 months delay (@ 10% pa) x 0·9842 £4,410·00 less purchaser's costs say £160·00 £4,250·00The 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.