It may be remembered from the August 2008 Tax Bulletin that in the case of Bower deceased v HMRC SpC 665, the Special Commissioner came up with a novel basis of valuation being the price that a willing speculator would be prepared to pay for the relevant asset.  

The High Court has concluded that the Special Commissioner’s decision was wrong. The full judgment in this case will apparently not be available for some time (citation: [2009] ALL ER (D) 68), so anybody particularly interested in this area will need to be patient, because the case digest does not really say very much.  

The asset in question was the right to a life annuity under a discounted gift bond – not an easy thing to value at the best of times. The following principles, which seem to be uncontroversial, emerged from the digest. The property should be assumed to have been capable of sale in the open market – even if it was inherently unassignable or subject to restrictions on sale. The question was what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date.  

The judge thought that the Special Commissioner might not have appreciated that the hypothetical sale took place in the real world. Although there had to be an assumed buyer in order to give effect to the statutory hypothesis that the sale took place and although the Special Commissioner had been entitled to consider possible purchasers, he was not entitled to invent them. The High Court made reference to the introduction of a speculator into the process, but there is no indication of how such a speculator should be viewed. (I find it very difficult to understand how a speculator can be brought into the mix at all, because it is well established that the hypothetical buyer is supposed to be a prudent purchaser who is also a prudent businessperson. It will be interesting to see more about this).  

The High Court observed that the Special Commissioner’s method of calculation had not been put forward by either of the parties, nor any of the witnesses. This was considered to be a breach of natural justice, and it was certainly not based on the evidence before him. It had flowed from his erroneous conclusion that he had been required or entitled to populate the real market in which the hypothetical sale took place with hypothetical speculators who had not shared the characteristics of real buyers.  

I think that, mercifully, we are back to normal as far as inheritance tax valuation principles are concerned.  

However, there is one point of which it will be very interesting to obtain further details. This is his Lordship’s suggestion that “if in the real world an asset was worthless, the statutory hypothesis did not make it valuable”. I would suggest that the very existence of a statutory hypothesis that excludes devaluing factors, such as the inability to assign or restrictions on sale, means that this is exactly the position. It requires an asset to have a value placed on it that does not exist in the real world by ignoring devaluing factors. Indeed, the judge even acknowledges the point by saying that the property should be assumed to have been capable of sale in the open market even if, in fact, it was not.  

Having regard to the subject matter of this case, which was an AXA Estate Planning Bond for which the tax advantage was derived from the amount of the discount (and as a result of this case, the discount is negligible), one might expect the case to go further.