Valuing leasehold interests in trade-related properties using profits method does not involve disaggregation of property value and "transferable goodwill"

In HMRC v Denning and others [2022] EWCA Civ 909, the Court of Appeal held that there should be no disaggregation of property value and "transferable goodwill" where valuations had been assessed using the profits method of valuation.

Background

Dr Zyrieda Denning (Dr Denning) had acquired the business and freehold interests in two care homes. She subsequently incorporated three companies: Jasmine Care Holdings Ltd (JCH); MH Hants Ltd (MHL); and MP Hants Ltd (MPL). MHL and MPL were wholly owned subsidiaries of JCH and Dr Denning was the sole shareholder in JCH.

Dr Denning sold one care home business to each of MHL and MPL, retaining the freehold interests in the properties and granting five-year leases of the care homes to both MHL and MPL with no premium. Dr Denning also assigned to MHL and MPL the goodwill of the businesses for a total of £1.8m. 

The taxpayers valued the leasehold interests, for the purposes of CGT and SDLT, in accordance with guidance provided by the Royal Institution of Chartered Surveyors (VPGA 4). The underlying issue was whether, when the valuation method in VPGA 4 was applied, was the resulting figure the value of the leasehold interest, or the value of both the leasehold interest and "transferable goodwill". 

HMRC challenged the goodwill figures, arguing that the consideration paid by the companies to Dr Denning was in reality part of the open market value of the leases.

The Upper Tribunal (Lands Chamber) (UT) was asked, on a reference under section 46D, Taxes Management Act 1970, to value the leasehold interests in the two care homes in accordance with section 272, Taxation of Chargeable Gains Act 1992.

UT decision

It was agreed by the parties' respective valuation experts that the care homes were 'trade-related properties' (TRPs) and therefore, the profits method of valuation in VPGA 4 applied. The parties' experts also agreed on the relevant capital values. However, the parties disagreed on what the valuations actually represented and whether the trading potential amount was attributable to "transferable goodwill" or the leasehold interests.

The taxpayers argued that the valuations included both the value of the leasehold interest and "transferable goodwill" and that the value of the leasehold interest was the market rent and so the agreed capital value related solely to the "transferable goodwill". 

HMRC argued that the capital valuations for the leasehold interests of the TRPs were their open market values, reflecting trading potential.

The UT disagreed with HMRC and held that when valuing leasehold interests for the purposes of CGT and SDLT, in accordance with the guidance in VPGA 4, the capital value was a distinct asset of "transferable goodwill" and not the value of the leasehold interests themselves. 

HMRC appealed to the Court of Appeal.

Court of Appeal judgment

The appeal was allowed.

The Court concluded that the UT was wrong to have attributed the agreed capital values to a distinct asset of "transferable goodwill", as opposed to the value of the leasehold interests themselves. 

In the view of the Court, VPGA 4 was aimed at the valuation of property interests and the fact that they were valued by reference to trading potential did not mean that two separate assets were being valued. There was only one asset, the leasehold interests, and the profits method of valuation was no more than a method of arriving at the value of the property. The fact that the leases were at a market rent was concerned only with the transaction between the landlord and tenant. It did not mean that an assignee of the lease would pay nothing for it.  

Comment

The question of what a valuation of TRPs, using the profits method of valuation, actually represents has exercised the courts for some time (see, for example, Mohammed and Ors v Newcastle City Council [2016] UKUT 415 (LC)) and this decision will be of interest to many TRPs.  

Unless the taxpayers appeal to the Supreme Court, this decision represents the law on this important valuation issue. 

The judgment can be viewed here.