UT-2023-000116; - [2025] UKUT 00164 (TCC)

Before us both parties referred to the decision of the Court of Appeal in Denning which was released after the hearing before the FTT. As we noted above, the FTT sought and received written submissions from the parties on the relevance of the decision in the present case.

Denning was a CGT and an SDLT case. The taxpayer owned several care homes and granted leasehold interests in them to companies that she owned. The leasehold interests were valued on behalf of the taxpayer following the guidance in VPGA4. The issue was whether the valuation method in VPGA4 resulted in a valuation of the leasehold interest or in both the leasehold interest and transferable goodwill. The taxpayer's argument was that the result of VPGA4 was a valuation of both the leasehold interest and goodwill. What was relevant for tax purposes in that case was the value of the leasehold interest.

At [10]-[15] Lewison LJ described the different methods of valuation. Lewison LJ noted that there are a number of different methods by which property can be valued. The most common and first method was by the comparable method. Secondly, there was the investment method. Third, there was the residual approach. Fourth, there was DRC, which Lewison LJ described at [13] in the following terms:

Fifth, there was the profits method, which was used in valuing trade-related property; and was the relevant method used in that case.

HMRC argued that the agreed capital values for the leasehold interests were their open market values reflecting trading potential. The case for the taxpayer was that that included both the value of the leasehold interest itself and also 'transferable goodwill'. The taxpayer argued that because the experts agreed that the rents payable under the leases were market rents it followed that a leasehold interest in property let at a market rent did not have a capital value. The Upper Tribunal accepted the taxpayer’s argument. The Court of Appeal reversed the Upper Tribunal’s decision.

At [49] Lewison LJ said:

“VGPA 4 is, in my judgment, clear that (like other methods of valuation) what it is aiming at is a valuation of property (i.e. a freehold or leasehold interest). The profits method of valuation is guidance on how to value property of a particular type. VGPA is replete with references to the valuation of property….”

Lewison LJ continued at [50]:

“50.

All these passages stress that what is being valued is the property asset, how to value it is by the profits method, and the inclusion of trading potential as part of that property valuation reflects value that is inherent in the property asset itself. Trading potential refers to future profits, rather than actual profits. That potential is available to any reasonably efficient operator who acquires the property. On the basis that goodwill is what brings in custom, it will be reflected in the turnover and the profit of the actual business. Yet it was common ground that the valuation by the profits method was based on the market’s perception of fair maintainable trade and fair maintainable operating profit; and that that method of valuation applied both to freehold and leasehold property. Even if no business is being conducted on the property, the profits method is still the appropriate way to value it, as section 7 of VGPA 4 explains.

51.

Put shortly, VPGA 4 does not recognise the concept of “transferable goodwill” as an asset separate from the property interest. It does, however, recognise “personal goodwill” which is excluded from the valuation under para 2.10. Apart from that personal goodwill, VPGA 4 does not refer to goodwill at all.”

Mr Jones drew particular attention to the final sentence of [50].

In conclusion, at [65]-[66], Lewison LJ said:

Mr Jones argued that it was clear from Lewison LJ’s judgment that in using the profits-based method of valuation VGPA4 was valuing the property rather than the business. Also, there was, in his submission, no requirement in that method to assume that staff, residents, chattels etc that actually are in the property did not exist. Mr Jones accepted that the staff, residents and chattels etc. actually in use at the care home were distinct from the properties as identifiable assets, but it did not follow from that distinction that it was necessary to assume that those things did not exist.

Mr Farrell submitted that, essentially, Denning was irrelevant to the present appeals, which concerned not the treatment of goodwill within the trading potential of the property, but the extent and means by which effect was given to the separability of the property and the business actually run from the property. Mr Demachkie also submitted that Lewison LJ’s passing reference to DRC was obiter.

We consider that Denning is of relatively limited relevance to the present appeals. These appeals concern, as Mr Farrell and Mr Demachkie put it, the extent and means by which it was necessary to give effect to the separability of the property from the business actually run from the property. Denning recognised that for the purposes of VPGA 4 there was a valuation of the single asset i.e. the property (which included its inherent trading potential).

We note, however, Lewison LJ’s comments, albeit obiter, about DRC being a “method of last resort” and agree with that comment. We also note that both parties in that appeal agreed that the valuations should be carried out in accordance with VGPA 4, which was introduced in 2014, even though the acquisitions took place in 2011. Lewison LJ raised no objection to the valuation being carried out on this basis.

With this background in mind we now turn to consider Grounds 1, 2, 3 and 4(1).