ESTATE DUTY (OWNER-OCCUPIED HOUSES)
Motion made, and Question proposed, That this House do now adjourn.—[Mr. Grey.]
Mrs. Margaret Thatcher (Finchley)
The subject which I want to raise on the Adjournment is, I believe, an important one for many widows and relatives of persons who have died, when the house in which they were living comes to be valued for Estate Duty purposes. The essence of the case which I want to raise is that, at present, the district valuers are valuing the house for Estate Duty purposes, not on its existing use basis, but as if it were to be developed at some unknown date in the future. This naturally gives a very much greater value to the house and involves the widow in a very much higher payment of death duty.
The point of principle was first drawn to my attention in a typical case, which occurred in my constituency. It concerned an owner-occupied house built in 1934 of a quite typical kind, with five bedrooms, bathroom, three reception rooms, garage, etc. When the owner died a certain amount of work was required to put the house into good repair, and the house was valued as an owner-occupied house at approximately £10,000, which compared very well with the price obtained for a nearby property sold at about the same time.
When the district valuer made his valuation on behalf of the Inland Revenue, he valued it not as an owner-occupied house but at the kind of value which it would have if a small block of flats were built on the site. He wrote to the person who was acting for the widow in the following terms:
“The property would form an excellent site for a small block of flats located in the same position as the existing building and my valuation made on the assumption that some 22 rooms or slightly more would be permitted, gives a figure of £14,850, which I have rounded down to £14,500.”
No application for planning permission had in fact been made by the widow or any other person and none was contemplated. She wishes to go on living in [column 1631]the house as it is. I wrote to N. MacDermotthe Financial Secretary and, following his answer, put down a Parliamentary Question on 27th April, and I am afraid that I was given a rather abrupt and unsatisfactory Answer.
Since then another case in my constituency has come to my attention, the relevant figures being £12,000 as the value of the house as an owner-occupied house and £25,000 on the basis of what the house would fetch if its full development potential were realised. This is a far greater increase in value than the case which originally came to my attention.
Naturally, being a lawyer and having practised at the Revenue Bar, I took the precaution of looking up the law on this subject. Estate Duty is payable on the principal value of the property within the charging provisions. There are no special statutory provisions for owner-occupied houses. They are valued as freehold or leasehold land and are aggregable with other estate. The relevant Section is Section 7 (5) of the Finance Act, 1894, which reads:
“The principal value of any property shall be estimated to be the price which, in the opinion of the Commisioners, such property would fetch if sold in the open market at the time of the death of the deceased.”
It is the application of this subsection which has given rise to some difficulty and doubt and a considerable amount of work for solicitors and barristers as well as for professional valuers. It will be noted at this stage that no reference is made in the relevant subsection to enhancement of value arising from the grant of planning permission. Such things were unknown in those days and no later amendment has ever been added. It is now fashionable to identify the increasing value of land with the point of time at which planning permission is granted. Until that time the property is usually valued on its existing use basis.
Naturally, I have looked up some of the case law on the subject, some of which I believe is favourable to my case and some of which, alas, is favourable to the Treasury case.
It might help the Financial Secretary to know that I have looked up the case of the Inland Revenue Commissioners v. Clay, 1914, 3 K.B., page 460, a case [column 1632]not very favourable to me, and I have looked up the Attorney-General v. Jameson, 1905, which I hope will appeal to him, especially as it is an Irish case and is reported in the Irish Report for that year on page 218. Discussing the meaning of price, the learned judge said that the price was to be that which a purchaser would pay for the right to stand in a deceased's
“shoes with good title to get into them and to remain in them … and to receive all the profits subject to all the liabilities of the position.”
I note that at the time of the death with which I am concerned the house was an owner-occupied house, and that is all I also looked up the case of the Earl of Ellesmere v. the Inland Revenue Commissioners, a later case and therefore in my favour if it triumphs over the others 1918 Law Times, page 568, in which the judge there quoted with approval the following statement
“The hypothetical purchaser must moreover be (it is thought) an ordinary purchaser as distinguished from a purchaser to whom for special reasons the property may have an exaggerated value.”
My contention in this case is that the district valuer is taking the value on the assumption that there would be a purchaser for whom special reasons the property had an exaggerated value, and that of course was specifically disproved in that case.
I have been through all the relevant text books—Dymond on Estate Duty, Green on Estate Duty, the relevant Halsbury's Laws, etc., and all the various laws under which the district valuer would operate. I quite understand that if one can prove that no increased value would in fact be paid by any speculator unless planning permission had been granted, then the law and the fact would be the same and no difference would arise; because if a speculator would not pay an increased value until planning permission, then the house would have to be valued on an existing use basis.
But it is not much comfort to a widow to tell her to litigate on this basis. She already suffers a double burden because the value of owner-occupied houses has gone up enormously, and therefore she has to pay Estate Duty on an already inflated value even on the value of the house as an ordinary house. If, in addition, she is going to have to pay as [column 1633]well on a potential development value, the burden is going to be very, very great indeed.
Often a house is the only capital asset which a husband leaves, coupled perhaps with a small income arising on his death, and to value the house highly means, of course, that the widow has got to find a capital sum very speedily to meet the Estate Duty or to move out of the house in pretty short order.
I believe there is great merit in the claim I am making that the house should be valued on an existing use basis at the date of death.
I have had a letter from one of my constituents, who says
“I cannot see how there can be any justification for assessing Estate Duty on what may happen if the land is developed at some future date.”
Where great merit exists, as I believe it does in this case, I would submit that it is a suitable case for one of the many concessions which are common practice by the Inland Revenue. There are, as the Financial Secretary knows, whole lists of such concessions, and there have indeed in the past been precedents for such concessions in the case of Estate Duty. There is a very close precedent in the famous Chancellor's concession which persisted from the war days until 1959, which applied to owner-occupied houses and which refrained from charging the unrealised value attributable to vacant possession where a close relative who had been ordinarily resident with the deceased continued to live in the house.
This concession might be adopted here, changing just a few words, so that it produced the following concession
“In the case of a house owned and occupied by the deceased, where a spouse or a near relative of his who was ordinarily resident with him at the date of death, satisfies the Commissioners that he or she intends to remain in the house and has no other place of residence available, any increase in the value above the existing-use value of that house, in so far as it could only be realised by a sale, shall be disregarded. The valuation shall however be reviewed if the property is sold within a reasonable period within say three years of the death.”
Such a concession would help very many widows and dependent relatives.
Alternatively, the Financial Secretary could take the view that the point at which Estate Duty starts to be charge[column 1634]able is too low and he could raise it considerably; but that would be a matter for debate on the Finance Bill. Or he could say that the duty in respect of owner-occupied houses should not be payable until the death of the widow. There would be no difficulty in that, because Estate Duty attaches to the land. Therefore, the amount would be safe and adequately secured. If nothing is done, all kinds of anomolous situations and inflated values will arise. For example, suppose that the permitted densities increase. That would give a further enhanced development value.
I hope that the hon. and learned Gentleman will answer sympathetically and agree to have a look at this whole matter. A number of hon. Members on both sides of the House have approached me about this matter and have shown a good deal of sympathy for the case I am putting forward. This is in no way a party political matter and I make it clear to the hon. and learned Gentleman that if one of my hon, or right hon. Friends in his position had given me an outright “No” , I would have taken him apart molecule by molecule. With that thought, I hope that he will not need to submit himself later in the Finance Bill to that process. If his answer is unsatisfactory I may have to take action during our proceedings on the Finance Bill, which might result in our being kept up till rather later than even this late hour. 12.12 a.m.
The Financial Secretary to the Treasury (Mr. Niall MacDermot)
The hon. Lady the Member for Finchley (Mrs. Thatcher) has such grace and charm that even the prospect of being taken apart molecule by molecule by her has its attractions. Apart from the persuasiveness with which she argued her case, it is a case which excites sympathy.
The hon. Lady, as a lawyer, will not misunderstand me when I remind her of the old saying that hard cases make bad law. What she is really inviting me to do by way of extra-statutory concession is to alter the law, which I do not have the power to do, and I think that it would make bad law to do what she asks, even if I had the power. The hon. Lady is complaining, first, that the Inland Revenue valuers, in valuing owner-occupied houses for Estate Duty purposes, [column 1635]are not valuing them at existing use value but are taking development value into account. To the extent that they do, they are doing it only because they are applying the law.
The law on this, which the hon. Lady cited and which is contained in Section 7 (5) of the Finance Act, 1894, requires the valuers to value land for Estate Duty purposes at the price which it would fetch if sold in the open market at the time of the death. One of the cases which she cited, the Ellesmere case, laid down clearly that that price is to be ascertained on the assumption that the property is sold in the open market in such a manner and subject to such conditions as might be calculated to obtain the best price that could be obtained for the vendor; that is, not a special price but the best price in the ordinary market.
The hon. Lady rightly pointed out that at the time at which that Act was passed our modern planning legislation had not been passed, so that the sudden increases in value which occur when planning permission is granted was something which was not known. But, then as now, market values contained and reflected development values. If the best price that would be obtained for the property in the open market was the development value, then in 1894, as in 1965, it is that price which must be looked at in determining the Estate Duty. The effect of our planning legislation is not to confer some additional value that did not exist before, but to place a restriction on the value, so that the development value in full cannot be taken into account until planning permission is granted, but for the purpose of this valuation vacant possession has to be assumed and the house has to be valued on that basis.
If there are appreciating factors, such as a development potential, they have to be taken into account by the valuer in his valuation. There is nothing hypothetical about this. There is an open market in houses, and by ordinary methods of valuation and comparison with prices which other comparable properties are fetching, valuers on both sides do their best to arrive at what they think is a fair valuation. If the parties are unable to agree, there is a proper [column 1636]machinery for determining the dispute, and machinery for appeal.
If the district valuer thinks that a prospective purchaser would take a development value into account, that factor has to be reflected in his estimate of the price that would have been payable at the death. The relevance of planning permission in this connection is that if planning permission has been obtained the development value is reflected in full, but that if it has not been obtained it is nothing like the full development value that is reflected. In the case to which the hon. Lady refers, I understand that there was no question of full development value being taken into account, but I do not want now to go into the details of that case, as I believe that the matter is still subject to negotiation.
To deal with the matter broadly and hypothetically, where there has been no planning permission, all the district valuer does is to assess a price which he thinks will reflect the consensus of the likely views of the buyer and the seller as to the possibility of planning permission being obtained. This is something which the prospective seller would have regard to just as much as a prospective buyer, and even if the prospective buyer was only intending to purchase in order to reside in the house himself and not with a view to developing, if the seller thought that it had a development value he would say to such a purchaser, in effect, “You may only want it for its existing use, but it has this development value. I can get that from someone else. If you want to buy it and live in it, you must pay a price which will include that prospective development value.”
This is the legal basis, and the district valuer has no power or right to depart from that basis. It is laid down in the Statute, and I do not think that it would be in order to attempt in an Adjournment debate to discuss whether it is a proper basis, and whether or not the law should be altered.
The hon. Lady suggested that we could and should deal with the matter by way of concession, and referred to the “Chancellor's concession” which was introduced towards the end of the war and continued during the post-war period. That was a special concession because [column 1637]of the special circumstances of the time. It was due to the acute war-time housing shortage, which gave an abnormal value to vacant possession. If the law had been applied in its strictness there, it would have resulted in quite artificially high and abnormal values for Estate Duty purposes. Therefore, this concession was introduced. It was formally withdrawn in 1959. I think that experience of the working of that concession would give one to hesitate very much before trying to introduce a comparable concession again, because it proved a very mixed blessing at times to those whom it was intended to help.
It quite often happens that a widow left alone in a house does not want to continue living there. It may be too large for her needs. It may be too fraught with associations which she would like to escape from. Perhaps she would like to change her life and not be reminded constantly of the past in ways which make her sad. Not all widows, but often a widow will want to sell the house, realise the capital asset which the house is and which often is the main part of her late husband's savings, and move somewhere else, perhaps to live with or near some other member of her family, and perhaps in a smaller house.
What happened was that as a result of this concession widows found themselves in effect tied to their houses for a two-year period. They had to reside in the house for two years to enjoy the concession. They found themselves tied to the house and were asking, in effect. “How long do I have to go on living in the house in order to get the concession?” It did not really work very satisfactorily in all cases, and I think one would be hesitant before thinking of introducing again a system which was intended to give relief but which might cause distress in some cases and be open to abuse in others.
Other suggestions have been made that the duty should be deferred until the house is sold, or that it should be deferred [column 1638]for as long as the widow continues to reside in the house. There are provisions for spreading the duty by instalments over a considerable period. The duty does not become payable until one year after the death, and then it may at the wish of the taxpayer be spread in yearly or half-yearly instalments over the following eight years, providing the house is not sold in the meantime. In this way there is a substantial alleviation of the immediate burden of the duty.
Also the house frequently is a valuable security on which it is possible, if need be, for the owner to raise a loan. But it is really the instalment provisions which provide the alleviation and which are intended to meet the hardship which can occur of the kind which the hon. Lady referred to. In the case of a widow without large means, where the house is substantially the only asset, as often happens, usually the full value of the house, or something very near the full value, is covered by the initial exemption for the first £5,000 of the estate.
There has also been the proposal that the payment of the duty should be deferred until the time of the widow's death, but this would alter the character of the Estate Duty which, unlike legacy and succession duties which were repealed in 1949, is framed on the basis that it does not in its assessment pay attention to the destination of the estate. It is the instalment provisions which are intended to provide relief from hardship in the case to which the hon. Lady refers.
If there are other cases the hon. Lady knows of, where she thinks these provisions are inadequate and are causing real hardship, I shall be glad to look at the matter further, but I do not think that a solution can be found in any event on the lines which she has so persuasively put forward.
Question put and agreed to. Adjourned accordingly at twenty-five minutes past Twelve o'clock.