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1.1 One of the first questions that needs to be considered when carrying out any valuation of an undivided share in real property is what is the date of valuation? This is because the statutory provisions in the relevant statute vary, depending on whether one is valuing before 1 January 1997. Normally, for Inheritance Tax purposes, the valuation will be after this date and the relevant statutory provisions will be found in the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996). However, even for Inheritance Tax purposes, there may still be occasions where it is necessary to carry out a valuation at an earlier date and in these instances the relevant statutory provisions will be found in the Law of Property Act 1925 (LPA 1925).

1.2 The main effect of the TLATA 1996 was to alter the way in which the legal estate of land subject to joint ownership is held from a trust for sale to a trust of land (see para. 2.3 below). The rights of the beneficiaries under the trust were also modified (see para 4.3 below).

1.3 The effect that the differences in these statutes have on the values of beneficiaries鈥� interests has not yet been fully tested. Areas of potential difference are considered below.

2.1 In any case where the legal estate of land is held in joint names, the legal joint tenancy thereby created is indivisible and is vested in trustees. These trustees are responsible for the exercise of all decision-making powers with regard to the management of the land and its eventual disposal. The trustees are under a legal duty to act in the best interest of the beneficiaries of the trust (some or all of whom may also be trustees). These beneficiaries hold an equitable interest (see para. 3.1 below).

2.2 Under the LPA 1925, the trustees held the legal estate on trust for sale. Such a trust arose either expressly by deed or by implication (usually by some statutory provision, with the result that the terms 鈥渋mplied trust for sale鈥� and 鈥渟tatutory trust for sale鈥� could normally be used interchangeably). Under a trust for sale, the trustees were under a duty to sell the land but they had a power to postpone the sale (section 25 LPA 1925). The important thing to remember is that the power to postpone a sale could only be exercised provided that the trustees were unanimous. If one trustee did not wish to postpone the sale, there would normally have to be a sale (however, see para. 6.1 et seq. below).

2.3 The TLATA 1996 abolished both express (section 4) and implied (section 5) trusts for sale and replaced them with trusts of land. The important distinction between a trust for sale and a trust of land is that, in the latter case, the trustees have a power (not a duty) to sell the land and they also have a power to postpone a sale indefinitely.

3.1 The interests held by beneficiaries in their own right can only be equitable. Depending on the circumstances of the trust, this may be held under either an equitable joint tenancy (see para 3.2), or an equitable tenancy in common (see para 3.3).

3.2 Briefly, in an equitable joint tenancy, each joint tenant is 鈥渨holly entitled to the whole鈥� of the interest which is the subject of the co-ownership. None of the joint tenants can be said to be in possession of a specific part but the total interest is equally vested in all of them. The other important characteristic of an equitable joint tenancy is that, on the death of one of the co-owners, their interest does not pass under their estate but the interest(s) of the survivor(s) expand(s) automatically to embrace the whole e.g. where one of three co-owners dies, the survivors鈥� interests will expand from one-third to one-half; and where one of two co-owners dies, the survivor will automatically become entitled to the entirety. The passing of the deceased鈥檚 interest to the survivors in this way is known as the doctrine of survivorship.

3.3 The vast majority of requests received for valuation advice will be in situations where land is held under an equitable tenancy in common. Under an equitable tenancy in common each tenant holds a distinct undivided share in the entirety. These shares may be equal, but may also vary in proportion between the individual tenants in common. There is no right of survivorship and on the death of an individual tenant in common their share will form part of their estate. An individual tenant in common can also further sub-divide their share either during their lifetime or under their will.

3.4 Whilst under the 1925 legislation the legal joint tenancy cannot be severed, it is possible for the joint tenants in their capacity as beneficiaries to sever their equitable interest and thereby avoid the doctrine of survivorship. This can be achieved by employing one of the following methods:

• A notice under s36 (2) LPA 1925 (as amended by TLATA 1996) allows the equitable joint tenancy to be severed thus converting it into an equitable tenancy in common. This does not affect the legal estate.
• Disposal by one joint tenant. A tenant can always dispose of their share but the effect of this is to convert the joint tenancy into an equitable tenancy in common. This applies equally where the disposal is to one of the other joint tenants because joint tenants cannot own unequal shares.
• Voluntary partition. This is a method whereby the joint possession is disunited and the effect is to make each former co-tenant a separate owner of a physical portion of the land and thus terminate the co-ownership. Instead of holding an undivided share in the whole, each person will hold a divided share in severalty.
• Sale of the legal estate by the trustees and distribution of the proceeds to the beneficiaries. This is the usual method of bringing an end to the joint tenancy and may come about either voluntarily, where all the trustees are in agreement to sell, or compulsorily, following an order of the court under either s30 LPA 1925 (for trusts for sale) or s14 TLATA 1996 (for trusts of land), where the trustees have previously refused to sell.

Finally it should also be noted that a Court may infer a severance from a course of dealing between the joint tenants.

4.1 Since 1925 it has not been possible for a tenancy in common to exist as a legal estate (see para 3.1 above) and a conveyance to two or more persons as tenants in common operates either as a conveyance in joint tenancy upon trust for sale (before 1997) or as a conveyance in joint tenancy as a trust of land (1997 onwards).

4.2 Under a trust for sale, the trustees were normally not required to sell at once, nor indeed at any time, because they were empowered, either by the trust deed or by statute, to postpone the sale indefinitely. In the case of a statutory trust for sale (or a trust for sale created by a trust deed which imports the requirement), they were required however, so far as practicable, to consult the tenants in common and to give effect to their wishes or to the wishes of the majority in value (sec 26 LPA 1925). With the consent of all adult beneficiaries, the trustees could also partition the land among the persons beneficially entitled, (s 28(3) LPA 1925).

4.3 Under a trust of land, the trustees are not under a duty to sell the land but can do so if they so wish. Alternatively, provided they have obtained the necessary consents, they can partition the land among the persons beneficially entitled (sec 7 TLATA 1996). As in the case of a trust for sale, they are usually required, so far as practicable, to consult the tenants in common and to give effect to their wishes or to the wishes of the majority in value (sec 11 TLATA 1996). Additionally, they may exclude a beneficiary from occupying the land and arrange for payments to be made to that beneficiary by way of compensation (sec 13 TLATA 1996).

4.4 Under both types of trusts, tenants in common can still deal with their equitable interests as freely as they could (formerly) have dealt with their legal estates before 1926. If A, B and C are tenants in common, and C sells his/her equitable interest to D, the legal joint tenancy remains vested in the trustees on trust for A, B and D. A tenancy in common is extinguished by partition, sale of the legal estate, or the acquisition by one tenant of the share of all other co-tenants.

5.1 In carrying out any valuation of an undivided share in land it should be remembered that what is to be valued is the particular interest which the transferor has and not the whole property (Walton v CIR (1995)). Normally what the hypothetical vendor of such an interest has to offer is:

• a right to receive the appropriate portion of the net income, if any, pending sale of the land by the trustees of the legal estate;
• at some future date the appropriate share of the net proceeds of sale, and
• a right to occupy unlet property jointly with other co-owners, unless the co-owner in occupation has some contractual right to exclusive possession - or has been excluded under s13 TLATA 1996.

5.2 The status of the co-owners. Whilst the approach to be adopted in valuing undivided shares was not really in contention in 鈥渢he Walton case鈥�, one important principle to come out of it is that, when considering the circumstances of the hypothetical sale, only the vendor and purchaser of the actual interest in question are hypothetical. In the Walton case, the deceased鈥檚 interest as determined by the Lands Tribunal (which was not subsequently challenged by the Revenue) was an undivided beneficial interest in an agricultural tenancy as a partnership asset. It was submitted on behalf of the Revenue that the landlord would have been a special purchaser for the deceased鈥檚 interest and, should be assumed to be 鈥渁 hypothetical landlord who is neither desperate to purchase nor uninterested in purchasing鈥� in contrast to 鈥渢he actual landlord with all his attributes鈥�. The Court of Appeal found in favour of the taxpayer that the landlord was not a hypothetical person but a real one. The Court also rejected a further argument advanced on behalf of the Revenue that it was required to assume a hypothetical landlord unless the actual landlord was a person with a policy known to the market. In his judgement Peter Gibson L.J. said 鈥淚 would add that the same logic requires that in the case of a deceased partner owning an interest in a tenancy which is a partnership asset, regard should be had to the actual intention of the actual surviving partner and not to a hypothetical partner鈥�.

5.3 It therefore follows that the co-owners in joint property cases should be treated as real and not hypothetical persons and any evidence regarding their actual attributes and intentions should be taken into account in arriving at a valuation. However, any evidence submitted as to the actual intentions of the co-owners should be treated with a note of caution. This is because, the other co-owners will often be beneficiaries of the transferor鈥檚 estate or have some other connection with them and consequently any evidence they give may well be self-serving. In the 鈥淲alton鈥� case the Court of Appeal accepted that such evidence could well be self-serving and it was up to the Lands Tribunal as a tribunal of fact to determine what, if any, credence should be attached to it. (See Para 9.4 below).

5.4 One other important point to be borne in mind is that, although it must be assumed that there is no connection between the vendor of the share to be valued and the other co-owners (the former being hypothetical and the latter actual), any connection between the other co-owners must be taken into account, e.g. are they likely to work in concert with a view to frustrating the intentions of a likely purchaser of the subject share?

6.1 Unless there is any evidence to the contrary, in most cases it is reasonable to assume that co-owners will co-operate to their mutual advantage. However, if the co-owners under a trust for sale could not agree then it was open to 鈥渁ny person interested鈥� to apply to the Court for an order for sale under section 30 Law of Property Act 1925. The chances of obtaining such an order might well have affected the parties鈥� negotiating positions. It is, therefore, important to consider whether the Court would have been likely to have exercised its discretionary powers to grant such an order and, in this respect, case law has shown that the Courts were reluctant to grant orders for sale where they considered the original purpose of the trust was still capable of being fulfilled. Therefore, it is necessary to firstly deduce the purpose behind the trust for sale and then decide whether or not this purpose has come to an end.

6.2 In some cases it will be possible to deduce the purpose behind the trust for sale from the trust deed itself or from the known circumstances surrounding it. In other cases it will be necessary to ask the parties what this purpose was. However, if the parties maintain that there is some unusual purpose and this is going to have a material effect upon the valuation, they should be asked to demonstrate that this purpose was known to the market at the valuation date. It may be possible to argue that private information unknown to the market should not be taken into account, as it would not have been available to a hypothetical purchaser. (See Lynall v CIR Practice Note 1 Appendix C).

6.3 In many cases it will be highly likely that an order for sale would be granted and it may be considered that the other co-owners, when faced with the prospect of almost certain defeat in the Court, would be prepared to reach agreement with the transferor and either purchase their share or agree to a sale of the property. In such circumstances, a discount of around 10% from the arithmetical fraction of the entirety would seem appropriate to reflect the disadvantages of holding only a part interest. However there will be cases when such an order is less than 鈥渉ighly likely鈥� particularly:-

• Where such an order would involve displacing a co-owner entitled to occupy the property as their main residence; or
• Where the purpose of the trust for sale has not been fulfilled and is still capable of being fulfilled.

In such circumstances it will be necessary to consider what benefit, if any, the co-owner will derive from the property until a sale is effected, e.g. it may be considered that the Court would be only likely to postpone an order for sale provided that a co-owner in occupation paid the transferor an occupational rent (see para. 6.6 below). Depending on the benefits being derived, deductions will range from as low as 10%, where the purchaser would be receiving immediate tangible benefits fully reflecting the value of the interest, up to 20% or even higher, where it is felt that little or no immediate benefit would be derived.

6.4 Guidance as to the interpretation of the purpose of the trust is given in the case of Smith v Smith and Smith (1975), which concerned a minority owner. Three people (confusingly all called Smith) had bought a house together in equal shares for them all to live in, the purpose thus being the provision of joint living accommodation. After a while they quarrelled and the first Smith moved out. She sought an order for sale under s.30 LPA 1925 which the other two resisted. On their behalf it was argued that s.26 (3) LPA 1925 required the trustees for sale, so far as practical, to give effect to the wishes of the co-owners, the majority of whom opposed a sale. Fox J decided that the court was not limited by s.26 (3), in exercising its discretion under s.30 to order a sale, the court must look at all the circumstances and decide whether it would be inequitable to order a sale. Also it was not 鈥渃onsistent with the general interests of the trust鈥� for two of the three tenants in common in equal shares to insist on the property remaining unsold when it was not producing any income, and therefore of no benefit to the third. He concluded it was not inequitable and ordered a sale.

6.5 Sometimes a trust deed will state that the property is to be sold when the majority of co-owners (usually by value but sometimes by number) wish it to be sold. Such a provision would clearly affect the likelihood of an order for sale, but may in fact merely represent evidence that the purpose behind the trust for sale was for the property to be held as long as the majority wished it to be held.

6.6 When an application for an order for sale under section 30 LPA 1925 came before the courts, there was some uncertainty as to the ability of the court to make an order other than an order for sale. The court was probably prevented from making an alternative order but might have indicated to one of the parties that, unless they carried out a specific action, the court was minded to grant an order for sale. The sort of action that could be envisaged here was, if one co-owner was in occupation of the property and the other(s) excluded, a court might have come to the view that, unless the co-owner in occupation paid the other(s) an occupational rent, an order for sale may be appropriate. Another example could be where a minority owner sought a sale of the entirety but the majority owner(s) resisted this. The minority owner may have argued that, unless an order for sale was granted, he or she would have been 鈥渓ocked into鈥� the investment and unable to dispose of it. One way a court might have overcome these competing priorities was to allow the minority owner to come to an agreement with the majority owner(s) whereby the latter acquired the former鈥檚 interest. The threat that, if agreement was not reached, an order for sale may be granted could be held over the parties in order to bring them to terms.

7.1 There have been relatively few reported Court decisions regarding actions brought under TLATA 1996. Banks and other lending institutions, seeking to recover debts, have brought most of these and in reaching their decisions the courts have generally applied similar criteria to those they would have employed under the old section 30 LPA 1925. There are, however, thought to be some differences with the LPA 1925 and these are considered in more detail below.

7.2 Exclusion and Restriction of Right to Occupy Trust Land. In connection with a trust for sale, the Court of Appeal ruled in the case of Bull v Bull (1955) that each co-owner had a right to participate in the occupation of the trust land. Under TLATA 1996 this is no longer the case as the right applies only where the land is available for occupation by the beneficiary in question and suitable for occupation by him (sec 12) and as the trustees now have the power to exclude or restrict the entitlement of any of the beneficiaries, unless the exercise of that power would prevent an occupying beneficiary from remaining in occupation (sec 13(7)). Section 13(6) includes a power to grant compensation to the excluded beneficiary but there is no stipulation that this should be based on market value. Where a beneficiary has been excluded from occupation under section 13 it could be argued that the value of their share has been reduced. However, if the excluded beneficiary is dissatisfied with the trustees鈥� decision, they still have a right to apply to the Court for an order under section 14 (see para 7.3 below).

7.3 Right to Apply for a Court Order. Under section 14 TLATA 1996 any person who has an interest in a property subject to a trust of land may make an application for a Court order. In determining any such application, the Court is required to have regard to the criteria listed in section 15 (1), namely:

• the intention of the persons who created the trust
• the purposes for which the trust property is held
• the welfare of any minor who occupies or might be expected to occupy the trust property as their home
• the interests of any secured creditor of any beneficiary

It should be noted that no order of precedence is given to these criteria and the Court may also have regard to other factors it feels to be relevant.

8.1 Valuations of undivided shares have proved difficult and contentious for many years, because of the manner in which they are held and because such interests rarely change hands in the open market. Two basic approaches to the problem have been commonly adopted, namely:

• the entirety approach involving firstly the valuation of the entirety interest and then deriving the value of the share by applying the appropriate arithmetical fraction (i.e. 1/2 in the case of a half share) and discounting the resulting figure to reflect the inherent disadvantages in owning a share compared with an entirety interest (N.B. There may, exceptionally, be cases where valuation of the entirety takes account of the existence of an occupying co-tenant and where a specific additional discount is inappropriate - see the decision of the Lands Tribunal in Monro v CIR (1999) (RVR vol 40 p. 81); and
• b. the income approach involving the capitalisation of income or notional income attributable to the share.- see the decision of the Lands Tribunal in HSBC Trust Company (UK) Ltd (As executor of the estate of Gwendoline Maisie Farmbrough deceased (2006) (see para 10.5 et seq below for further details)

Neither of these two approaches is necessarily correct in all circumstances but in most cases the entirety approach will be preferable (see para 10.4 below).

8.2 An entirety approach is likely to be appropriate where the owner of a share can look forward to receiving a share of the entirety value at some future date. This might be by:-

• a sale of the entirety (by agreement with the co-owners, or following an order for sale, under Section 14 TLATA 1996 or Section 30 LPA 1925); or
• a sale of the share to one of the co-owners; or even
• a sale of the share to an outsider who for the reasons in a) or b) above might base their bid upon the entirety values.

8.3 An income approach may be appropriate when:-

• a sale of the entirety is unlikely to be agreed to by the co-owners; AND
• there do not appear to be grounds for an application for an order for sale under Section 30 LPA 1925 or Section 14 TLATA 1996; AND
• there is not a special purchaser from among the co-owners who, by acquiring, would be able to obtain control over, or ownership of, the entirety.

If an income approach is followed it will be necessary to check this by an entirety approach. In most circumstances the two methods should not produce a significantly different result.

9.1 Para. 5.2 above referred to the Court of Appeal ruling in the Walton case and the fact that only the purchaser and vendor of the actual interest to be valued can be assumed to be hypothetical. In an earlier Lands Tribunal decision in Wight and Moss v CIR (264 EG 935) (The Nellie Wight case), the Member (Mr W H Rees FRICS) concluded that the co-owner should be treated as a hypothetical purchaser of the deceased鈥檚 interest. The Walton case has now confirmed that this particular aspect of the decision in the Nellie Wight case was incorrect. However, the Nellie Wight case still provides us with important guidance on the valuation of undivided half-shares, where a co-owner was in occupation of the trust property at the valuation date.

9.2 The facts of the Nellie Wight case were that an undivided half share in a dwelling house fell to be valued, following the death of one of the joint owner-occupiers (two elderly spinsters). The appellants contended for a valuation based on the income approach enhanced slightly to reflect the co-owner鈥檚 likely bid. The DV valued on the basis of the vacant possession value of the house divided by two and then deducting 10%. The Tribunal approved the DV鈥檚 approach though it increased the final deduction to 15%.

9.3 Although the rationale employed by the Lands Tribunal in reaching its decision has now been shown to be flawed, this does not mean that it is necessarily wrong to apply a discount of 15% when considering valuations of a half-share in a dwelling-house where a co-owner occupies it as their main residence. In arriving at his decision the Member considered the likely success in obtaining an order for sale and concluded that 鈥渃ounsel for the appellants (i.e. the taxpayer) is right: it is not highly likely that such an order would be obtained鈥� (he argued that no order for sale would be granted whilst the underlying purpose of the trust continued and since the other co-owner was still in occupation, no order would be made whilst she was still alive).

9.4 Accordingly, the factors to be borne in mind when valuing a half share in a property in which the other co-owner is in occupation, will include

1. The likelihood of the actual co-owner wishing to purchase the deceased鈥檚 share.

2. In valuations before 1 January 1997, the likelihood of a purchaser of the deceased鈥檚 share wishing to occupy the property jointly with the co-owner.

3. The prospect of the court ordering a sale if the co-owners do not agree to pay the owner of the deceased鈥檚 share a market rent (see para. 6.4 above)

4. The age and state of health of the co-owner. If it were decided that the co-owner really would not be in the market to acquire the deceased鈥檚 share and there was no prospect of the court ordering a sale of the entirety whilst the co-owner remains in occupation then the age and health of the co-owner will have a bearing on the length of time before an order for sale may be granted. The market may take a very different view when the property is occupied by an 85 year old widower in poor health, than if it were to be occupied by a healthy 40 year old, with their partner and a young family.

9.5 In the Nellie Wight case, the member went on to say - 鈥淚t seems that the percentage of 10 is derived from the decision in Cust鈥� (Cust v CIR: [1917] 91 EG 11 8 December 1917) 鈥渁nd that this percentage has become customary. The finding in Cust related to an estate (which fell to be valued in 1913) comprising licensed premises, houses, shops, cottages, smallholdings, farms, gardens, stables and woodlands. The position in the case of such a half-share as has to be valued here is unusual in the sense that the purchaser should have the right to occupy the property jointly with the other owner and that is a factor which, in my judgement, on the evidence, is one which also points to a larger percentage than 10鈥�. These remarks suggested that the deduction in respect of undivided half-shares in property that is not owner-occupied, as a main residence, should normally be less than 15% as problems of joint owner-occupation would not arise.

9.6 This was put to the test, in the first case to reach the Lands Tribunal, involving a trust of land and where the discount for the undivided share was in dispute. This case was the 2006 Lands Tribunal case of James Anson St Clair-Ford (As executor of the estate of Norman Peter Youlden deceased) v HMRC. This case involved the valuation for Inheritance Tax purposes of a half share in the freehold interest of a shop, in a Devon market town, which was let to a well-known retailer. The DV argued for a discount of 10%; whilst the surveyor representing the estate argued for 15%. The entirety value was also in dispute and the Tribunal determined this at the DV鈥檚 figure of 拢390,000. The Tribunal also agreed with the DV in the matter of the discount and applied 10%, giving an end figure of 拢175,500 say 拢175,000. In his decision, the member, P R Francis FRICS, said 鈥�. I am satisfied on the evidence that 10% is indeed the customary discount applied to half-shares particularly when they are undivided and there is no likelihood that the surviving partner will remain in occupation (as in a residential property with tenants in common). There is evidence to suggest higher discounts for minority shares and where there may be other complications, but in the circumstances of this case, I have not been taken to any authority which suggests a departure from convention would be appropriate鈥�.

9.7 The level of discount to be applied when valuing an undivided half-share interest should therefore normally be as follows:

• where the other co-owner(s) is (are) not in occupation and the purpose behind the trust no longer exists - 10%
• where the other co-owner(s) is (are) not in occupation but they have a clear right to occupy as their main residence and the purpose behind the trust still exists - 15%
• where the other co-owner(s) is (are) in occupation as their main residence. - 15%

If the other co-owner is in occupation and the transferor has been excluded from possession, or is likely to be excluded from occupation, under Sec 13 TLATA 1996 (see para. 7.2 above), it will be necessary to look at any benefits obtained by way of compensation and compare the value of these benefits with the notional value of the interest on the assumption that exclusion had not been authorised.

10.1 When valuing shares other than half shares, it is sometimes argued that the level of discount from the arithmetical fraction should be varied, depending on whether the share to be valued is a minority or majority one (see para. 10.4 below).

10.2 Generally individual share owners are connected to one another in some way, whether it be a family or business relationship, and any transfer which takes place for consideration often reflects precisely the arithmetical fraction which the share represents (e.g. a 1/5 share changes hands for 1/5 x the value of the whole) because the shareholders have a common understanding as to the nature of the arrangement. However, when considering a hypothetical disposal for taxation purposes it is not possible to assume that such an understanding will prevail (see para. 5.4 above) and dictate the value accordingly. The share is assumed to be on the open market and available to all potential purchasers, including existing co-owners, possibly bidding in competition with one another.

10.3 Useful guidance on the valuation of minority shares was provided by the 1997 Lands Tribunal decision in the case of Charkham v CIR (RVR vol. 40 p7) (鈥淭he Charkham case鈥�). This case involved the valuation, at five different dates, of minority undivided shares in two blocks of central London property held by various members of the Charkham family. The interests in property in which the undivided shares were held were:

• The freehold interest in two shops situated at the southern end of Tottenham Court Road. The shops were subject to leases and formed part of a parade the site of which had development potential.
• The freehold interest in four houses, each converted into five flats, situated in Alderney Street, Westminster. Some of the flats had been sold off on long leases and others were subject to tenancies protected under the Rent Act 1977.

The entirety valuations were agreed prior to the hearing and the agreed valuations in respect of the Tottenham Court Road properties reflected a substantial element of development value. It was also agreed that none of the other co-owners would have been in the market at any of the valuation dates.

At the hearing, the DV submitted a valuation based on the 鈥渆ntirety鈥� approach, whilst the witness for the appellants adopted an 鈥渋ncome鈥� based approach. The valuation dates, the sizes of share concerned, the discount contended for by the DV, the implied percentage that the appellants鈥� witness eventually contended for (he was obliged to change his valuation whilst being cross-examined) and the discount awarded by the LT were as follows:

10.4 A number of questions were put to the Tribunal in the Charkham case and the main findings of the Member (Mr A P Musto FRICS) are set out below.

• Likelihood of obtaining an order for sale under Section 30 LPA 1925

The Member considered the evidence before him and said 鈥淚 find on the basis of the authorities before me that in the event that it becomes necessary for a minority shareholder to make an application to the Court under section 30 the Court is likely to grant an order which would either order to force (sic) the trustees to sell the appeal properties or force the trustees to acquire the minority share at a fair price. However I find that a purchaser in the open market for a minority share would perceive some uncertainty as (to) the outcome and the costs involved if such an application was required. The uncertainty would in my view result in a purchaser making some discount in the price that he would pay for the minority share鈥�. Later he said that he thought section 30 鈥渨ould be of limited benefit to a potential purchaser of a minority share in view of the uncertainty attached to the outcome of an application and the extent of any liability for costs鈥�. Although the Member did not specifically mention it, the emphasis on the fact that he was dealing with a minority share seems to imply that he would have treated a majority share somewhat differently, possibly resulting in a lower level of discount (see also para 10.5 below).

• Minority Shareholder鈥檚 Lack of Control

The appellants argued that allowance should be made for the lack of control, which a minority shareholder could exercise over the trustees in respect of the management and future of the properties. The Member agreed with the DV that the trustees had a statutory duty to act prudently and reasonably in the best interest of the beneficiaries. However, he then went on to consider the Tottenham Court Road properties, where the trustees concluded a Joint Marketing Agreement (JMA) with neighbouring owners in order to realise the full development potential of the site, and he took the view that some discount should be made to reflect the fact that a minority shareholder would not have all the information available to the trustees and would not be a party to the JMA. In considering the valuation of the Alderney Street properties it was accepted there was some potential for differences in opinion over what to do with the vacant flats and that this should be reflected in the discount rate. Prior to the coming into force of the Housing Act 1988, when flats became vacant the trustees had the option of either selling them off on long leases or re-letting them on protected tenancies at fair rents. After the passing of the Housing Act 1988, if the trustees wished to retain vacant flats as investments, they had the option of re-letting them on assured shorthold tenancies at market rents.

• Entirety or Income Method

The member had to consider whether the DV鈥檚 鈥渆ntirety鈥� approach or the appellants鈥� surveyor鈥檚 income based approach was preferable. He decided that, on balance, the 鈥渆ntirety鈥� approach was to be preferred and accepted the DV鈥檚 evidence that 鈥渁 purchaser in the open market of an undivided share in commercial property would adopt the 鈥渆ntirety鈥� approach as there is likely to be evidence of open market sales of comparable property within the investment field. This method has in my view the attraction of simplicity by making single discount and therefore avoids the possibility of double counting for any perceived disadvantage or advantage of the ownership of an undivided share when compared with the ownership of the entirety鈥�. He then went on to point out the difficulties in using the appellants鈥� surveyor鈥檚 approach because of the effect that a variation in a single element of valuation would have in the end result and noted that it had been necessary for the witness to change his valuation of the Alderney Street properties because he had not reflected the benefit of the vacant flats at each date.

• Discount for Size of Shareholding

The appellants argued that there should be a greater discount for the 6.04% shareholding than for the 24.04% holding. The Member concluded that he should make little or no distinction between the two.

10.5 The next case to reach the Lands Tribunal, where the discount for a minority undivided share was involved was in 2006. This case, was HSBC Trust Company (UK) Ltd (As executor of the estate of Gwendoline Maisie Farmbrough) v HMRC, (鈥淭he Farmbrough case鈥�). This case involved the valuation, as at 5th January 2001, of a 13/80 undivided share in a mixed commercial and residential development in North London. The development included 28 flats 鈥� 24 of which were let on assured shorthold tenancies with the remainder on regulated tenancies. There were also 9 shop units let on conventional retail leases and 10 lock up garages. The capital value of the entirety had been agreed at 拢4,150,000 (including an addition for the hope of obtaining vacant possession on the flats and selling them off on long leases). The gross rent receivable, at the date of valuation, was 拢270,000 per annum but, it had been agreed that a figure of 拢100,000 should be deducted from this to arrive at a net rent, of 拢170,000.

10.6 The sole area of dispute in the Farmbrough case was the approach to be adopted in valuing the 13/80 undivided share. The main area of contention was the fact the shares were held under a Trust Deed, effective from December 1967 and clause 5 of this deed provided that no member (i.e. share owner) could call for sale of the trust property or any part thereof until a period of seventy five years had elapsed (i.e. December 2042); or until members holding an absolute majority of the shares had called for such a sale, in writing. HMRC had obtained legal advice to the effect that this clause also applied to the disposal of individual flats on long leases. Furthermore the other 5 share owners had stated they were not interested in selling. At issue was the appropriate valuation methodology to be utilised, i.e. the 鈥渆ntirety鈥� approach, or the 鈥渋ncome鈥� (investment) approach. If the income approach was appropriate, then the issues were firstly whether this should have regard to the gross or net rents and secondly, what adjustments were required to reflect the fact the deceased held a minority interest bearing in mind the restrictions on sale imposed by clause 5 of the Trust Deed.

10.7 The Tribunal member, P R Francis FRICS, heard evidence from both the surveyor representing the estate and the DV on behalf of HMRC. During the course of his evidence, the surveyor representing the estate said that if the entirety basis were to be adopted, 鈥渋n normal circumstances a (minority share) discount would be in the region of 10 to 20%鈥�. However, because of the effect of clause 5, he felt this should be increased to 50%. He produced two income based valuations 鈥� by capitalising firstly the gross income and then the net income. His three valuations, for the minority share, ranged between 拢337,187 (entirety method) and 拢390,000 (net income method). The DV鈥檚 prime valuation was based on a capitalisation of the gross income. He also produced alternative check valuations based on the agreed net income and the gross income but making a standard 15% deduction for management instead of the agreed deduction of 拢100,000 from the gross income to arrive at the agreed net income (which was in the region of 37%). The DV sought a determination at 拢520,000.

10.8 The Tribunal member expressed doubts as to whether the entirety method was an appropriate way of determining the value of a minority share where there were specific restrictions imposed on sale of the trust property i.e. clause 5. He preferred the investment method and here he was persuaded that a net income approach, using a single rate of capitalisation was preferable and a purchaser would have regard to the returns obtainable in other markets in arriving at this yield. The Tribunal member considered the appropriate net yield was 6.5% and that this should be applied to the net income of 拢170,000. He accordingly determined a value of 拢425,000 for the minority share making no specific deduction to reflect the fact he was determining the valuation of an undivided share (this being reflected in the yield). Based on the agreed entirety value, the figure determined equated to a 37% discount for the share

10.9 Following the Charkham and Farmbrough cases, the following principles should be observed when valuing shares other than other half shares:

• The 鈥渆ntirety鈥� method should be adopted in most straightforward cases. The 鈥渋ncome鈥� approach should normally only be utilised either as a check valuation or where the circumstances are unusual, such as in the Farmbrough case.
• When valuing a minority share a larger discount than 10% may be appropriate in cases where

** i.** it is felt unlikely that a potential purchaser would seek an order for sale (under Section 14 TLATA 1996 or Section 30 LPA 1925) or, there is evidence that the majority of the share owners under a trust of land would oppose an application for an order for sale by a minority shareholder, and

** ii.** it is felt that there is potential for dispute concerning how the property is managed,

However, the discount should not normally exceed 20%. It must be remembered that one of the reasons why the deduction for the share in the Farmbough case appears so great, when looking at an 鈥渆ntirety鈥� approach is that the member鈥檚 decision was based on capitalising the net income, which was considerably less than what one would normally expect in relation to the gross income. The decision in the Farmbrough case reflected the particular and unusual facts in that case.

• Except in the cases outlined in b) above, no distinction in discount should normally be made to reflect differences in the size of shareholdings.

10.10 Clearly even a majority share has disadvantages compared with ownership of the entirety. There will be circumstances however, where a discount of less than 10% share should be considered -.e.g. where it is known the co-owner(s) is/are keen to place the entirety interest on the market, or in cases involving large majority shares, such as a share of over 90% in a high value property (see Section 18, paras. 18.7 and 18.8).

11.1 Para 10.9a above sets out circumstances where it may be appropriate to use the 鈥渋ncome鈥� approach in the valuation of an undivided share. When using this method of valuation the choice of YP is critical. Obviously if the YP is reduced by only 10% or 15% from that applicable to the entirety, it would give the same result as the entirety method with a similar discount. There is generally little or no evidence on the choice of YP and it is the use of substantially reduced YPs that give rise to substantial discounts when the income method is used. In the Farmbrough case, the member only considered a valuation based on net income and here no comparable evidence of property based net yields was produced.

11.2 When one considers the basic factors that affect the choice of YP, probably the most significant is the degree of security (in real and monetary terms) and quality of both the income and the investment. It should always be borne in mind that, at the end of the day, this is still an investment in property and so the best starting point for the choice of yields will be property investments rather than looking to the yields on stocks and shares.

11.3 In choosing a yield, the starting point should be the yield that the market would apply to the entirety interest. However, adjustments should then be considered for the following reasons:

• There is more scope for disagreement over management of the investment, it being necessary to agree actions with the co-owner(s) as well as the tenant (see para 10.4b above).
• There is a lack of liquidity. Eventually the shareowner may receive a share of the entirety value but it may prove difficult to sell in the meantime.

11.4 It is not necessarily as severe a disadvantage to own a small-undivided share as at first may be supposed. An undivided share may enable an investor with limited money available to acquire a property investment, which would otherwise have been too expensive. The choice may for example be between investing in the entirety of a secondary shop or an undivided share in a shop in a prime trading location. Both investments may provide a similar income, but it is possible that, even with the disadvantages of shared ownership, the undivided share may provide a better investment and justify a similar or higher YP.

Alternatively consider the relative advantages between owning a single let house and a 1/50 undivided share in an estate comprising 50 such houses. The income will be the same, but often the main reason for holding such an investment is the capital gain that will accrue when a property falls vacant. With 50 houses there is a good chance that one or two will fall vacant each year producing a steady stream of capital. Whilst with the single house the capital growth would come in one lump sum but one may have to wait many years for this to occur. There may be some investors who would in fact prefer the undivided 1/50 share, if so the choice of YP should reflect that and there may be only a modest discount for shared ownership.

When valuing undivided shares, comparisons are often drawn with the valuation of shares in property companies. In particular reference may be made to the SAV practice of making large discounts, up to 60%, from the entirety value when valuing small shareholdings in unquoted companies. Similarly the parties may point to the YP used in the capitalisation of income based upon the yield from stock company shares.

These are misleading comparisons and no weight should be given to them. If one considers the relative positions of a person owning a minority of the shares in a company whose only asset is a property and someone owning a corresponding undivided share in the property itself, it can be seen that there are considerable advantages to be derived from owning the undivided share, namely:

• The company is free to fix its dividend, or indeed to pay no dividend at all.
• The owner of an undivided share has an automatic right to the appropriate share of the net income.
• If the property is vacant, the undivided shareowner has the right to occupation (together with the other co-owners) while the company shareowner does not.
• The company shareholder has no ability to enforce a sale of the underlying asset, equivalent to section 14 TLATA 1996 and section 30 LPA 1925 whereby such a sale may be achieved.

Both the company shareowner and the undivided shareowner can of course dispose of their assets in isolation if they so wish.

The law relating to undivided shares and the factors to be taken into account in deciding the amount of the discount are different in Scotland. If caseworkers in Scotland require advice on the discount to be applied they should seek advice from CEO.