© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Open market sale
Summary of principles
"[272] Both parties had relied on Hoffman LJ in IRC v Gray [1994] STC 360 ("Gray") which Mr Goldberg rightly said reflected the paragraphs in the IVS 13 upon which he particularly relied (paragraphs 29, 30(d) and (e), 31 and 32).
[273] We take from Gray the following principles:
(1) The hypothetical vendor is anonymous but reasonable and prudent; the vendor is neither over-anxious nor unduly reluctant.
(2) The buyer is slightly less anonymous but also reasonable and makes proper enquiries; the buyer is not too eager to buy.
(3) Although the sale is hypothetical, there is nothing hypothetical about the open market and the demand for the property in question at the relevant time must be considered.
(4) The valuation may be a figure within a range of prices and is a retrospective exercise in probabilities.
(5) The vendor must be supposed to have taken the course which would get the largest price without undue expenditure of time and effort.
As far as the "largest price" is concerned, we agree with Mr Goldberg that that reflects paragraphs 30.4 and 140 of IVS 104 from IVS20. We have set out those paragraphs in full at Appendix 5.
...
[277] Mr Henderson relied upon paragraph 203 of Netley v HMRC [2017] UKFTT 442 (TC) ("Netley") where Judge Cannan said:-
"203. The following principles of valuation are not controversial:
(1) The sale is hypothetical. It is assumed that the relevant property is sold on the relevant day (see Duke of Buccleuch v IRC [1967] AC 506 at 543 per Lord Guest).
(2) The hypothetical vendor is anonymous and a willing vendor, in other words prepared to sell provided a fair price is obtained (see IRC v Clay [1914] 3 KB 466 at 473, 478).
(3) It is assumed that the relevant property has been exposed for sale with such marketing as would have been reasonable (Duke of Buccleuch v IRC at 525B per Lord Reid).
(4) All potential purchasers have an equal opportunity to make an offer (re Lynall [1972] AC 680 at 699B per Lord Morris).
(5) The hypothetical purchaser is a reasonably prudent purchaser who has informed himself as to all relevant facts such as the history of the business, its present position and its future prospects (see Findlay's Trustees v CIR (1938) ATC 437 at 440)."
[278] Although we are not bound by Netley, we agree with that analysis." (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)
- Retrospective exercise in probabilities
"[276] Amongst the quotations from Gray, one quotation to which Mr Henderson took us, was included at paragraph 3. It reads:
"...The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part in the calculation. The inquiry will often focus on what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened.""" (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)
- Different ways of exploiting asset: which would give highest price?
"[410] Obviously, a hypothetical purchaser might simply view the purchase of the Product Assets as being the purchase of an income stream and leave the PSAs in place unless something were to go wrong.
[411] However, the valuation principles that we have described mean that we must look at what would get the largest price without undue expenditure of time and effort.
[412] In our view, the hypothetical purchaser of the Product Assets might well have seen the right to terminate the PSAs as a real opportunity. Mr Engineer had chosen the structure utilising CPL but a hypothetical purchaser would have had "a clean sheet" and, presumably, would have wished to maximise profits. Given that CPL was making significant, and rising, profits having outsourced the majority of the activities required to monetise the Product Assets, we take the view that the termination of the PSAs would be a possible "best use" of the Product Assets because those profits could then be taken in house with comparative ease.
[413] The ability to terminate would give a hypothetical buyer a range of options depending on their attitude." (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)
The market
- Matter of inquiry/fact rather than assumption
"[275] In Mr Goldberg and Mr Brodsky's Skeleton Argument they relied on paragraphs 3 to 6 of Mr Justice Lewison's judgment in HMRC v Bower [2009] STC 510 ("Bower") and that includes inter alia quotations from Gray. At paragraph 6 it stated:
"Thus, although the whole world is in theory free to bid, there must be an inquiry into who is in the market. This is an inquiry, not an assumption, and in my judgment, an inquiry is an inquiry into the facts." (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)
Hypothetical purchaser
- Hypothetical purchaser more likely to be person with understanding of the asset/business
"[408] Mr Goldberg had argued that "One of the more likely hypothetical purchasers is somebody else in the pharmaceutical business…" and therefore might already have the expertise to successfully exploit the Product Assets in house. In their Note on the Evidence HMRC argued that that was an impermissible approach to valuation since, as Gray made clear, the hypothetical buyer is anonymous. That is true. However, we have quoted paragraph 6 from Bower and paragraph 3 from Gray (paragraphs 275 and 276 above) because those make it clear that one should be looking at who, "in the real world" would be likely to be in the open market. All the experts have agreed that the Product Assets were decidedly "niche". Indeed, as we will mention in regard to competition, Ms Brotherston had noted that there was not a competitive or active market for the Product Assets. It is a minor point but, on the balance of probability, Mr Goldberg is correct in what he said." (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)
- Incorrectly approaching from perpective of risk-tolerant investor looking for high return
"[26] He also approached things from the perspective of a risk-tolerant investor. He asked himself what someone with an appetite for risk who was looking for a potentially high return might do. There are reasons for approaching the valuation exercise in that way, and the RICS rules on such valuations (known as the Red Book) do provide for how a property might be valued for a special purchaser. That was not the task here, however. The issue was market value, and the market would not value the Pasture as a speculative investment." (Gordeno v. Irwin Mitchell LLP [2026] EWHC 136 (Ch), Deputy Judge Farnhill)
Historic purchase price of asset
- Many examples of fortuitous purchases and huge gains on sale
"[387] We were not persuaded by the argument for HMRC that because the Partnership had paid only £1.9 million for the Product Assets then their value could not be as high as their sale price of £40 million. We are aware of numerous examples, in many sectors, of fortuitous purchases and then a huge gain on sale. We also observe that, as we have noted at paragraph 66, albeit it was a sale between related parties, a number of Product Assets were sold for £2,045,000 and they were viewed as having zero or relatively modest turnover.
[388] We agree with Mr Palmer that what Mr Engineer had done was to take the Product Assets and repurpose them thereby making them more valuable and in that context, cost was a very bad indication of value." (Chemidex Generics Limited v. HMRC [2024] UKFTT 1146 (TC), Judge Anne Scott)