Scope
The scope of this Practice Note is solely to ensure a consistent valuation approach for this property Class/ Subclass/ Type for Non Domestic Revaluation 2023 and subsequent entry in the new Valuation List which becomes effective on 1 April 2023.
The basis of valuation for new entries in the Valuation List, and Rating Revision cases after 1 April 2023, is Schedule 12 (2)(1) of the Rates (NI) Order 1977.
Description
This Practice Note refers to property classified as:
Class: Miscellaneous Education, Cultural, Scientific
Sub Class: Historic Building
Type: N/A
This Practice Note covers the following:
(i) Premises that comprise a historic property where the principal use is non-domestic e.g. occupied by the National Trust (NT). There may be living accommodation for a caretaker or similar within the hereditament but the principal use remains non-domestic e.g. Springhill House and Gardens, 20 Springhill Road, Moneymore.
(ii) Premises where the principal use is as a residence but where the house is also open to the public.
(iii) Gardens and leisure grounds etc. open to the public at a fee.
(iv) Other historic buildings e.g. the remains of windmills, towers, forts etc.
There are currently 19 entries in the Valuation List for this property classification.
If part of the property was occupied as a private residence it should be considered separate to the Historic building and valued in its own right.
Legislative background
Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.
“Subject to the provisions of this Schedule, for the purposes of this Order the Net Annual Value of a hereditament shall be the rent for which, one year with another, the hereditament might, in its actual state, be reasonably expected to let from year to year, the probable average annual costs of repairs, insurance and other expenses (if any) necessary to maintain the hereditament in its actual state, and all rates, taxes or public charges (if any), being paid by the tenant”.
Regulatory Legislation
Occupation should be considered for exemption under Article 41 of theRates (NI) Order 1977.
Hereditament occupied by the NT (see Appendix 2) and used exclusively for charitable purposes will be 100% exempt.
Hereditament occupied by National Trust Enterprises (NTE) (see Appendix 2) will be wholly rateable.
Flats or houses occupied by caretakers etc. that remain in the occupation of the NT will be 50% rateable and 50% exempt as per Article 41.
Article 41 (2) (d)
(a)any hereditament, other than a hereditament to which sub-paragraph
(b)applies, which is occupied by a body—
(i)which is not established or conducted for profit; and
(ii)whose main objects are charitable or are concerned with science, literature or the fine arts;
where the hereditament is used wholly or mainly for the purposes of those main objects;Article 41 (3) (a) - The hereditament shall be distinguished
(a) in the capital value list, if it is used for domestic purposes which are also exempting purposes, as exempt from rates under that list to one-half of the extent to which it is so used;
(b) in the NAV list, as exempt from rates under that list to the whole of the extent that it is used for exempting purposes which are not domestic purposes.
Properties owned by the NT but, which are in the rateable occupation of third parties and are held either under the terms of a lease or franchise agreement, may be fully rateable.
Where property is occupied by the District Council or the Northern Ireland Environment Agency (NIEA), consideration should be given as to whether property is occupied for public benefit and is therefore exempt under Article 41(2) (a) of the Rates (NI) Order 1977.
Valuation approach for 2023
The R&E method of valuation is to be retained as the approach for this type of hereditament.
Research by the Practice Note author concluded that there was insufficient rental evidence available to develop a comparative approach.
In the absence of rental evidence, or a suitable unit of comparison to permit such rental evidence to be reliably analysed, the preferred method of valuation may be either the R&E method or the Contractor’s basis. Where the nature of the occupation of the property is primarily concerned with achieving anticipated profit, and the tenant’s rental bid is, therefore, likely to be based upon a consideration of receipts and expenditure, then in the absence of reliable rental evidence, the R&E method may be the most appropriate method of valuation to adopt.
Source: The Receipts and Expenditure Method of Valuation for Non-Domestic Rating Guidance Note produced in 1997 by the Joint Professional Institutions' Rating Valuation Forum which consists of the RICS, the IRRV, the RSA, the SAA, the VLA and the VOA.
Step 1
Gross Receipts will be determined by taking into account all income reasonably to be derived from occupation of the property. A period of three years accounts, prior to the AVD should give sufficient information to establish a fair and reasonable indication of the trading position. In the case of new ventures where trading accounts do not exist, refer to the accounts of similar ventures, or to the business plan prepared for the new occupier.
In general, receipts should include all income derived directly and indirectly from occupation of the property.
Step 2
The proper Cost of Purchases made to produce those receipts should be deducted to determine the Gross Profit. Such costs relate only to those purchases which form part of the venture undertaken.
Step 3
Deduct the Working Expenses from the Gross Profit to determine the Divisible Balance. Outgoings considered as allowable working expenses are those incurred as a result of the operation. For example, salaries, National Insurance payments, provision of services, insurance, phone bills, advertising, Head Office expenses. However, a mortgage payment, which is an expense of the business, is not an expense for a rating valuation.
Step 4
The Divisible Balance (or net profit) is the remaining sum available to be shared between the landlord, and the tenant. It comprises two main elements:
a. The Tenant’s Share – to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit. It must be a proper and sufficient inducement, not merely a fraction of the divisible balance. A 50/50 split of the divisible balance is adopted as a last resort. This is deducted from the Divisible Balance to leave:
b. The Landlord’s Share – i.e. the amount available for the payment of rent and rates.
The above sets out the methodology for assessing a rent using the Receipts and Expenditure. It may also be possible to determine a ‘shorthand’ approach whereby a percentage is applied to the Gross Receipts to determine a rental value. The NAV can be devalued to an overall £/m2 for comparative purposes.
Application of the Practice Note will require an estimate to be made of the FMT i.e. the likely level of trade [excluding VAT] considered to be maintainable at 1 October 2021, for each property. In assessing the FMT, some adjustments may be required to reflect the nature and type of business carried on at each establishment.
The established FMT will be apportioned between the primary income sources i.e. accommodation, drink, food and other income of the property. The Net Annual Value (NAV) is then assessed by the application of differential percentage rates to each of these income streams.
Unit of Assessment
With regard to NT properties, the hereditament is defined as everything within the pay boundary. Pay boundary is considered the area of the property charged to be accessed, i.e. everything in the same occupation should be assessed as a single entry.
Exceptions to the above are:
(i) Where part is occupied separately e.g. NTE.
(ii) Where premises are occupied by NT but parts capable of separate occupation are used for purposes not deemed to be an integral part of the visitor amenity following on from the decision in the Lands Tribunal (LT) case, Lyric Players Theatre .v. Commissioner of Valuation (VR/25/1970) (see Appendix 1).
For example a typical NT Property:
Stately home with tearoom/café, and shop area defined or otherwise, for sale of NT related gifts e.g. bookmarks, photos NT publications etc. These would generally be expected to be an integral part of the visitor amenity and thus treated as exempt.
Where occupation departs from this, for example, the shop sells a wide range of goods (clothes, household items etc) in a clearly defined area or is in theoccupation of NTE or a third party, then this falls to be valued as separate occupation and would be valued having regard to local tone with adjustments for location etc. Similarly, restaurants etc, either inside or outside the pay boundary and an attraction in their own right and in a clearly defined area should be separately assessed.
(iii) Other properties including holiday accommodation, caravan parks and campsites which are deemed to be removed from normal facilities which promote the charitable objects of the occupier should be separately assessed having regard to local tone.
Basis of Valuation - National Trust Properties
Historic properties such as stately homes occupied by the NT and not run with a view to profit should be valued on the receipts and expenditure basis. These receipts require to be adjusted upwards to reflect numbers from NT members visiting and therefore not paying on the day.
If the hereditament, vacant and to let, with little or no adaptation ischaracteristic of another class property, for example a hall, then it will be valued relative to that class.
Basis of Valuation - Non National Trust Properties
Many historic properties are neither operated for profit nor are they capable of being operated for profit. The motivation of the actual occupier is neither profit nor income. They are motivated by different factors such as heritage conservation, education, or social and economic benefits. If these benefits were not present in sufficient quantities, then organisations such as local authorities would not occupy many of their historic properties. The same motivation would lead the hypothetical tenant (who may be the actual occupier) to pay a rent to secure the hereditament.
In considering their rental bid, the hypothetical tenant would weigh up the benefits that they are expected to receive from occupying the hereditament. The motivation behind the occupiers of these types of historic property is as noted above. The hypothetical tenant would look at all the relevant information available in judging to what extent the hereditament could meet these benefits. A number of factors would influence the rental bid but, most important will be the number of visitors. The greater the number of visitors, the more likely that objectives, such as heritage, education and social benefits can be achieved. Where a receipts and expenditure valuation is carried out in these circumstances and it produces a negative figure, then the valuation should be assessed at a nominal rateable value
Historic properties that are under the ownership and occupation of other bodies such as the District Councils and the NIEA may often include old ruins of castles and sites of special architectural or historic interest.
The same conditions apply here as with NT properties. Therefore, if the historic property is loss making then this should be entered in the list as a nominal rateable value.
Again a charge to enter the property will not necessarily indicate the need for a substantive assessment. They may have a nominal figure dependant on the nature of the property and the visitor numbers attracted.
If the hereditament, vacant and to let, with little or no adaptation is characteristic of another class property, for example a hall, then it will be valued relative to that class.
Properties occupied by the NIEA buildings branch such as depots and yards for maintenance crews etc. should be valued by reference to local tone for such properties, taking care to reflect the location and attributes of the property.
Historic properties, occupied by the National Trust (NT), and operating at a loss are assessed at NIL.
NT and National Trust Enterprises (NTE) are two separate organisations with separate functions and aims, and are therefore separately valued. See Appendix 1 for details of relevant case law.
Caravan parks, holiday lets and shops are usually occupied by NTE and valued in accordance with normal practice for those property types.
Rent and Lease questionnaire
For this class of property Rent and Lease Questionnaires (RALQs) were not
issued. Occupiers were asked to provide accounts.
Contacts
For advice on any aspect of this Practice Note contact LPS on 0300 200 7801
More useful links
Appendix 1
Case Law relating to assessment and consideration for Exemption.
HOARE (VO) .v. THE NATIONAL TRUST 1998 RA 391
This case was concerned with two stately homes occupied by the National Trust (NT) (Petworth and Castle Drago). The parties agreed that the only hypothetical tenant for the property was the NT, so it was necessary to decide how much rent the NT themselves would pay under the rating hypothesis for the hereditament. The Court of Appeal considered that where there was only one possible hypothetical tenant, the known policies of that hypothetical tenant should be taken into account. They called this the principle of reality (Gibson at 415).
The Court accepted that the NT would not take a property unless it was accompanied by a sufficient endowment to ensure that their own central resources were unaffected. Under the principle of reality, this known policy of the hypothetical tenant had to be included in the considerations. This was sufficient evidence that, under the rating hypothesis, it was considered that the trust would not pay a rent for the hereditament, and a NIL assessment was appropriate.
NATIONAL TRUST .v. CHILCOTT (Valuation Officer)
Gloucester Valuation Tribunal April – July 2004 (ie) Separate Hereditaments at National Trust Properties:
16106295070/214N00
16106295283/214N00
16106295406/214N00
16306353039/214N00
16306353209/214N00
Involved National Trust Property
Visitors were directed into a large car park, from which pedestrian access was via a narrow public highway to the ticket office and further access to the house and gardens.On the car park side former farm outbuildings had been converted to include a café and plant sales area. Within the gardens was a restaurant which was only accessed after entry. The shop (a converted outbuilding) was adjacent to the entry point and visitors were directed to exit the gardens through the shop.
Valuation Officer had identified certain elements as separate hereditaments occupied by National Trust Enterprises (NTE – later reference will explain) and requiring individual rating assessment. The NT contended that the degree of control was sufficient for the NT to be considered in paramount control.
Held: Tribunal concluded that Valuation Officer had correctly identified elements of the property which were hereditaments occupied by NTE and since NTE was a separate legal entity it was in exclusive occupation of the identified elements.
Tribunal found that NT and NTE are two separate organisations with separate functions and aims. One is a registered charity, the other a registered company. Tribunal found that the establishment of the NTE, in line with Charity Commissioner Guidelines was an important factor to consider. They found that a trading subsidiary must be a separate legal entity as it carries out activities that are not compatible with the charitable status of the charity.
Tribunal thus was satisfied that NTE is a separate legal entity from the NT and was clear that it was NTE who were in exclusive occupation of the identified units.
It is understood that from 1st March 2005, the NT took back various functions previously undertaken by NTE. NT now operates their mansion houses/ historic property, gardens, holiday cottages, and most restaurant/ cafes/ tea rooms. NTE retains the shops and plant sales, both those at visitor attractions, and in high street/ retail locations, and “road facing” restaurants/ cafes/ tea rooms outside the pay boundary at visitor attractions, where customers are likely to include both those visiting the attraction, and passing trade. These “exceptions” are those the Charity Commissions and HM Revenue and Customs regard as primarily trading units for profit, as opposed to a visitor amenity. These “exceptions” should therefore be separately assessed for rating purposes.
(Definitions/ Background on NT & NTE – see Appendix 2).
LYRIC PLAYER’S THEATRE (APPELLANTS) .v. COMMISSIONER OF VALUATION FOR NI (VR/25/1970)
Purpose-built theatre; included a licensed bar and coffee bar (opening for half hour before and half hour after play – and during intervals). Premises also include a small shop area.
Theatre occupied by a Charity. Theatre claimed their use of hereditament was exclusively charitable. Tribunal held that works staged by this particular theatre were chosen for educational value, likely to improve aesthetic education of people and thus wholly charitable for the advancement of education.
Attention then focused on whether (or not) those portions of the ground floor used for the licensed bar, coffee bar should be rated as being used for non-charitable purposes.
Tribunal held that “the use of portions of the hereditament as a licensed bar and a coffee bar is reasonable and proper for the due fulfilment of the paramount charitable purposes of the Appellants and should be regarded as truly ancillary to those purposes”. (ie these were considered to be an integral part of the total experience of attending this theatre and something which directly facilitates the carrying out of the Appellants’ objects.)
The use of an area for the display and sale of local handicrafts in the lower lounge was not specifically raised or objected to by the Commissioner of Valuation. This was however considered by the Tribunal and disregarded as such use was minimal.
Appendix 2
Background Information relating to National Trust and National Trust Enterprises.
The National Trust
The National Trust was founded as a charity in 1895 to preserve and conserve places of historic interest or natural beauty. It derives its powers from the National Trust Acts of 1907 and 1973 and includes among its general purposes:
The permanent preservation for the benefit of the nation... of lands and tenements (including buildings) of beauty or historic interest and as regards lands... the preservation (so far as practicable) of their natural aspect, features, animals and plant life.
The National Trust (Enterprises) Ltd
This body was set up in 1973 to handle the many commercial activities of the Trust. It is understood that the Trust is not permitted to engage directly in trade and as a consequence of this all activities which are classed as “trading” under the Income and Corporation Taxes Act and Charities Act (GB) are undertaken by NTE which is a wholly owned subsidiary of the Trust.
The NTE was set up as a trading company removed from the main charitable body of the NT so that the NTE trading activities would not impact on the NT charitable status for tax purposes. NTE gift aided all its income to the NT. Since that, the position has changed in that all trading functions within the pay boundary of the historic property have been brought back under the control of the NT. The only exception to this is where these functions have been franchised out to a third party.