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Council Tax Manual - Practice Note 2: The Valuation of Composite Hereditaments for Council Tax

1.0 Introduction

A ‘composite’ hereditament is a dwelling (Local Government Finance Act 1992 Section 3(3)) which has domestic and non-domestic parts, specifically one where an appropriate entry will appear in both the Council Tax and Rating List.

The basis of valuation of a dwelling which is a composite hereditament, or part of a composite hereditament, is contained in The Council Tax (Situation and Valuation of Dwellings) Regulations 1992 (SI No 550) as amended. The Regulations require a value to be attributed to domestic use of such dwellings. This practice note details the approach to be followed when placing a band on the domestic use.

2.0 Definition of a Composite Hereditament

The definition of a composite hereditament is contained in S.64(9) of the Local Government Finance Act 1988. It provides that,

"A hereditament is composite if part only of it consists of domestic property"

(Hereditament is defined in S.64(1) of the Act by reference to S.115(1) of the General Rate Act 1967 whilst the definition of domestic property is contained in S.66 of the 1988 Act, as amended.)

Composite properties fall into two main categories, namely,

(a) those that include a non-domestic element which appear (or will appear) in the non-domestic rating list (the majority), and

(b) those that include a non-domestic element which is exempt from rating and for that

reason do not appear in the non-domestic rating list (the minority).

3.0 Definition of Dwelling

The definition of a dwelling for Council Tax is contained in S.3 of the Local Government Finance Act 1992. S.3(3) makes specific reference to composite hereditaments providing

“A hereditament which –

(a) is a composite hereditament for the purposes of Part 111 of the 1988 Act: and

(b) would still be such a hereditament if paragraphs (b) to (d) of section 66 (1) of that Act (domestic property) were omitted,

Is also, subject to subsection (6) below, a dwelling for the purposes of this Part.”

Accordingly any property which is a composite hereditament for the purposes of S.64(9) of the Local Government Finance Act 1988 is a dwelling unless it only includes domestic property which is,

(i) a yard, garden, outhouse or other appurtenance belonging to or enjoyed with the property used wholly for the purposes of living accommodation;

(ii) a private garage which either has a floor area of 25 square metres or less or is used wholly or mainly for the accommodation of a private motor vehicle; or

(iii) private storage premises used wholly or mainly for the storage of articles of domestic use.

In all instances where any of the above forms the only domestic property within the hereditament it will not constitute a dwelling and should not be valued for Council Tax.

More than 1 self-contained unit

Article 3 of The Council Tax (Chargeable Dwellings) Order 1992 (SI No 549) made under the provisions of Section 3(5) of the LGFA 1992 provides that,

"Where a single property contains more than one self-contained unit, for the purposes of Part 1 of the Act, the property shall be treated as comprising as many dwellings as there are such units included in it and each such unit shall be treated as a dwelling".

"Single property" is defined as property which would apart from this order be one dwelling within the meaning of section 3 of the LGFA 1992.

Many large composite hereditaments contain more than one self-contained unit as defined by the Order and therefore will consist of more than one dwelling, each requiring a band. For guidance as to when disaggregation of the larger hereditament is to occur see Practice Note 5.

4.0 Basis of Valuation

The basis of valuation of a dwelling which is also a composite hereditament or part of a single property which is a composite hereditament (see 3 above) is contained in The Council Tax (Situation and Valuation of Dwellings) Regulations 1992 as amended. Regulation 7(1) states,

"In the case of a dwelling which is a composite hereditament or is part of a single property which is a composite hereditament, the value of the dwelling, for the purposes of valuations under Section 21 of the Act, shall be taken to be that portion of the relevant amount which can reasonably be attributed to domestic use of the dwelling".

(a) "The Relevant Amount"

The “relevant amount” referred to above is defined in Reg 7(2) as being,

"the amount which the composite hereditament might reasonably have been expected to realise on the assumptions mentioned in Regulation 6, other than paragraph (2)(h) of that regulation, if for references to the dwelling throughout paragraphs (2) to (6) of that regulation, there were substituted references to the composite hereditament".

Thus, the relevant amount represents what the composite hereditament would have achieved if sold on the open market by a willing vendor as at AVD, subject to the assumptions laid down in Reg 6(2) (excluding that contained in paragraph (2)(h) which states that the use of the dwelling would be permanently restricted to use as a private dwelling). The assumptions are detailed in full in point 3 of Practice Note 1 of this Manual.

As the composite hereditament (dwelling) to be valued is derived from the definition of a hereditament contained in S.64(1) of the LGFA1988, a sale of the entire composite hereditament as one unit is to be assumed. Any additional value derived from sub-sales or lotting, would be inconsistent with the requirement to value the composite unit as a whole, and must be disregarded.

Because it is necessary to assume that the dwelling is sold as one unit the “relevant amount” will only reflect demand from persons who are in the market to purchase it in its entirety. In instances where there would be a strong demand for certain constituent parts if sold in isolation, it is likely that the "relevant value" will be below the value of the unit if sold in parts.

(b) "Domestic Use"

In order to exclude the non-domestic element of a dwelling which is a composite hereditament Reg 7(1) provides that the value shall be that portion of the relevant amount which can reasonably be attributed to domestic use of the dwelling.

Reg 7(2) provides that "domestic use" has the same meaning as in Section 24 of the LGFA 1992. S.24(10) states that "domestic use", in relation to a dwelling, means use in such a manner as to constitute it domestic property for the purposes of Part III of the LGFA 1988. Domestic property is defined in S.66 of the 1988 Act

4.1 The Monmouth School case

The case of Daniels LO v Monmouth School 2009 concerned the identification of the composite hereditament to be apportioned. The East Wales VT had accepted a case that dwellings which were separate hereditaments and situated in various parts of Monmouth outside the main school boundaries were to be mathematically apportioned from a relevant amount comprising the ‘whole school valuation’, without reference to the curtilage of the specific composite hereditament in question. The High Court rejected such a basis, confirming that the valuation unit to be apportioned was the hereditament that had the domestic element and it was wholly incorrect to include any other property.

5.0 Establishing the Domestic Use to be Valued

(a) Notional and Actual Use

Reg 7(1) requires a band to be placed, which reflects the value that would reasonably be attributable to the domestic use of the dwelling. Therefore, the distribution between domestic and non-domestic use of any composite hereditament should reflect how the market would view its use if it were made available with vacant possession, and not necessarily the use made of the property by the actual occupier.

When determining what portion of the “relevant amount” is to be attributed to domestic use, the caseworker should stand in the shoes of a typical prospective purchaser and determine how that person would be most likely to occupy the dwelling under consideration. Where a clear and discernible pattern is evident (e.g. a parade of shops with flats above, most of which are being occupied in a particular manner), this should be followed.

Any actual distribution between domestic and non-domestic uses which does not conform with the prevailing pattern of use in that locality should be disregarded. Where there is no obvious pattern it will be appropriate, in most instances, to have regard to the actual use rather than any notional one.

Where an actual use is adopted, and a change in the distribution between domestic and non-domestic accommodation subsequently occurs, consideration will need to be given as to whether the band which has been placed on the domestic use of the hereditament needs to be reviewed.

(b) Property used for both domestic and non-domestic purposes

Where use of any part of a property is shared, or for the purposes of nationality, is assumed to be shared, (e.g. a bathroom or a lounge in a guest house), unless the non-domestic use can be considered to be de minimis, that part of the property does not constitute domestic property under Part III of the 1988 Act because it is not used wholly for the purposes of living accommodation (S.66(1)(a) of the 1988 Act).

However, whilst such accommodation should not be valued directly as part of the dwelling, the existence of this non-domestic property, as part of the hereditament, should ensure that no depreciation is caused to that portion of the “relevant amount” which is properly required. For example, living accommodation at the rear of a shop may have only one WC which is used by the proprietor and staff alike. Although none of the value which attaches to the WC can be reflected for Council Tax purposes the value which is attached to the domestic use of the remainder of the living accommodation will nevertheless reflect its existence as part of the larger composite.

6. Attributing a Value to Domestic Use

Having established the likely extent of the domestic use of the hereditament, Reg 7(1) requires a portion of the “relevant amount” to be attributed to it.

In the appeals of Atkinson and others v Lord (LO) 1997 RA 413 before the Court of Appeal the appellants submitted that Reg 7(1) requires the determination of that portion of the relevant amount which can reasonably be attributed to the domestic use of the dwelling, and in order to establish that portion it is necessary to firstly establish the relevant amount, i.e. the value of the whole composite hereditament. In the subject appeals, which concerned valuation of agricultural dwelling houses, the Listing Officer did have regard to the value of the hereditaments as a whole, in the sense that he placed each of them within a valuation 'bracket', then discounted for 'separate lotting' by deducting 10% from the figure which otherwise would have been attributable to domestic use.

In the judgement of Lord Justice Schiemann "the valuer is indeed required always to have regard to the relevant amount and a failure to consider it would amount to making an error of law. However, the valuer is not invariably required to determine the relevant amount. In certain circumstances it can suffice if he determines that the relevant amount must lie in a certain range or be above or below a certain figure".

The legislation prescribes what has to be valued but does not prescribe how or by what method. LJ Schiemann had no conceptual difficulty in having regard to an amount without having determined it. In the words of LJ Hutchinson,

"Having regard to it (ie. the value of the property as a whole) means forming a general view - which, because he is an expert, will be an informed view - of the broad range within which the value of the whole property falls, taking into account the assumptions required by the Regulations to be made. Only thus will he have any means of cross-checking whether his attribution of value to the domestic part is reasonable".

Having reached a general but 'informed' view of the value of the whole hereditament it is then necessary to attribute a value to the part in domestic use.

By definition there can be no comparable evidence of domestic property which is sold as part of a composite and, therefore, that part of the "relevant amount" which represents the value attributable to domestic use cannot be derived directly from market evidence. Nevertheless there will often be sales of domestic property of a similar size and quality which will provide a guide as to the value of the domestic use which attaches to a composite hereditament for the purposes of Council Tax.

It is unlikely, however, that this comparable evidence will fully reflect all the characteristics of domestic property situated within composites. Accordingly, where not already inherent in comparable evidence, adjustments (or further adjustments) may be required to reflect for such factors as the lack of "self containment", inferior layout or the nuisance generated by the non-domestic part.

When considering such factors, however, it will be necessary to offset against any depreciation any increase in value which results from the convenience of being situated so close to the non-domestic part.

The band placed on any domestic use must fully reflect the fact that the domestic property to which it relates is an integral part of a larger hereditament for which there is a completely different market. The variables of size, quality and location are to be viewed in terms of how they affected the market for the composite hereditament as a whole as at AVD, and this will often result in a different value attaching to its domestic part as compared to that which is suggested by sales of similar but non-composite property.

It may be necessary to stand back and consider whether the figures arrived at, after making any adjustments for such factors as mentioned above, are reasonable given the market for the composite hereditament. Sometimes it will be necessary to make a further subjective adjustment to the figures arrived at in order to reflect adequately the fact that the living accommodation is part of a larger hereditament.

Due to the subjective nature of establishing a value which is attributable to domestic use of a composite hereditament it is necessary to ensure that all bandings can be shown to be reasonable in terms of:

1. The value of similar living accommodation in the vicinity which is not part of a composite hereditament,

2. The value which remains to be attached to the non-domestic part; and

3. The bands which attach to similar living accommodation situated within a similar composite hereditament.

In the light of the Court of Appeal decision in the Atkinson and Others case, the Listing Officer must keep a written record of the matters which have been taken into account when valuing particular classes of composite hereditaments e.g. agricultural dwellings, especially when it is common practice to adopt a particular size of discount to reflect 'separate lotting' (10% in the agricultural dwelling house examples before the Court of Appeal).

7.0 List Alterations

7.1 Dwelling ceases to be a composite

The Council Tax list will need to be altered if a dwelling becomes or ceases to be a composite. This may occur where a farmhouse is sold as a family home separately from the land and buildings. While this will always result in an alteration, in the addition or removal of a composite identifier in the list, it will not always result in a band change. Council Tax (Alteration of Lists and Appeals) Reg 1993 Reg 4(1) (a)(iii)

7.2 Addition or deletion of a composite indicator – note for Referencers

Reason for Report CR09 should be used for the addition or deletion of a composite indicator to a dwelling in the Council Tax List. This is a List Alteration which will result in a LON being generated and this should be sent.

For public houses, the name of the pub should be entered in the address before the road number. If the word ‘The’ is included in the pub name it should be included in the name in the Rating List as well. The address of composite dwelling accommodation at pubs should be the same as the pub, but in some cases it may be necessary to include extra information e.g. if there is more than one domestic banding - Flat 1 and Flat 2, or Manager’s Flat and Staff Flat.

7.3. Composites and the Material Increase provisions

Material increase provisions apply to dwellings (LGFA1992 Section 24(10), whereby there needs to be a relevant transaction (RT) before physical change can be reflected in the banding. Thus a new extension for wholly domestic use added to a composite dwelling will not fall to be valued until a RT takes place.

However, the Council Tax (Alteration of Lists and Appeals) Regulations 1993 Reg 4(1)(a)(iv), states that where the domestic part of a composite increases or decreases, the list can be altered,

Questions have arisen as to the working of these two provisions in practice and the following advice gives guidance on how to apply the provisions.

7.3.1 Material increases: extensions to domestic accommodation

It has not been the past practice of Listing Officers to alter the list where, for example, an extension to a farm house takes place, where the house is actually part of a composite (the non-domestic part of the farm being exempt). It is considered that this is correct where the extension to the living accommodation is newly built and not a conversion of part previously used for non-domestic purposes.

7.3.2 Where there is a conversion of previous non-domestic space:

If, however, an ‘extension’ involved increasing the domestic space at the expense of the non- domestic space, then that would fall within the provision of Reg 4(1)(iv) where the list can be altered … “ in the case of a dwelling which continues to be a composite hereditament, there has been an increase or reduction in its domestic use.” In these circumstances the new domestic proportion should be taken into account in the banding. The effective date of such a change will be the date of the change of circumstances (Reg 14(4))

7.3.3 Previous extension followed by change in proportion of domestic use:

There may be circumstances where a separate new domestic extension has been previously built and treated as a material increase, and subsequently there is an increase (or decrease) in the domestic use of the rest of the composite. It is considered that the legislation provides only limited protection against list alteration, and that in this case, then all the domestic part of the dwelling should be valued, under 4(1)(iv) including the extension, as the relevant date for the physical state of the dwelling will be the date of the change under the Council Tax (Situation and Valuation of dwellings) Regs 1992 6(1)(d) and (5A) (b) and (5B)(c). The physical state of the dwelling at the relevant date will include the extension and should be valued.

8.0 Valuation of Public Houses and Farms

The approach to the valuation of public houses and farms is explained in Appendices 1 and 2 to this Practice Note.

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