IS THE LAW UNFAIR?

 

BLOG 235

IS THE LAW UNFAIR?

 

Tax and commonsense can be uneasy bedfellows as Jonathan Slade has discovered to his cost – assuming, that is, that the decision of the First-tier Tribunal is correct, about which I have doubts.

 

Jim and Dora Slade owned St Peter’s Farm in Didcot.  Jim’s share passed to Dora on his death.  On her death, the farmland was left to Jonathan and the farmhouse, garden and grounds were left in trust for various family members.  In 1987 (it appears after Dora’s death) the land registration was changed to split the farm into three separate titles, known as the Northern Parcel, the Southern Parcel and the Farmhouse.  Splitting an asset in this way does not give rise to a disposal for capital gains tax purposes, it is still a single asset.  The Farmhouse was then sold.

 

Jonathan as executor assented to the Northern and Southern Parcels being transferred to his son and himself as tenants in common.  They subsequently sold the Southern Parcel.

 

Some family members claimed that the land sold was part of the farmhouse and so they were entitled to a share.  They also challenged Jonathan’s title to the Northern Parcel.  They commenced a High Court action.  This was settled by Jonathan and his son agreeing to pay £184,596 to the other family members and also to pay their legal fees of £55,404.  Their own legal fees came to £40,981, so they paid out a total of £280,981.  Jonathan claimed to deduct this in calculating their gains on the disposal of the Southern Parcel.

 

HMRC refused to allow the deduction.  They said that the money could not have been spent on defending the taxpayer’s title to the Southern Parcel as by the time of the dispute they had no such title (as they had sold it).  They were defending their entitlement to retain the proceeds of sale.  They were also defending their conduct as executors and trustees.

 

The Tribunal largely ducked this issue.  It made some comments but drew no conclusions even tentatively.  This is because it held that, as the payments related both to the Southern and the Northern Parcels, they had not been incurred exclusively in defending title to the Southern Parcel, so did not meet the basic conditions for deduction.  The legislation does not allow for any apportionment.

 

There are two reasons that I question the decision.  The first is that what was included in Dora’s estate was the farmhouse, garden and grounds and the farmland.  This was presumably acquired as a single asset and remained a single asset.  It is that single asset that passed to the executors.  Accordingly, the sale of the Farmhouse was a part disposal of that single asset and the appropriation of the farmland to Jonathan and his son was the disposal of the remainder.  A beneficiary is deemed to inherit at the date of death, so what Jonathan inherited would have been a share of the original single asset.  The sale of the Southern Parcel was then a part disposal of that single asset.

 

Part disposals are dealt with in TCGA 1992, s 42.  This specifically provides that on a part disposal both the costs of the asset and enhancement expenditure (such as on defending the title to it) must be apportioned in the proportion that the proceeds of the part sold bears to the value of the whole at the time of the sale.  Accordingly, that appropriate proportion should have been held to be deductible.

 

Indeed, HMRC’s Statement of Practice D1 acknowledges that this is the correct legal basis for dealing with an asset but allows taxpayers to adopt a simplified method of dealing with this situation and states that they can use any fair and reasonable basis of apportionment.  It is inconceivable that if they believed that this simplification would deny a taxpayer any relief for enhancement expenditure relating to the whole estate, they would not have made this clear.  Of course, the Tribunal is not bound by HMRC’s practices; it must apply the law.

 

Even if the farmland had been gifted to Jonathan prior to Dora’s death, there would have been a part disposal at that date, so what remained in the estate would still fall to be dealt with under the part disposal rules and the disputed North and South Parcels would still have been a single asset.

 

Secondly, the Tribunal accepted that if the claim by the family had been made before the sale of the Southern Parcel, the payment under the settlement would have constituted enhancement expenditure.  It is inconceivable that Parliament in 1965 could have intended that eligibility for a deduction should depend on when someone asserted a claim to an interest in the asset.  Applying a purposive construction to the phrase “any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset” in TCGA 1992, s 38(1)(b), it is hard to see why a claim made after the sale which related to claimed rights existing at the time of sale should be treated any differently from the same claim made before the sale.

 

Thirdly, lawyers tend to charge fees based on time spent, and it is reasonably clear from the nature of the claim that some of the time would have been spent exclusively in relation to the Southern Parcel, particularly as it was the sale of that Parcel that triggered the claim.  To the extent that expenditure can be identified as relating only to the Southern Parcel, it is wholly and exclusively incurred in relation to that Parcel, so should be deductible.

 

This is not wholly a criticism of the Tribunal.  No breakdown was in front of it, and it can only reach a decision based on the evidence it is given.  Having said that, where there is a taxpayer in person, who cannot be expected to know the law, it would surely be reasonable for the Tribunal to explain to the taxpayer what evidence it needs and give him a couple of weeks to produce it, before arriving at a decision.

 

Fourthly, TCGA 1992, s 52(4) states, “For the purpose of any computation of the gain, any necessary apportionment adopted shall, subject to the express provision of this Chapter, be just and reasonable”.  As s 42, the main provision to require apportionment contains its own method of apportionment – as does s 37A – the only other provision in Chapter 3 which refers to an apportionment is s 43 (assets derived from other assets).  The wording of s 52(4) is very odd if it is intended to apply only to s 43.  One would expect it to have been included in s 43 if that were the case.  It is accordingly by no means apparent that it cannot apply to s 38.

  

ROBERT MAAS