Couch (Inspector of Taxes) v Administrators of the estate of Caton, deceased
| Jurisdiction | England & Wales |
| Judgment Date | 19 June 1997 |
| Date | 19 June 1997 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Stuart-Smith, Morritt and Schiemann L JJ.
Launcelot Henderson QC (instructed by the Inland Revenue Solicitor) for the Crown.
William Massey (Brooke North & Goodwin, Leeds) for the taxpayers.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs TAX(1978) 52 TC 281
Rushden Heel Co Ltd v Keene TAX(1948) 30 TC 298
Smith's Potato Estates Ltd v Bolland (HMIT) TAX(1948) 30 TC 267
Capital gains tax - Valuation of unquoted shares - Whether costs of appeal to special commissioner against Revenue's valuation allowable deduction from chargeable gain - Capital Gains Tax Act 1979, s. 32(2)(b) (Taxation of Chargeable Gains Act 1992 section 38 subsec-or-para (2)Taxation of Chargeable Gains Act 1992, s. 38(2)(b)).
This was an appeal by the taxpayer from the decision of Rimer J ([1996] BTC 114) which allowed an appeal from the decision of a special commissioner that costs incurred in a capital gains tax appeal were allowable as a deduction from a chargeable gain.
The deceased owned 14.02 per cent of the issued share capital of an unquoted company at the date of his death in September 1987. Pursuant to the Taxation of Chargeable Gains Act 1992 section 62Capital Gains Tax Act 1979, s. 49(1) the administrators ("the taxpayers") were deemed to have acquired the shares for a consideration equal to their market value at the date of the death. In 1988 the taxpayers sold the holding and the consideration received was £3,269,173. In order to calculate the chargeable gain, the consideration which the administrators were deemed to have paid for the shares was ascertained and the deductions under Taxation of Chargeable Gains Act 1992 section 38s. 32 of the 1979 Act were to be determined. By Taxation of Chargeable Gains Act 1992 section 38s. 32(2)(b) of the 1979 Act the incidental costs to a person making the disposal were to consist of costs reasonably incurred in making any valuation including in particular expenses reasonably incurred in ascertaining market value.
The taxpayers appealed to the special commissioners against the Revenue's assessment of their liability to capital gains tax. After lengthy negotiations the appeal was heard over five days. A special commissioner determined the value of the shares and found that the professional costs incurred by the taxpayer up to and including the hearing of the appeal were an allowable deduction by virtue ofTaxation of Chargeable Gains Act 1992 section 38s. 32(2)(b) of the Act as "expenses reasonably incurred in ascertaining market value".
Held, dismissing the taxpayers' appeal.
The intention of the Taxation of Chargeable Gains Act 19921979 Act was similar to the concession allowing the cost of the preparation of accounts from which to compute profits for income tax purposes to be deducted, but no more. The words of Taxation of Chargeable Gains Act 1992 section 38s. 32(2)(b) reflected that intention. The reference to a valuation or ascertainment of market value was not a reference to the final and indisputable valuation. It was a reference to a taxpayer's initial valuation made in order to complete his return, which might or might not be accepted by the inspector. Costs incurred in conducting a dispute with the Revenue were not deductible: (Smith's Potato Estates Ltd v Bolland (HMIT) (1948) 30 TC 267 applied).
Morritt LJ: At his death on 7 September 1987 Mr PS Caton owned 14 per cent of the issued share capital of Yorkshire Switchgear Group Ltd. For the purposes of capital gains tax, in consequence of the provisions of Taxation of Chargeable Gains Act 1992 section 62s. 49(1) of the Capital Gains Tax Act 1979, his personal representatives ("the administrators") were deemed to have acquired that holding on his death for a consideration equal to its then market value. On 15 April 1988 the administrators sold the holding for approximately £3.27m representing £1.31 per share.
The question then arose whether the administrators were liable to pay capital gains tax and if so how much. The Revenue assessed them as liable for tax of £494,430 on the footing that the open market value of the shares on 7 September 1987 had been 35p. The administrators appealed to the special commissioners contending that the open market value at the date of death was 50p or 80p per share, depending on whether certain unpublished confidential information was or was not taken into account. After lengthy negotiations the appeal was heard over five days in December 1994. One of the three questions to be determined was whether-
the professional costs incurred by the taxpayers up to and including the hearing of the appeal [were] an allowable deduction in the nature of "expenses reasonably incurred in ascertaining market value" within the meaning of Taxation of Chargeable Gains Act 1992 section 38sec. 32(2)(b) Capital Gains Tax Act 1979 for the purposes of computing the chargeable gain.
The special commissioner, Dr AN Brice, answered that question in the affirmative and in the light of her answers to the other two questions determined that the open market value of the shares when deemed to have been acquired by the administrators was 56p each. The inspector of taxes appealed. In the event his appeal was confined to the question of the deductibility of professional costs. By his order made on 20 December 1995 Rimer J ([1996] BTC 114) allowed the appeal. He determined at p. 141-142 that:
the … costs both of the negotiations leading up to the appeal and of the appeal are not costs and expenses which are deductible for the purposes of [Taxation of Chargeable Gains Act 1992 section 38s. 32(2)(b)].
This is an appeal of the administrators from that order. They contend that the decision of the judge was wrong in law and ask that the determination of the special commissioner be affirmed. The issue for our determination is, thus, one of the proper construction ofTaxation of Chargeable Gains Act 1992 section 38s. 32(2)(b) of the Capital Gains Tax Act 1979 in the context of the Act as a whole.
The scheme of the legislation is to charge tax on chargeable gains arising on the disposal of an asset. The computation of such a gain involves ascertaining the consideration received on its disposal and deducting from that amount the consideration (including costs) given or deemed to have been given for its acquisition, expenditure incurred in the protection of the asset or the enhancement of its value and the incidental costs of the disposal. In this case there was no doubt as to the consideration received in respect of the disposal of the shares. The questions arose in respect of what was deductible therefrom in computing the chargeable gain. That which may be deducted is prescribed byTaxation of Chargeable Gains Act 1992 section 38s. 32,which, so far as material, is in these terms:
-
(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation … of the gain accruing to a person on the disposal of an asset shall be restricted to-
(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition …
(c) the incidental costs to him of making the disposal.
(2) For the purposes of this section and for the purposes of all other provisions of this Act the incidental costs to the person making the disposal of the acquisition of the asset or of its disposal shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition or, as the case may be, the disposal, being fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance (including stamp duty) together-
(a) in the case of the acquisition of an asset, with costs of advertising to find a seller, and
(b) in the case of a disposal with costs of advertising to find a buyer and costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation … including in particular expenses reasonably incurred in ascertaining market value where required by this Act.
The material words are those appearing at the end of Taxation of Chargeable Gains Act 1992 section 38subs. (2)(b) which permit the deduction of-
costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation under this Chapter
and
expenses reasonably incurred in ascertaining market value where required by this Act.
To deal with cases in which an acquisition or disposal is deemed to have taken place as well as to avoid the artificial reduction of the consideration in cases of actual acquisitions or disposals the legislation contains a number of provisions which deem the consideration to have been the open market value of the asset at the relevant time. Examples are to be found in Taxation of Chargeable Gains Act 1992 section 17s. 29A (acquisitions or disposals otherwise than by a bargain...
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