Couch (Inspector of Taxes) v Administrators of the estate of Caton, deceased
| Jurisdiction | England & Wales |
| Judgment Date | 20 December 1995 |
| Date | 20 December 1995 |
| Court | Chancery Division |
Chancery Division.
Rimer J.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
William Massey (instructed by Rayner de Wolfe, agents for Brooke North & Goodwin, Leeds) for the taxpayers.
The following case was referred to in the judgment:
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 an allowable deduction from chargeable gain - Capital Gains Tax Act 1979 section 32 subsec-or-para (2)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 Revenue against the decision of a special commissioner that costs incurred in an appeal against the Revenue's valuation of unquoted shares were allowable as a deduction from a chargeable gain.
At the date of his death in September 1987 the deceased owned 14.02 per cent of the issued shares in an unquoted company. In 1988 the administrators of his estate ("the taxpayers") sold all the issued share capital of the company for £1.31 per share.
To arrive at the chargeable gain the market value of the shares had to be ascertained at the date of death and the allowable deductions under the Capital Gains Tax Act 1979 section 32Capital Gains Tax Act 1979, s. 32 determined.
The taxpayers disputed the Revenue's valuation of the shares pursuant to the Capital Gains Tax Act 1979 section 150 subsec-or-para (1)Capital Gains Tax Act 1979, s. 150(1). A special commissioner determined a value and also held that 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 theCapital Gains Tax Act 1979 section 32 subsec-or-para (2)Capital Gains Tax Act 1979, s. 32(2)(b) for the purposes of computing a chargeable gain.
The Revenue did not challenge the commissioner's valuation of the shares but appealed on the ground that the costs of the appeal to the commissioner should not be allowed as a deduction.
They contended that the only deductible costs were the costs reasonably incurred by the taxpayers in valuing the shares as at the date of death in order to enable them to compute the chargeable gain for which they were liable and to make the tax return which they were required to make ("the initial valuation") under the Taxes Management Act 1970 section 12 subsec-or-para (1)Taxes Management Act 1970, s. 12(1). Any costs which might subsequently be incurred in connection with the question of value, in particular the costs of any negotiations with the Revenue or an appeal against an assessment, were not costs or expenses within the meaning of Capital Gains Tax Act 1979 section 32 subsec-or-para (2)s. 32(2)(b). If it had been intended that the costs of negotiation and appeal should be deductible, it would have been spelt out specifically in the statute.
The taxpayers contended that the relevant words in Capital Gains Tax Act 1979 section 32 subsec-or-para (2)s. 32(2)(b)extended not only to the costs of the initial valuation, but also, where the value proposed by the taxpayer was not accepted, to the costs of a negotiated valuation with the Revenue or of any appeal in so far as it concerned the issue of valuation.
Held, allowing the Revenue's appeal:
It was a natural use of language to describe the costs of procuring a valuation of a parcel of shares on a particular day as costs in making a valuation or as incurring expenses in ascertaining their market value within Capital Gains Tax Act 1979 section 32 subsec-or-para (2)s. 32(2)(b). However, costs subsequently incurred in negotiating the question of value with the Revenue or pursuing an appeal against an assessment were not. Those costs were incurred for the purpose of conducting a tax controversy with the Revenue, not for valuation.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994), the Revenue appealed to the High Court against the following decision of a special commissioner (Dr AN Brice) released on 28 February 1995.
The administrators of the estate of Mr Philip Stuart Caton deceased (the taxpayers) appeal against an assessment to capital gains tax dated 22 December 1989 in the sum of £494.430.25.
At the date of his death, on 7 September 1987, Mr Philip Stuart Caton was entitled to 2495,552 ordinary shares of 25p each in Yorkshire Switchgear Group Ltd (the company). The company was not quoted on a recognised stock exchange. On 15 April 1988 all the issued share capital of the company was sold and, for the purposes of computing the liability of the taxpayers to capital gains tax on that disposal, it is necessary to determine the value of the shares at the date of death and also the incidental costs of the acquisition and disposal.
The issues for determination in the appeal were:
(2) When determining the value of the shares at the date of death should it be assumed that unpublished information relating to the trading profits and budget forecasts of the company, and unpublished information relating to a possible sale of the company, would be available to a purchaser?
(3) What was the value of the shares on 7 September 1987? Was it 35p per share as proposed by the Inland Revenue? Or 50p per share as proposed by the taxpayers on the basis that no information about a proposed sale of the company was available? Or 88p per share as proposed by the taxpayers on the basis that information about a proposed sale was available? Or some other figure?
(4) Were the professional costs incurred by the taxpayers, up to and including the hearing of the appeal, incidental costs of the disposal and thus an allowable deduction in computing the chargeable gain?
At the time of the disposal the relevant legislation was contained in the Capital Gains Tax Act 1979Capital Gains Tax Act 1979 ("the 1979 Act").
The provisions about valuation were contained in Capital Gains Tax Act 1979 section 49 section 150 section 152ss. 49, 150 and 152. Capital Gains Tax Act 1979 section 49 subsec-or-para (1)Section 49(1) provided:
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(1) For the purposes of Capital Gains Tax Act 1979this Act the assets of which a deceased person was competent to dispose-
(a) shall be deemed to be acquired on his death by the personal representatives … for a consideration equal to their market value at the date of death, but
(b) shall not be deemed to be disposed of by him on his death …
Capital Gains Tax Act 1979 section 150Section 150provided:
(1) In Capital Gains Tax Act 1979this Act "market value" in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.
(2) In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.
Capital Gains Tax Act 1979 section 152Section 152provided:
(1) The provisions of Capital Gains Tax Act 1979 section 152 subsec-or-para (3)subsection (3) below shall have effect in any case where, in relation to an asset to which this section applies, there falls to be determined by virtue of Capital Gains Tax Act 1979 section 150 subsec-or-para (1)section 150(1) above the price which the asset might reasonably be expected to fetch on a sale in the open market.
(2) The assets to which this section applies are shares and securities which are not quoted on a recognised stock exchange … at the time at which their market value for the purposes of tax on chargeable gains falls to be determined.
(3) For the purposes of a determination falling within Capital Gains Tax Act 1979 section 150 subsec-or-para (1)subsection (1)above, it shall be assumed that, in the open market which is postulated for the purposes of that determination, there is available to any prospective purchaser of the asset in question all the information which a prudent prospective purchaser of the asset might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm's length.
The provisions about allowable deductions were contained inCapital Gains Tax Act 1979 section 32s. 32 which provided:
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(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 …
(b) 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...
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