Drown and Another (as executors of Leadley deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 September 2014 |
| Neutral Citation | [2014] UKFTT 892 (TC) |
| Date | 11 September 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 892 (TC)
Judge Barbara Mosedale
Mr R Roberts, of Beavis Morgan LLP, appeared for the Appellant
Mr M Boyle, HMRC officer, appeared for the Respondents
Income tax and capital gains tax - Negligible value claims made by executors in respect of period before deceased's death - Whether claims could be made by executors - Purposive interpretation of relevant legislation - Appeal allowed in so far as claim used against income and gains arising in lifetime of deceased.
The First-tier Tribunal upheld appeals against a decision by HMRC that a negligible loss claim and a claim for relief on a loss on a qualifying loan, in respect of a tax year prior to death, could not be validly made by the taxpayer's executors. However the losses could only be set against income and gains arising prior to death.
Mr Leadley had made two investments of £25,000 each in the share capital of unquoted trading companies. In addition he had loaned over £334,000 to a third company. All three investments went bad and HMRC accepted that the shareholdings had become of negligible value by 5 April 2010 and the loan had become irrecoverable by 3 November 2009.
Mr Leadley was killed in a car accident on 11 May 2010. His self assessment return for 2009-10 was submitted by his executors in January 2011. This showed capital losses totalling £384,000 of which £40,000 was to be set against the deceased's income for that year (by virtue of the combined effect of a negligible value claim under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 24s. 24 in respect of the shareholdings, and a claim under ITA 2007, Income Tax Act 2007 section 131s. 131 to have the resulting loss set against income). The balance of £344,000 was substantially the loss on the loan, which was claimed as an allowable loss under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 253s. 253 and was to be carried forward against future capital gains. (In reality no future gains accrued to the deceased in 2010-11 prior to his death).
HMRC accepted that had the deceased actually lived to sign his 2009-10 self assessment return, all claims would have been validly made. However their position was that
(a) a Income Tax Act 2007 section 131s. 131 claim had to be made by "an individual" and the executors were not an individual,
(b) a valid Income Tax Act 2007 section 131s. 131 claim required a deemed disposal to have been created by a valid Taxation of Chargeable Gains Act 1992 section 24s. 24 claim,
(c) the executors were not able to make a valid Taxation of Chargeable Gains Act 1992 section 24s. 24 claim and
(d) that by the same reasoning, the executors were not able to make a valid Taxation of Chargeable Gains Act 1992 section 253s. 253 claim.
The case turned mainly on the requirements of Taxation of Chargeable Gains Act 1992 section 24s. 24, where sub-sections 1A and 1B say that "A negligible value claim may be made by the owner of an asset" and the asset has become of negligible value whilst owned by that person. HMRC's argument was that the shares had become of negligible value before they were owned by the executors and that, although the shares had become of negligible value during the deceased's ownership, he was not the owner when the claim was made.
Judge Mosedale, however, took issue with HMRC's view that the claim was made when the return was submitted in January 2011. She found that the date of the claim was 5 April 2010 as this was the date set out in the capital gains tax schedule filed with the 2009/10 tax return. Indeed, she added, "it was obvious that the claim was backdated to a date earlier than the date of the submission of the tax return because it was a claim against income tax liability for 2009/10". She considered the HMRC argument to be an "overly literal" interpretation of Taxation of Chargeable Gains Act 1992 section 24s. 24 and drew support for rejecting this from the decision of Vinelott J in Williams v BullivantTAX[1982] BTC 384.
It was obvious that the purpose of the relief was that the claimant should be the owner of the asset at the point at which it became of negligible value and at the date of claim. A further requirement that the claimant should remain the owner of the asset after the effective date of the claim would serve no useful purpose. Such a requirement could give rise to arbitrary results, where, for example, at the time of a claim specifying an effective date one year earlier, a company had been dissolved so that the shares concerned no longer existed. This could not have been Parliament's intention. Instead, applying a purposive construction would require the claimant to be the owner of the asset at the date the claim is to have effect, which is either the date the claim is submitted or such earlier time as is specified in the claim (up to two years before the beginning of the tax year in which the claim is made).
Having made that finding, the next issue was whether the executors "stood in the shoes" of the deceased for tax purposes in respect of periods up to the date of death. Although TMA 1970, Taxes Management Act 1970 section 74 subsec-or-para 1s. 74(1) makes the personal representatives of a deceased person liable for the tax due on income and gains for periods up to the death, they are not chargeable in respect of that tax. There would seem to be no statutory requirement for the personal representatives to file returns for that period (though they do so in practice in order to establish the amount of that liability). It is the deceased who remains chargeable to the tax, the personal representatives are merely liable to pay that tax. The amount of Mr Leadley's chargeability depended on whether a negligible value claim was made.
TMA 1970, Taxes Management Act 1970 section 77s. 77 applies Taxes Management Act 1970 section 74s. 74 for capital gains tax purposes and provides that it" shall not affect the question of who is the person to whom chargeable gains accrue, or who is chargeable to capital gains tax, so far as that question is relevant for the purpose of any exemption, or of any provision determining the rate at which capital gains tax is chargeable." In other words, the personal representatives are charged on the same basis as the deceased.
However, these sections do not, literally, provide that personal representatives can make the claims that a deceased person could have made. There is actually nothing in any of the relevant Acts that expressly provides that personal representatives either can, or cannot, make claims in respect of the deceased's chargeability which the deceased could have made had he lived to file his return. Nevertheless, both Taxes Management Act 1970 section 74 section 77s. 74 and s. 77 indicate a clear intention by Parliament that personal representatives should be liable to the tax to which the deceased was chargeable.
Looking at the logic behind TCGA 1992, Taxation of Chargeable Gains Act 1992 section 62s. 62, which provides that on death the deceased's assets are acquired by his personal representatives, it was clear that death is a cut-off point; any losses accruing up to the date of death could not be claimed by the personal representatives against gains arising after that date. The same logic suggests that pre-death losses were intended to be available to reduce the deceased's chargeability to tax, on income and gains arising in his lifetime, irrespective of the fact that it is the personal representatives who are liable to pay the pre-death tax and irrespective of the fact that only personal representatives can complete any outstanding returns for the pre-death period and make any claims.
Judge Mosedale held that the clear inference of Parliament's intent, gained from Taxation of Chargeable Gains Act 1992 section 62s. 62, is that losses available to the deceased in his lifetime would be available after his death to be offset against gains in his lifetime. It would seem, she added, remarkable that losses should be held to be unavailable simply because the deceased was not alive to personally submit the claim. It also seemed contrary to Parliament's intention: Taxation of Chargeable Gains Act 1992 section 24s. 24 and Income Tax Act 2007 section 131s. 131 should not be given a literal interpretation where it defeats that intention.
Quite apart from the statutes, Judge Mosedale commented that, as a matter of common law, the personal representatives represent the deceased in respect of all assets. They are his heirs and assigns. The right to make a claim must, under common law, transfer on death to the personal representatives, and it seemed to her that, again under common law, the executors would be able to make on behalf of Mr Leadley any claim which he could have made, unless the taxing statute expressly provided that the claim died with him. There is no such express provision.
In conclusion, she held that a purposive interpretation of Taxation of Chargeable Gains Act 1992 section 24s. 24 TCGA and Income Tax Act 2007 section 131s. 131 ITA is that the personal representatives are treated as the deceased in so far as they are returning the deceased's own tax liability. As the executors stand in the shoes of the deceased person in so far as his pre-death tax chargeability is concerned, for the purposes of Income Tax Act 2007 section 131s. 131 the executors are "an individual" (as representatives of Mr Leadley) making the claim; for the purposes of Taxation of Chargeable Gains Act 1992 section 24s. 24 the executors are treated as representing Mr Leadley, who was the owner of an asset which became of negligible value while owned by him. Therefore the claims under Taxation of Chargeable Gains Act 1992 section 24s. 24 and Income Tax Act 2007 section 131s. 131 were upheld. The claim under Taxation of Chargeable Gains Act 1992 section 253s. 253 was also upheld as valid, on similar grounds, but the losses...
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