Mashiter (HM Inspector of Taxes) v Pearmain
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE OLIVER,LORD JUSTICE PURCHAS,MR JUSTICE NEILL |
| Judgment Date | 21 December 1984 |
| Judgment citation (vLex) | [1984] EWCA Civ J1221-4 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | 84/0502 |
| Date | 21 December 1984 |
[1984] EWCA Civ J1221-4
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL
ON APPEAL FROM THE CHANCERY DIVISION
(REVENUE LIST)
(MR JUSTICE PETER GIBSON)
Royal Courts of Justice,
Lord Justice Oliver
Lord Justice Purchas
Mr Justice Neill
84/0502
CHAN. REV. 11/83
MR C. KATOWSKI (for MR R. CARNWATH) (instructed by The Solicitor of Inland Revenue) appeared on behalf of the Appellant.
MR J.M. TALLON (instructed by Messrs. Balderston, Warren & Co., Solicitors Baldock, Herts) appeared on behalf of the Respondent.
This is an appeal by the Commissioners of Inland Revenue against an Order made by Peter Gibson J. on the 27th June 1983 dismissing their appeal by way of case stated from a determination of the General Commissioners of Income Tax for the Division of South Cambridge that an assessment to capital gains tax made on the Respondent for the year 1976/77 be reduced.
The point at issue is a short one, namely, whether the gain made by the respondent's wife on the sale of certain land at Guilden Morden in Cambridgeshire falls to be computed by reference to the provisions of paragraph 24 of Part II of the 6th Schedule to the Finance Act 1965 or by reference to those of paragraph 23(2) of the same Schedule.
The facts can be very shortly stated. In July 1950 Mrs Pearmain, the respondent's wife, acquired the property concerned under a deed of gift from her mother. The value of the land at that time was £1300. On the 6th April 1965, the date from which capital gains tax was first introduced, the value was £2500. In August 1976 Mrs Pearmain sold part of the land at a price of £ 15000, from which falls to be deducted a sum of £1140 in respect of incidental costs of sale. It is to the gain realised by that sale that the assessment under appeal relates.
The principal charging provisions are in Sections 19 and 22 of the Act, but it is not in dispute that a chargeable gain arose. The only dispute is as to the extent of it. It is necessary only to refer to Section 22(4)(9) and (10) of the Act and to certain paragraphs of the 6th Schedule.
Section 22(4) deals with the acquisition of an asset by way of gift. It provides (for relevant purposes) as follows: "Subject to the provisions of this Part of the Act, a person's acquisition of an asset and the disposal of it to him shall for the purposes of this Part of this Act be deemed to be for a consideration equal to the market value of the asset—(a) where he acquires the asset otherwise than by way of a bargain made at arm's length and in particular where he acquires it by way of gift……….".
Subsection (9) provides that the amount of the gains accruing on a disposal shall be computed in accordance with Part I of Schedule 6 of the Act and subsection (10) is in the following terms: "Every gain accruing after 6th April 1965 shall, except so far as otherwise expressly provided by this Part of this Act, be a chargeable gain, but subject to the provisions of Part II of Schedule 6 to this Act (which restricts the amount of chargeable gains accruing on the disposal of assets owned on the 6th April 1965)".
Part II of the 6th Schedule contains special provisions relating to property already owned at the 6th April 1965 and the general computation provisions are to be found in Part I. The only relevant paragraph of the latter for present purposes is paragraph 4 (l) which provides: "Subject to the following provisions of this Schedule, the sums allowable as a deduction from the consideration in the computation under this Schedule 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 moneys worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset…..".
Sub-paragraphs (b) and (c) of the subsection need not be set out. They permit the deduction of expenditure in enhancing the value of the asset and of incidental costs of disposal.
It is obvious, however, that in relation to assets acquired before the 6th April 1965, if tax is charged on the whole gain made on a subsequent disposal it will or may be levied in part upon a gain which accrued before the Act came into force unless special provision is made to meet this. That broadly is the function of Part II of the Schedule. There are special provisions for quoted shares but in relation to assets generally an option is conferred upon the taxpayer either to spread the gain on a straight line growth basis over the whole period of ownership of the asset and apportion it so that what is chargeable is that which accrued after the 6th April 1965 or to treat the asset disposed of as if it had been sold and immediately reacquired on the 6th April 1965. These provisions are contained in paragraphs 24 and 25.
The critical provision for the purposes of the present appeal is paragraph 23 which relates to land whose value has been enhanced by the exploitation or anticipated exploitation of its development value. The purpose of the provision was explained thus by Lord Wilberforce in Watkins v. Kidson 53 T.C 117 at page 129: "That paragraph is inserted mainly in order to deal with land which acquires a development value after 1965. This would cause the value of the land to increase dramatically and it was no doubt thought inappropriate to allow that increase to be spread over the whole period of ownership. In that case the land must be valued as at 6th April 1965 and the subject is taxed on the increase in value after that date".
That paragraph was amended in 1974 and in its amended form reads as follows: "23 (l) This paragraph shall apply in relation to a disposal of an asset which is an interest in land situate in the United Kingdom—(a) if, but for this paragraph, the expenditure allowable as a deduction in computing under this Schedule the gain accruing on the disposal would include any expenditure incurred before 6th April 1965 and (b) if the consideration for the asset acquired on the disposal exceeds the current use value of the asset at the time of the disposal, or if any material development of the land has been carried out after the 17th December 1973 since the person making the disposal acquired the asset".
In relation to land falling within sub-paragraph (l), sub-paragraph (2) provides that: "for the purposes of this Part of this Act, including Part 1 of this Schedule, it shall be assumed in relation to the disposal……. that that asset was sold by the person making the disposal, and immediately reacquired by him, at its market value on the 6th April 1965".
It is common ground in the instant case that paragraph 23(l)(b) was satisfied. What is in issue is the applicability of sub-paragraph (l)(a). The Revenue's contention is that when one considers what expenditure would have been allowable in computing the gain apart from paragraph 23, that would have included the consideration deemed to have been paid for the original acquisition of the asset under Section 22(4) and therefore, by definition, incurred before 6th April 1965. The respondent on the other hand contends that the words "expenditure incurred" in the paragraph can only relate to an actual expenditure and that, accordingly, the property having been acquired by way of gift and it not being contended that there is any other relevant pre-1965 expenditure, the paragraph does not apply. The difference as regards valuation is substantial. Using the formula in paragraph 24(2), which would be applicable if the respondent's contention is right, the chargeable gain was £5457. The alternative basis, on which the assessment under appeal was made, yields a chargeable gain of £11,360.
The General Commissioners, to whom the respondent appealed, upheld his contention and reduced the assessment to the lower figure and that decision was affirmed by the learned Judge. In his judgment he observed: "If the relevant provisions do not point to a more restricted application of the deeming provision in Section 22(4), I would not have any hesitation in saying that the fiction of an acquisition by way of gift being a transaction for full consideration would naturally carry with it the consequence that the recipient of the gift in giving that consideration would have in- curred expenditure. Certainly that would, so far from leading to absurdity, produce the sensible result in the present case that the major increase in value which took place after 6th April 1965, would be wholly taxed instead of part of such gain being artificially treated as having accrued before 6th April 1965, and so escaping tax".
He then considered whether there were matters which compelled the more restricted application. One such matter, it was suggested was, that even on the Crown's construction, there were anomalies—for instance a long lease at a rack rent granted without a premium where there would be no allowable pre-1965 expenditure but where the development gain would, it is common ground, fall to be spread over the whole period prior to disposal.
As I read the learned Judge's judgment he was not over-impressed with this point save to the extent that it led him to the conclusion that he had to look strictly at what the statute clearly said and nothing more in order to ascertain its meaning. Approaching the matter in this way, he concluded that the key provision was to be found in paragraph 31. That is in these terms: "So far as the provisions of this Part of this Act as modified by this Part of this Schedule require the computation of a gain by reference to events before 6th April 1965 all those provisions including Part 1 of this Schedule, and Schedules 7 and 8 and...
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