Introduction – Drown & Anor
In the original case (Drown & Anor (as Executors of Leadley Deceased) v Revenue & Customs), the First-tier Tribunal (FTT) upheld a taxpayer’s appeal against HMRC’s decision regarding two claims relating to:
- a ‘negligible loss’ claim (NVC), and
- a claim for relief on a loss on a qualifying loan, in respect of a tax year prior to death.
Both of these claims were made by the Executor of the Estate of Mr Leadley. This note concentrates on the first.
The FTT’s decision came as they thought to dismiss the appeal would be contrary to the ‘intention of Parliament’. Not something you often hear trundled out in support of a taxpayer!
However, in a twist to the tale, earlier this year, the Upper Tier Tribunal (UTT) upheld HMRC’s appeal.
Balance of power
It is worth pointing out that the taxpayer (the Executors of the estate of Mr Leadley) had by now pulled out of the case because “the tax at sake… is disproportionately small in comparison to the potential costs which could be incurred should the UTT, and potentially the Court of Appeal. Ultimately rule in favour of HMRC”.
It is difficult to ascertain what effect the lack of representation might have had on the outcome here. However, HMRC had upped their firepower from the Inspector who had represented HMRC at the initial hearing this time stayed in the office and HMRC appointed Counsel instead. This mismatch in the resources between taxpayer and HMRC is often forgotten when HMRC are being awarded increasingly wide ranging powers.
A summary of the facts
The deceased taxpayer, a Mr Leadley, had made two separate investments in two unquoted trading companies and also provided loans to a third company. Unfortunately, all of these 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.
Things got worse when Mr Leadley was killed in a car crash in May 2010. His tax return for 2009-10 was submitted by his Executors in January 2011. They had recorded capital losses of £384k including £40k for offset against the deceased’s income for that year.
This was as a result of two provisions:
- a negligible value claim (NVC) in respect of the shareholdings (under CGT rules). This enables a loss to be triggered despite there being no disposal at such time the value of the shares has become, unsurprisingly, of negligible value, and
- a claim under the income tax rules which allows certain capital losses to be set against income). (“Loss v Income claim”)
HMRC accepted that if the deceased had actually survived to sign his 2009-10 tax return then all claims would have been valid. However their arguments for denying the reliefs were broadly as follows (and referred to hereafter as ‘HMRC’s three arguments’):
- a capital loss versus income claim had to be made by ‘an individual’ and the executors were not an individual;
- a valid capital Loss v income claim required a deemed disposal to have been created by a valid NVC; and
- the executors were not able to make a valid NVC
From HMRC’s perspective, the timing of Mr Leadley’s death was an unfortunate occurrence but, with regret, the ‘law was the law’.
HMRC’s arguments (1) and (2) – the NVC and Capital Loss v Income claim
The provisions state 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.
The FTT took issue with HMRC’s view that the claim was made when the return was submitted in January 2011. Instead, 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.
She considered the HMRC argument to be an ‘overly literal’ interpretation of NVC provisions and rejected it. She added that 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.
It was quite wrong for HMRC to impute a further requirement that the claimant should remain the owner of the asset after the effective date of the claim. Such a requirement would serve no useful purpose and “could give rise to arbitrary results.” The judge decided that this could not have been Parliament’s intention.
Instead, applying a purposive construction, a claim should 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).
HMRC argument (3) – Can the Executor make a claim?
After dismantling the first two of HMRC’s arguments, the FTT then set about what was left. HMRC had disputed the assertion that the Executors ‘stood in the shoes’ of the deceased for tax purposes in respect of periods up to the date of death.
Although the Act make the Personal Representatives (“PR’s”) of the deceased liable for the tax due for the period up to the death, they are not chargeable in respect of that tax. The PR’s are merely those who are liable to pay it.
Of course, the amount of Mr Leadley’s tax bill was dependent on whether a NVC was validly made.
To cut a short story even shorter, the Judge held that the clear inference of Parliament’s intent, gained from various provisions, was that losses available to the deceased in his lifetime should be available after death. They could therefore be offset against gains in his lifetime. She said that it would be “remarkable” that losses should be held to be unavailable simply because he had died and was therefore personally unable to submit his tax return. Therefore a purposive approach should be taken.
As such, the PR’s should be treated as the deceased in so far as they are returning the deceased’s own tax liability. The claims detailed above were therefore upheld.
The Upper Tier
Counsel for HMRC who, albeit with no opponent, clearly put forward compelling arguments leading the UTT to reject the FTT’s decision and find in favour of HMRC in all respects.
Addressing arguments (1) and (2) above
Once again, HMRC advanced the argument that the date of the NVC is the date it was submitted. Although that claim can state that the shares became of negligible value before at an earlier date this does not treat the claim itself as being made at an earlier date.
As we have seen, this is germane because at the date of the submission of the claim Mr Leadley had died. As such, it was HMRC’s assertion, that he could not be the owner of the assets and the PRs could not make a valid claim for relief.
Counsel for HMRC pointed out that there were other scenarios where PRs could not take the same steps as the deceased in his lifetime. For example, if he had bought a painting for £100k and it was now worth £10k. If he were to sell before death then he would crystallise a loss that, assuming he could not offset v gains in the current year, he would be able to carry back for up to three years. However, if he holds at his death then there would be no such allowable loss.
HMRC also then shared an internal memorandum from 1993, which stated:
“Thus we have the situation where if a taxpayer is knocked down on the way to her accountant’s office to sign the negligible value claim no one can make a capital loss on the asset whereas if she is knocked down after signing the claim a capital loss will be available. This seems extremely harsh.
However the taxpayer could equally have been on her way to sell the asset for £1 realising a large loss, or £1m realising a large gain. The opportunity to make that gain is lost on death. On her death any losses and gains which may have accrued in assets which she owned disappear as the assets pass at market value to the personal representatives.”
The UTT explicitly stated that they found this submission as being a ‘convincing’ one. Furthermore, the UTT could not find anything in the legislation which supported the FTT’s view that a claim could be taken to be made at any time other than when it was submitted. Indeed, the wording of the relevant section seemed to indicate that the draughtsman was contemplating a claim being made part way through a year (rather than at the beginning or end) when he had his quill in his hand.
In respect of the FTT’s view that HMRC’s approach was an overly literal one, the UTT were once again unprepared to offer affirmation. It was the FTT’s view that there was no ‘permissable construction’ of the section which would result in the claim being effective earlier than the date it was submitted.
Finally, there was the FTT’s determination that the PRs stood in the shoes of the deceased. It was recognised by the UTT that this would be a ‘solution’ to the case as, if this was the finding, then it would not matter when the claim was made as it would have been made by the owner.
However, the UTT found no support for this ‘idea’. Indeed, the relevant Act treats the two as distinct persons as a matter of fact and law.
Comment – Drown & Anor
It is worth pointing out that this case did result in an estate not being able to make a claim for a capital loss for the reason only that, before he was able to make a valid claim for relief, he had died. As such there was a negative economic impact on a family’s estate. Furthermore, it was a family that felt it had to give up the goat when it came to defending its originally successful appeal due to a stated lack of resources.
It is easy to sympathise with the FTT that this was not a fair state of affairs and they have perhaps read beyond what appears to be the clear meaning of the words due to what they saw as ‘arbitrary consequences’.
However, the UTT took a more legalistic approach to the case. It is clear from the legislation that they needed to be owned by Mr Leadley at the time the claim was made. He clearly wasn’t the owner and there was no ability for the Executors to stand in his shoes.
Bearing in mind the fact that the taxpayer did not appear and were unrepresented due to a lack of finances it seems unlikely that this case will go any further. So it really is a case of Drown and out.
If you or your clients have any queries regarding this case or any other tax matters then please get in touch.