The recent First-tier Tribunal (‘FTT’) decision in Slade v HMRC [2022] UKFTT 227 (TC) may leave the appellants with the reasonable belief that tax law, if not altogether crazee, is at least sometimes hard to reconcile with fairness.
In her will, Dora had left some farmland to her son Jonathan. He (who was at the relevant time the sole executor) assented to two parcels of land (the ‘Northern Parcel’ and the ‘Southern Parcel’) being transferred to himself and his son (also Jonathan), believing that the parcels formed part of the farmland left to him. They subsequently sold the Southern Parcel for some £221,000 net of costs. The Northern Parcel was worth about £86,000.
Some of the family asserted that the Parcels didn’t form part of the farmland left to Jonathan, but formed part of Dora’s residuary estate, in which they had an interest.
The claim was settled out of court on terms that the Jonathans paid the claimants £240,000 (including their costs). The Jonathans’ own costs were about £41,000.
A person disposing of an asset may, in computing a capital gain, deduct (inter alia) ‘expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset’. That seemed to the Jonathans to fit the bill: was that not precisely what they had spent £281,000 on? Surely the costs, or at least most of them, were deductible in computing any capital gain on the disposal of the Southern Parcel?
The FTT thought there was a short answer. The sums paid concerned not only the Southern Parcel but also the Northern Parcel. So, said the FTT, ‘it cannot be said that the sums paid by JJS and JMS were wholly and exclusively incurred by them in establishing, preserving or defending their title to the Southern Parcel. They were partly paid in relation to the Northern Parcel. There is no provision for apportionment of sums paid which are not wholly and exclusively incurred for that purpose.’
Short, but surely wrong. If I buy two separate assets for a single aggregate price, nothing will have been paid ‘wholly and exclusively’ for either asset: does that mean that my base cost for the assets is nothing at all? Of course not: the Act provides that ‘any necessary apportionments shall be made of any consideration or of any expenditure and the method of apportionment adopted shall, subject to the express provisions of this Chapter, be just and reasonable’.
Unfortunately, the FTT’s dismissal of the case on these grounds resulted in its declining to address some more interesting aspects of the case.
By the time the expenditure in question was incurred, the asset in question had been sold. Thus, the expenditure had not been incurred in defending title to the asset but in defending title to the proceeds of sale of the asset.
Should that matter? Does it matter? And if it does, is the answer the same if the claim is intimated before disposal but settled after disposal, so that you start off defending your title to the asset and end up defending your title to the proceeds? And what if (unlike the Jonathans) you lose your case altogether and it is held that you never had good title to the asset in the first place? You plainly cannot be liable to pay tax on a purported gain arising on the disposal of an asset that you never actually owned.
Further, the appellants asserted that the family members were themselves liable to Capital Gains Tax (‘CGT’) on the amounts paid to them, either because the amounts were derived from their purported interest in the Northern and Southern Parcels or because there was no underlying asset and the damages were subject to CGT in full (albeit that by extra-statutory concession D33 damages up to £500,000 may be treated as exempt). The corollary to this, they said, was that ‘the payments were deductible by the appellants as they related to the same underlying asset.’
Prevaricating on whether the family members were liable to CGT, the FTT adopted HMRC’s coy but correct answer (even if to a layman it may sound like what he would call a cop-out): ‘the tax treatment of damages in the hands of the other family members is irrelevant to the tax treatment of the appellants’ disposal of the Southern Parcel.’
So: it’s possible that the outcome of the case may have been right (in the sense of technically correct) albeit for the wrong reason. But not one which Messrs Slade will be pleased to have taken ‘Bak ‘Ome’.
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