Tribunal resurrects executors’ negligible value claim

Wed 01 Oct 2014

The First Tier Tribunal (FTT) has ruled that executors of a deceased’s estate can claim capital losses on deemed disposals of

·         assets whose value has become negligible (TCGA 1992 s 24(2)); and

·         loans that have become irrecoverable (TCGA 1992 s 253).

This overrules HMRC’s long-established practice of refusing claims by personal representatives (PRs) on the basis that a claim can only be made by the person who owned the asset, or had made the loan, which HMRC interpreted as meaning that the PRs were not legally competent to make such a claim.

Income tax share loss relief under ITA 2007 s 131 was also available on the shares because they were shares in an EIS-qualifying company, subscribed for by the deceased.

In Peter L Drown & Another (Executors of Jeffrey John Leadley Deceased (TC04007)) HMRC rejected loss relief claims in respect of shares owned by, and loans owed to, the late Mr. Leadley (L) which had become of negligible value or irrecoverable before his death on 11 May 2010; those facts were not in dispute. HMRC’s internal review also upheld their original refusal of the claim, so the PRs appealed to the First Tier Tribunal (FTT).

(Statutory references are to TCGA 1992, unless otherwise stated.)

Income tax share loss relief

ITA s 131 allows an individual who subscribed for shares in an EIS-qualified company to claim income tax loss relief if those shares are disposed of at a loss, including deemed disposals under TCGA 1992 s 24(2) (assets of negligible value). For an ITA s 131 claim to be made the conditions for s 24 must be met first.

HMRC agreed that the other qualifying conditions for an ITA s 131 claim were met. Therefore the claim depended on the s 24 conditions being met, including the PRs’ competence to make the claim.

The negligible value claim

Where the value of an asset has become negligible s 24(2)(b)(iii) allows a negligible value claim to be made as if the asset concerned had been disposed of for its negligible value on the date of claim or on a date, specified in the claim, up to two years before the start of the tax year in which the claim is made, provided that the asset’s value had become negligible on or before that date.

S 24 requires the shares to have become of negligible value while they were owned by the claimant. HMRC said that the PRs were the claimant and the shares’ value had become negligible before the PRs owned them, while they were owned by the deceased: only the owner at the time the shares’ value became negligible could claim and he was dead. The appellants claimed that as PRs they stood in the shoes of the deceased for the purposes of making claims and so could make claims in his stead.

Judge Barbara Mosedale ruled that HMRC’s construction of s 24 was literally, strictly correct but it was overly literal and should be replaced by a purposive interpretation of the statute. She found justification for this in relation to s 24 in the earlier case of Williams v Bullivant which concerned a different aspect of s 24, not directly relevant to this case. Judge Mosedale said “. . . where s 24(1A) requires the claim to be made by the owner of the asset, a purposive construction is that [the claimant] should be the owner of the asset at the date the claim is to have effect, which under s 24(2) is either the date the claim is submitted or an earlier time specified in the claim . . .”

Personal representatives and claims

In considering HMRC’s submission the Judge considered both the status of PRs in common law and how tax law treats PRs and deceased estates generally.

Common law treats the PRs as standing entirely in the shoes of the deceased and entitles them to do take all the actions that the deceased could have taken as if they were the deceased.

With regard to tax law the distinction between chargeability to and liability for tax. TMA 1970 s 74 makes it clear that only the deceased is chargeable on income and gains that arise in his lifetime: the PRs are solely liable to pay the tax. HMRC has no power under TMA 1970 s 7 or 8 to require PRs to complete a tax return but it is established practice that PRs will complete returns for periods up to the date of death in order to establish their liability as PRs. The Judge held that

·         it is implicit in TMA 1970 ss 74 and 77 that the PRs’ liability depends on the exemptions and rates  applicable to the deceased;

·         those sections indicate that Parliament clearly intended that the PRs should be liable for the tax chargeable on the deceased but no provision is made for the situation where the deceased had the right to make a claim; and

·         there is nothing in any of the relevant Acts that expressly provides whether the PRs can or cannot make claims in respect of the deceased’s chargeability which the deceased, had he lived, could have made.

In considering whether Parliament intended a PR to be able to submit a claim that the deceased could have made she referred also to s 62(2) which, whilst not directly relevant, gave an indication of Parliament’s intention.

The Judge decided that the purpose of the legislation is not to deny losses but to decide on which side of the death “cut-off” they fall, i.e. to deny the deceased’s heirs and assigns relief for losses that the deceased had incurred but not to prevent those losses being allowed against income or gains that arose before the cut-off. She held that “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.”

The Judge’s conclusion on s 24 and s 131

“In conclusion, a purposive interpretation of s 24 TCGA and s 131 ITA is that the personal representatives of the deceased are treated as the deceased in so far as they are returning the deceased’s own tax liability.”

Loans becoming irrecoverable

All the conditions for s 253 relief were met; the only matter to be determined was whether the PRs could make a claim on the deceased’s behalf. The Judge found that “While the wording of s 253 differs from that of s 24 TCGA and s 131 ITA, the same point arises. Mr Leadley made the loan. At the date of the claim the loan had become irrecoverable. But the ‘claimant’ is the personal representatives in the sense that it was the executors who completed the 09/10 return, Mr Leadley having died.”

Therefore the Judge ruled that the PRs were able to make s 253 claims on the deceased’s behalf.

Will HMRC appeal?

Neither side was represented by counsel in this case, the PRs being represented by their accountant and HMRC by a revenue officer. The decision was on a point of law, so HMRC may appeal to the Upper Tier Tribunal and possibly further.