Inland Revenue Commissioners v Executors of the estate of Dr Robert Richards

[1971] 1 All ER 785

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(Judgment by: Lord Reid)

Between: Inland Revenue Commissioners v
And: Executors of the estate of Dr Robert Richards

Court:

Judges:
Lord ReidLord Morris of Borth-Y-Gest
Lord Guest
Lord Donovan

Subject References:
TAXATION
CAPITAL GAINS TAX
ASSESSMENT
Deductions from consideration on sale
Expenditure wholly and exclusively incurred in establishing, preserving or defending title to asset
Executors of estate
Expenditure incurred by executors in obtaining valuations and procuring confirmation of title
Valuations necessary for purpose of satisfying Revenue's claim to estate duty
Satisfying claim an essential step before executors could obtain title by confirmation and deal with assets
Sale of assets realising capital gain
Whether cost of obtaining valuations expenditure wholly and exclusively incurred by executors in establishing title to assets

Legislative References:
Finance Act 1965 - Sch 6, para 4(1)(b)

Hearing date: 4, 5 November 1970
Judgment date: 4 February 1971

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Judgment by:
Lord Reid

My Lords, Dr Richards died in 1965. In January 1966 the respondents, his executors, sold certain stocks and shares which had belonged to him for prices which showed a capital gain. They were assessed to capital gains tax on a sum of £1,183. They claimed under the Finance Act 1965, Sch 6, to make deductions (1) of £535 as incidental costs in disposing of these assets and (2) of £242 in expenditure incurred by them in establishing their title to these assets. The Crown now admits the former sum as a proper deduction. The question in this appeal is whether the latter sum is a proper deduction.

In order to obtain confirmation entitling them to deal with the assets of the deceased the executors must exhibit in the Commissary Court 'a full and true inventory duly stamped' (Probate and Legacy Duties Act 1808, s 38). The sum of £242 was the proportion of the cost of preparing and exhibiting such an inventory which was attributable to the stocks and shares of which the sale produced the capital gain in question. The relevant provisions of Sch 6 are:

'4(1)

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 money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset, (b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset, (c) the incidental costs to him of making the disposal.

(2)

For the purposes of this paragraph and for the purposes of all other provisions of this Part of this Act the incidental costs to the person making the disposal of the acquisition of the asset or of its disposal shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition or, as the case may be, the disposal, being fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance (including stamp duty) together-(a) in the case of the acquisition of an asset, with costs of advertising to find a seller, and (b) in the case of a disposal, with costs of advertising to find a buyer and costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation under this Schedule, including in particular expenses reasonably incurred in ascertaining market value where required by this Part of this Act ...

21

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(4)

For the purposes of any computation under this Schedule 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 Schedule, be such method as appears to the inspector or on appeal the Commissioners concerned to be just and reasonable.'

Paragraph 4 is primarily concerned with persons who dispose of assets during their lifetime. It allows the seller to deduct from the price which he receives the amount that he paid for the asset, the amount by which he has enhanced its value, and 'expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title'. If he had to take legal action to establish his title to property which he had bought or inherited, the cost of that action is a permissible deduction.

The Crown does not dispute that this provision covers the case of an executor acquiring a title to deal with the estate of a deceased person. Their case is that every executor has a double duty. He must pay estate duty and then he must administer the estate. Estate duty must be paid before confirmation can be obtained. They say that all the expenditure on preparing a full and true inventory was also necessary to prepare the affidavit required by s 8 of the Finance Act 1894 and therefore it cannot have been wholly and exclusively incurred in establishing the executor's title.

It is therefore necessary to consider first the nature of estate duty. It is a stamp duty (Finance Act 1894, s 6). It is charged on an ad valorem basis, estates of less than £10,000 being now exempt. And the Inland Revenue affidavit which must be submitted before confirmation can be granted is not final but is subject to any necessary later adjustment. ad valorem stamp duties are or recently were payable on a wide variety of deeds or instruments, and these duties often are or were only a very small percentage of the principal sum dealt with by the instrument which has to be stamped. It appears to me to be unreasonable to say that, in every such case, the work necessary to determine the amount of that principal sum was done for two independent purposes, one being to satisfy the Inland Revenue that the proper stamp duty was being paid. The payment of the stamp duty is simply an ancillary step necessary to give legal effect to the instrument. The Crown's argument has to my mind only become plausible because the rate of estate duty is now in many cases very high. If the total estate were less than £10,000 and it was only necessary to satisfy the Inland Revenue that no duty was payable, I cannot think that that should be regarded as an independent purpose or that it could properly be said that the work of preparing the inventory was done for two independent purposes, first to obtain confirmation and secondly to show that no duty was payable.

I find confirmation of this view in the very paragraph of Sch 6 with which we are concerned. Paragraph 4(2) explains what is meant by expenditure wholly and exclusively incurred in the acquisition or disposal of the property in question. It includes stamp duty in the incidental costs, although it provides that the incidental costs 'shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition or, as the case may be, the disposal'. And there is another indication in this Schedule that 'wholly and exclusively' must not be read too literally. Suppose a person buys several items of property in one lot for a single price, and then sells one of these items and the question arises whether he has made a capital gain. Strictly speaking it is impossible to say that the price or any part of it was expended wholly and exclusively on any one of the items. But para 21 (4) makes the scheme workable by providing for apportionment by such method as appears to the inspector or the commissioners to be just and reasonable.

If then one is entitled to construe 'wholly and exclusively' not strictly but so as to give a reasonable result I am of opinion that the fact that the work necessary to obtain confirmation also serves the ancillary purpose of determining the amount of stamp duty does not prevent the cost of that work from being held to have been wholly and exclusively incurred in establishing the executors' title. Payment of estate duty is another matter. The respondents do not claim that as a deduction. No doubt they had to pay the duty before they could get confirmation, but I could not regard payment of duty as merely ancillary. This may be a matter of degree. When stamp duty is very small it might be possible so to regard it. But in 1965 estate duty could be very large and no one could reasonably say that paying it was merely an incidental step towards getting a title to what remained after it had been paid

I would dismiss this appeal.