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

[1971] 1 All ER 785

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

Court:

Judges: Lord Reid
Lord 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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Appeal dismissed.

The respondents were the executors of an estate consisting of heritable estate in Scotland and movable estate in Scotland and England. Through their solicitors, the respondents made the investigations and obtained the valuations which were necessary to enable them to ascertain the particulars and value of the estate so that they could complete the appropriate Inland Revenue form. This form was sent to the Estate Duty Office together with a remittance in payment of estate duty. The form was returned duly stamped. Under s 38 of the Probate and Legacy Duties Act 1808 the respondents were obliged to obtain confirmation (the equivalent of probate in English law) before disposing of or distributing the estate. In order to obtain confirmation it was necessary to exhibit the stamped Inland Revenue form to the appropriate commissary court. This the respondents did. After obtaining confirmation they sold certain stocks and shares which had belonged to the deceased for prices which showed a capital gain of £1,183 on which they were assessed to tax. The total cost in solicitors' fees and outlays in obtaining valuations and procuring confirmation amounted to £525. The proportion of this expenditure applicable to the stocks and shares sold was £242. The respondents claimed that in computing the gain on which tax was assessed this sum should be deducted from the consideration as expenditure 'wholly and exclusively incurred' by them in establishing their title to the estate within the meaning of para 4(1)(b) ^[F1] of Sch 6 to the Finance Act 1965. It was contended by the Crown that this sum represented expenditure for the purpose of ascertaining the amount of, and paying, estate duty and was not therefore incurred 'wholly and exclusively' for the purpose of establishing title.

Held -

(Lord Morris of Borth-y-Gest dissenting)

The work involved in obtaining a valuation of the stocks and shares was work which was necessary before the respondents could obtain title by confirmation for, in order to obtain confirmation, they had to satisfy the Inland Revenue's claim to estate duty for which it was necessary that the stocks and shares should be valued; satisfying the Inland Revenue's claim was not itself an independent purpose of the valuation but was ancillary to the main purpose, ie to obtain confirmation; accordingly the expenditure in question was wholly and exclusively incurred by the respondents in establishing their title and was thus an allowable deduction (see p 789 f to h and p 798 b to e, h and j, post).

Notes

For deductions in the computation of chargeable gains, see Supplement to 20 Halsbury's Laws (3rd Edn), para 3012.

For the Finance Act 1965, Sch 6, para 4, see 45 Halsbury's Statutes (2nd edn) 651.

Appeal

This was an appeal by the Crown from an Interlocutor of the First Division of the Court of Session as the Court of Exchequer in Scotland (the Lord President (Lord Clyde), Lord Guthrie, Lord Migdale and Lord Cameron) dated 11 December 1969 and reported [1970] SLT 137 refusing an appeal by way of case stated from a determination of the Commissioners for the General Purposes of Income Tax dated 23 November 1967 whereby they held that a sum of £242 16s 1d and a further sum of £508 were allowable deductions in the computation, under Sch 6 to the Finance Act 1965, of the gain accruing to the respondents, the executors of Dr Robert Richards, on a disposal of certain assets. The Crown admitted before their Lordships that the sum of £508 was a proper deduction. The appeal was accordingly concerned with the sum of £242 16s 1d alone.

The following facts were found by the commissioners. Dr Robert Richards died on 18 November 1965 leaving heritable and movable estate as follows:

The respondents, through their solicitors, made such investigations and obtained such valuations as were necessary to enable them to ascertain the particulars and value of the estate under their charge on Inland Revenue form A-1 which they sent to the Estate Duty Office, Edinburgh, with a remittance in payment of estate duty. The Estate Duty Office returned the inventory to the respondents who thereafter sent it along with the settlement of the deceased to the Commissary Clerk of Aberdeenshire with a request that confirmation be issued. In due course the Commissary Court of Aberdeenshire granted confirmation in favour of the respondents. The respondents had the confirmation resealed in the Principal Probate Registry of the High Court in London. On obtaining confirmation the respondents exhibited it to, inter alia, the companies of which the deceased was a shareholder and in certain cases they paid noting fees on so doing. On various dates in January 1966 the respondents sold stocks and shares ('the stocks and shares') forming part of the deceased's estate. The gross prices realised amounted to £50,815 11s 11d and, after deducting stockbrokers' commission and the cost of contract stamps, amounting to £645 18s 11d, the net sum received by the respondents was £50,169 13s.

The capital gains accruing on these sales amounted to £1,211 after deduction of the commission and cost of stamps. A statement prepared by the the respondents' solicitors headed 'Calculation of fees and outlays chargeable' in respect of the stocks and shares sold and stocks and shares transferred (to beneficiaries) was lodged with the inspector of taxes. The fee paid by the respondents to their solicitors for the work described above was according to the scale fee prescribed by the Table of Fees approved by the Council of the Law Society of Scotland and amounted to £379 10s. The outlays incurred in obtaining valuations and in procuring confirmation and having it resealed in England amounted to £146 9s 3d. The total sum was therefore £525 19s 3d. The proportion of this fee applicable to the stocks and shares was £242 16s 1d. The fees paid by the respondents to their solicitors for intimating the confirmation in respect of the stocks and shares and the outlays connected therewith amounted to £27 11s. The respondents paid commission to their solicitors for all work done by them in connection with the sales of the stocks and shares. This commission, calculated in the manner prescribed by the Table of Fees, amounted to £508. The respondents claimed to deduct the following sums in computing the capital gains accruing on the disposal of the stocks and shares:

(a)

the sum of £242 16s 1d, as expenditure wholly and exclusively incurred by them in establishing their title thereto;

(b)

the sum of £27 11s, as incidental costs to them of making the disposal; and

(c)

the sum of £508 as incidental costs of making the disposal.

The deduction of £27 11s was allowed by the inspector of taxes.

The other sums were disallowed.

It was contended on behalf of the respondents that:

(i)

the provisions of Sch 6, para 4 to the Finance Act 1965 applied to this case;

(ii)

the expenditure incurred in obtaining confirmation was an allowable deduction in terms of para 4(1)(b) of Sch 6, as being expenditure wholly and exclusively incurred in establishing the respondents' title to the stocks and shares sold;

(iii)

the commission paid on the sale of the stocks and shares was an allowable deduction in terms of para 4(1)(c) of Sch 6, as being the incidental costs of making the disposal;

(iv)

para 16(1) of Sch 6 conferred on the executors of a deceased the option of charging certain expenditure against the gain arising on the deemed disposal on death, but did not preclude such expenditure as a claim under para 4 of Sch 6.

It was contended on behalf of the Crown that:

(i)

the expenses claimed by the respondents as deductions in computing their gains were not such as were permitted upon a proper construction of para 4 of Sch 6 in the context of the relevant provisions of Part III of the Act and the schedules thereto;

(ii)

by virtue of the provisions of s 24(1) the expenditure deemed to be incurred by the respondents on the acquisition of the deceased's assets was limited to the market value of those assets at the date of death of the deceased;

(iii)

the inventory of the deceased's estate was prepared for the purpose of ascertaining the amount of, and paying estate duty, and for the purpose of obtaining confirmation and the expenditure thereon amounting to £525 19s 3d was not incurred by the respondents wholly and exclusively in establishing their title to the deceased's assets;

(iv)

the expenditure amounting to £508 paid to the solicitors by the executors as commission on the realisation of stocks and shares was not incurred wholly and exclusively for the purposes of the executors' disposal of the stocks and shares, but was part of the solicitors' remuneration for their services in winding up the deceased's estate;

(v)

the provisions of para 4 of Sch 6 required that, in order to qualify as an allowable deduction in computing gains, expenditure must be incurred wholly and exclusively for the purpose described in those provisions and expenditure which was made wholly or partly for purposes not described in the provisions did not qualify as a deduction, and it was not legitimate to apportion a sum of undifferentiated expenditure incurred for both Qualifying and non-qualifying purposes.

The commissioners held that the respondents were entitled to the deductions allowed by the Finance Act 1965, Sch 6, para 4 and that, in terms of para 21(4) of that schedule, they were entitled to make any necessary apportionments. They found as a fact that the main purpose of the work of obtaining valuations and procuring confirmation was to provide the respondents with a title to deal with the deceased's estate and that payment of estate duty was incidental to that end. They held, therefore, that the said sum of £525 19s 3d was expenditure wholly and exclusively incurred by the respondents in establishing their title to the whole estate and that, of this, the sum of £242 16s 1d was the proportion applicable to the stocks and shares sold. They also found that the sum of £508 paid as commission represented the incidental costs to the respondents of making the disposal of the said stocks and shares. Accordingly, they allowed the deductions claimed.

The Solicitor General for Scotland (E G F Stewart QC), J P Warner and W D Prosser (of the Scottish Bar) for the Crown.

J P H Mackay QC and G W Penrose (both of the Scottish Bar) for the respondents.

Their Lordships took time for consideration

4 February 1971. The following opinions were delivered.