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

[1971] 1 All ER 785

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(Judgment by: Lord Morris of Borth-Y-Gest)

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

Court:

Judges: Lord Reid

Lord Morris of Borth-Y-GestLord 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 Morris of Borth-Y-Gest

My Lords, Dr Robert Richards who died on 18 November 1965, left heritable estate in Scotland and movable estate partly in Scotland and partly in England. The total estate in Scotland and England was of the value of £93,861. Included in the various items of movable estate in Scotland were cash in bank £2,092, life insurance policy £574, heritable bonds £2,800 and stocks and shares £24,454. The heritable estate in Scotland consisted of a dwelling house in Aberdeen. The movable estate in England consisted of life policies £2,806 and stocks and shares £52,597.

The respondents employed solicitors to do such work as was necessary (1) in order to investigate the particulars of the estate and (2) in order to obtain valuations of any such items of the estate as called for valuation. In order to comply with statutory obligations it was necessary to prepare an Inland Revenue affidavit. That has to be in a prescribed form and with prescribed particulars (see Finance Act 1894, s 8 (14)). By reason of s 38 of the Probate and Legacy Duties Act 1808, it was obligatory on the respondents 'on or before disposing of or distributing' any part of any personal or movable estate or effects in Scotland of the deceased and before uplifting any debt due to the deceased, and in any event within six months after having assumed possession or management of them and before being confirmed as executors testamentary or dative, to exhibit (on oath or solemn affirmation) in the proper Commissary Court in Scotland a full and true inventory, duly stamped, of all the personal or movable estate and effects of the deceased either already recovered or known to be existing. Those situated in Scotland had to be distinguished from those situated elsewhere. Any testamentary or other writing relating to the disposal of the estate and effects had to be mentioned. A refusal or neglect to satisfy the requirement would have been an offence involving a financial forfeiture and the payment of increased stamp duty.

The provisions of s 6(1) and (2) of the Finance Act 1894 are as follows:

'(1)

Estate duty shall be a stamp duty, collected and recovered as hereinafter mentioned.

'(2)

The executor of the deceased shall pay the Estate duty in respect of all personal property (wheresoever situate) of which the deceased was competent to dispose at his death, on delivering the Inland Revenue affidavit, and may pay in like manner the Estate duty in respect of any other property passing on such death, which by virtue of any testamentary disposition of the deceased is under the control of the executor, or, in the case of property not under his control, if the persons accountable for the duty in respect thereof request him to make such payment.'

Subsection (3) deals with the cases where an executor does not know the amount or value of any property which has passed on the death. The provisions of s 8(3) and (14) are as follows:

'(3)

The executor of the deceased shall, to the best of his knowledge and belief, specify in appropriate accounts annexed to the Inland Revenue affidavit all the property in respect of which Estate duty is payable upon the death of the deceased, and shall be accountable for the Estate duty in respect of all personal property wheresoever situate of which the deceased was competent to dispose at his death, but shall not be liable for any duty in excess of the assets which he has received as executor, or might but for his own neglect or default have received.

'(14)

All affidavits, accounts, certificates, statements, and forms used for the purpose of this Part of this Act shall be in such form, and contain such particulars as may be prescribed, and if so required by the Commissioners shall be in duplicate, and accounts and statements shall be delivered and verified on oath and by production of books and documents in the manner prescribed, and any person who wilfully fails to comply with the provisions of this enactment shall be liable to the penalty above in this section mentioned.'

The respondents' solicitors did the work that was necessary to enable the respondents to complete the Inland Revenue form A-1. That form together with a remittance in payment of estate duty was sent to the Estate Duty Office, Edinburgh. Having regard to the size of the estate the amount of estate duty that had to be paid was very considerable. It was collected as the stamp duty on the 'full and true inventory'. The inventory was returned to the respondents who then sent it to the Commissary Clerk of Aberdeenshire. Confirmation was thereafter granted in favour of the respondents. After that the respondents had the confirmation resealed in the Principal Probate Registry of the High Court in London. For their work as above described the fees and outlays chargeable of the respondents' solicitors amounted to £525 19s 3d. The value of the estate of the deceased (including certain inter vivos gifts) as adjusted for duty was £106,052. Of the amount of £525 19s 3d the sum of £379 10s represented solicitors' scale fees based on an estate value of £106,052 for the work of

'Making investigations obtaining valuations framing and delivering Inventory settling Estate Duty, expeding Confirmation and Resealing in English Probate Registry.'

The balance of £146 9s 3d covered their outlays including valuation fees and confirmation dues.

It is provided by s 24(1) of the Finance Act 1965 that:

'On the death of an individual all the assets of which he was competent to dispose shall for the purposes of this Part of this Act be deemed to be disposed of by him at the date of death, and acquired by the personal representatives or other person on whom they devolve, for a consideration equal to their market value at that date.'

In January 1966, the respondents sold certain stocks and shares of the estate for sums which amounted in gross to £50,815 11s 11d but which after deducting £645 18s 11d (in stockbrokers' commission and the cost of contract stamps) amounted to the net sum of £50,169 13s. No question arises in regard to that deduction. The respondents employed their solicitors in connection with these sales of the stocks and shares. So that those sales could take place the solicitors gave intimation of confirmation to the companies concerned. Their legal fees and outlays in so doing amounted to £27 11s. The solicitors also received (in accordance with a table of fees) a legal commission based on the £50,815 received on the sales of the stocks and shares. That commission amounted (after giving credit for a share of brokerage received from the stockbrokers) to a sum of £508. The sums of £27 11s and £508 are independent of the sum of £525 19s 3d already noted. The net amount of £50,169 13s which the respondents received for the stocks and shares sold was £1,211 more than their value at the date when the respondents were deemed to have acquired them (see s 24(1)). So the question arises as to what sums are allowable as deductions from £1,211 when computing the amount of the capital gains of the respondents.

The provisions of para 4 of Part I of Sch 6 to the Finance Act 1965, are as follows:

'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.'

The respondents have claimed to be able to make three deductions from the sum of £1,211. One such deduction is of the sum of £27 11s to which I have referred. That deduction was allowed by the inspector of taxes and its deduction was not challenged before the commissioners. A second deduction that was claimed was of the sum of £508 which was paid by the respondents to the solicitors in connection with the sales of the stocks and shares. It was claimed to be allowable in terms of para 4(1)(c) of Sch 6 as being incidental costs of making the disposals. That deduction was disallowed by the inspector. Before the commissioners the Crown contended that the expenditure of £508 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 estate. The commissioners allowed the deduction on the basis that the sum of £508 was part of 'the incidental costs' to the respondents 'of making the disposal'. Before their Lordships in the First Division ^[F2] the Crown challenged this deduction. Their Lordships upheld it. In your Lordships' House it has not been contended that the decision as to this item was erroneous. I think that it was clearly correct.

The third deduction claimed by the respondents is of a sum of £242 16s 1d. This was disallowed by the inspector of taxes but was held by the commissioners to be allowable. Their Lordships in the First Division ^[F3] upheld the decision of the commissioners. It becomes necessary to appreciate what the sum is. There has never been any specific expenditure of a sum of £242 16s 1d. There has not been and is not any identifiable item of £242 16s 1d. It is a sum arrived at by applying to the sum of £525 19s 3d the proportion which £48,958 (the value in the estate of the stocks and shares that were sold) bears to £106,052(the value of the estate for estate duty purposes). So the question to be decided is whether the sum of £525 19s 3d was expenditure wholly and exclusively incurred by the respondents in establishing preserving or defending their title to or right over the estate. If it was, then it is not in dispute that the sum of £242 16s 1d would be correct as an apportionment of the £525 19s 3d (see para 21(4) of Sch 6 to the Finance Act 1965), and on that basis would be a sum wholly and exclusively incurred by the respondents in establishing preserving or defending their title to or right over the stocks and shares that were sold. Of the three words 'establishing, preserving or defending' it is clear that it is the word 'establishing' that is here relevant. The commissioners expressed their decision in the following words:

'We found as a fact that the main purpose of the work ... 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. We therefore held that the ... sum of £525:19:3 was expenditure wholly and exclusively incurred by the Respondents in establishing their title to the whole estate, and we found that of this, the sum of £242:16:1, was the proportion applicable to the stocks and shares sold.'

My Lords, as the commissioners had set out all the facts in regard to the work done by the solicitors for the respondents and in regard to the expenditure incurred, I do not think that a review of the conclusion reached by the commissioners is precluded by the circumstance that they call their conclusion a finding of fact. Nor, when all the facts are found as to what work was done and as to what expenditure was incurred and when it is known what work as a matter of statutory obligation was required to be done, can it be a question of fact as to what was the main purpose of doing the work. With respect, therefore, I do not share the view of their Lordships in the First Division ^[F4] that the conclusion of the commissioners is unassailable as being a finding of fact. If the decision of the commissioners were to be regarded as a finding of fact it is to be observed that it is a finding that there was a 'main purpose' of the work done by the solicitors for the respondents, ie the main purpose of providing a title to deal with the deceased's estate. This necessarily involves that there was a subsidiary purpose or that there were subsidiary purposes. The decision of the commissioners has, therefore, itself the inevitable result that the expenditure involved was not wholly and exclusively incurred in providing a title to deal with the deceased's estate. I pass to consider the expenditure of the £525 9s 3d. Was it wholly and exclusively incurred by the respondents in establishing their title to the estate (see para 4(1)(b))? Lord Migdale ^[F5] was disposed to the view that it was within the words (see para 4(1)(c)) 'incidental costs', to the respondents 'of making the disposal'. On that view, the question similarly would be whether the expenditure was wholly and exclusively incurred for the purposes of the disposal.

The expense of £525 19s 3d was properly incurred by the respondents. It was also necessarily incurred. It was incurred because the respondents had to comply with the statutory obligations to which I have referred. They were bound to exhibit a full and true inventory. They were bound to specify all the property in respect of which estate duty was payable on the death of the deceased. They were bound to take care to receive the assets of the deceased. They were bound to pay estate duty. They were accountable for the estate duty. Though estate duty is a stamp duty it must be recognised, having regard to the ad valorem rates of it, that compliance by executors with the relevant statutory obligations is of great importance to the Revenue. I think that it follows that there were many reasons why the respondents incurred the expense of £525 19s 3d. If priority for any reason had to be assigned I would think that it would be found in a duty to obey the law. But enquiry whether expenditure is 'wholly and exclusively' incurred in doing one thing is resolved once it is seen that the expenditure is incurred for various reasons and in doing several things. The words in para 4(1)(b), ie, 'any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to or to a right over the asset' may not be difficult of application when no question of a death is involved. The words would seem to be primarily applicable to expenditure incurred by a living person in reference to some asset of his. The stringency of the words 'wholly and exclusively' does not, however, abate when the words are used or applied in reference to the duties of an executor. It is perhaps unfortunate that there is no express statutory provision to cover the situation which has given rise to this case. It is true that the respondents in this case could not have disposed of the stocks and shares until after they had incurred the expenditure in question and, furthermore, that they could not have done so until after they had paid estate duty (or estate duty so far as it could at first be assessed) but the expenditure was not, in my view, incurred by them wholly and exclusively in establishing their title to the estate. The respondents had to incur expenditure because of legal requirements involving considerable revenue-raising operations. Those requirements are by no means restricted to such as lay down and regulate machinery for establishing title. They may involve making various enquiries so as to ascertain whether there were gifts made inter vivos. From the public point of view their importance derives from the extent of the financial exactions. Having regard to the rates at which estate duty may have to be paid it is I think unrealistic to regard the payment of it as being merely incidental to a title-establishing purpose or as being merely a preliminary stage in one single operation of establishing title. The work done by the solicitors in connection with Revenue form A-1 which is an 'Inland Revenue Scotland Estate Duty' form was work that had to be done so that the respondents could comply with the provisions of s 6(2) and s 8(3) of the Finance Act 1894. The work done by the solicitors was dual purpose work. One purpose or a part of its purpose was the securing ultimately of a grant of confirmation; another and separate purpose was to enable the executors to satisfy their statutory obligation of paying estate duty and to enable the executors otherwise to obey the law. In my view, therefore, the expenditure of £525 19s 3d was incurred at least partly for purposes other than that of establishing title. Accordingly, I do not think that it was incurred 'wholly and exclusively' for that purpose.

For these reasons I would allow the appeal.

My Lords before his death my noble and learned friend Lord Upjohn had prepared a speech with which I agree. It is in accord with precedent that I adopt it and read his reasons as part of my speech. His speech was as follows:

This case is concerned with the capital gains tax imposed by the Finance Act 1965 on the sales in January 1966 by the respondents, executors of Dr Robert Richards, who died on 18 November 1965, of some £50,000 of stocks and shares included in his estate. The sole question before your Lordships is whether in the computation of the taxable gain the respondents are entitled to be allowed as a deduction certain expenses under and by virtue of para 4 of Part I of Sch 6 to the Finance Act 1965. My noble and learned friend, Lord Morris of Borth-y-Gest, has set out all the relevant facts and figures in such meticulous detail that I need not repeat any of them.

The expense which the respondents claim to deduct amounts to the sum of£242 16s 1d, which is the proper amount apportioned under para 21(4) of Sch 6 in respect of the stocks and shares sold, of the total expense of £525 19s 3d incurred by the executors through their solicitors (undoubtedly necessarily and properly as an executry expense) in the work described in the case stated 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 form 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, and 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, London.'

This is conveniently summarised in the questions framed by the General Commissioners for the opinion of the court:

'... whether ... the Respondents were entitled, under the relevant provisions of the Finance Act 1965 to deduct:-(a) a proportion, amounting to £242:16:1 of their outlays in obtaining Confirmation and having it resealed ... '

My Lords, as everyone knows, on every death in order to obtain confirmation in Scotland or probate in England the personal representatives of the deceased have to present an Inland Revenue Affidavit in the proper form which sets out the value of the estate and this, together with a remittance of the estate duty thereby found to be due, has to be sent to the estate duty office. When that has been done and accepted, then confirmation or probate follows and only then have the executors legal power to deal with the estate where proof of title is required, sell assets, assent to the vesting of property and so on.

The only deductions that are permitted from the capital gain for tax purposes on the disposal of an asset are set out in para 4 of Part I of Sch 6 to the Act, and the relevant paragraph is para 4(1)(b) and (c) which is in the following terms:

'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- ... (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.'

The General Commissioners held that the expenditure of £525 19s 3d was expenditure wholly and exclusively incurred by the respondents in establishing their title to the whole estate, and therefore the apportioned part of £242 16s 1d was allowable under para 4(1)(b). Their decision was upheld by the First Division ^[F6] primarily on the footing that the decision of the General Commissioners was one of fact, from which of course there is no appeal, but also because they agreed that the sum was deductible under para 4(1)(b) and (c).

My Lords, I am quite unable to agree that this question is one of fact. It seems to me to be plainly a question of law whether the deduction can be justified in law on a sound construction of para 4. Secondly, the Lord President (Lord Clyde) in the course of his judgment, appears to some extent to have introduced a subjective test. He said: ^[F7]

'Taxpayers in Scotland do not regard the payment of estate duty as an end in itself, but as a compulsory preliminary stage in the single operation of establishing the executors' right to deal in the estate.'

This, assuming it to be true (there was no evidence on the point), I regard as a quite irrelevant test. The word 'purpose' in para 40(1)(b) must be read in an objective sense. The question to be determined is wholly objective and depends in this case on whether the payment is 'expenditure wholly and exclusively incurred by him in establishing his title to ... the asset'.

With all respect to the opinion of Lord Migdale ^[F8] I do not think these costs can be described as incidental costs of making the disposal; I find that rather unrealistic, bearing in mind that the really important payment that has to be made before confirmation or probate is obtained is not these costs but the amount of the duty itself. In my opinion, these costs either fall within the words of para 4(1)(b) I have just quoted or are not allowable at all.

My Lords, para 4 applies equally to capital gains tax to which a living person is subject and it is not difficult to see the type of expense at which the draftsman was aiming to allow in such a case; it is more difficult in the present case. The costs of £525 19s 3d were necessarily incurred because, by virtue of the Finance Act 1894, the respondents had to submit an Inland Revenue affidavit and remit the duty. They had to do this because it was a statutory duty imposed on them and its object was to tax the property passing on the death of the deceased, and a very burdensome tax it is, too, in the case of large estates. The sanction imposed by Parliament is that until the affidavit is filed and duty is paid the executors cannot effectively deal with the estate; a most powerful sanction. Of course the result is that when the duty is paid and confirmation or probate obtained, the executors perfect their title. But I cannot regard this expenditure as incurred in establishing title to the deceased's property. They do not need to establish title; as executors they have it already; but until they have paid duty they cannot deal with the assets. So I regard the payment of duty and its attendant costs as all part of the statutory obligation to pay estate duty and no more. I cannot regard this as a single operation of establishing the executors' title. It is far from that.

But in any event I cannot myself see how it can be successfully alleged that these costs are wholly and exclusively incurred in establishing title. These words must be given their ordinary meaning. The immediate necessity for the expenditure is to prepare the affidavit pursuant to the statutory duty placed on them so that they may be compelled to pay the duty, and that is the principal object of incurring the costs; the fact that in the result the title is perfected is, in my opinion, a very secondary result, and I do not see how it can be said that these costs can be wholly and exclusively incurred in establishing title. I find myself in full agreement with the opinion of my noble and learned friend, Lord Morris of Borth-y-Gest, and would allow the appeal.