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ANDREW COCKMAN LLM, FTII, TEP of Deloitte & Touche analyses the recent Special Commissioner's decision in Executors of Margaret Evelyn Dickinson.
ANDREW COCKMAN LLM, FTII, TEP of Deloitte & Touche analyses the recent Special Commissioner's decision in Executors of Margaret Evelyn Dickinson.
EXECUTORS OF MARGARET Evelyn Dickinson was heard before Dr A N Brice sitting as Special Commissioner in September 2001. The case involved three interesting points that arose out of a claim to revalue land within three years of the date death under section 191, Inheritance Tax Act 1984.
Background
Miss Dickinson died in February 1992, leaving most of her estate to charities. There was no inheritance tax payable on her death. Most of the properties were sold within three years of her death at values in excess of those shown in the Inland Revenue account.
The executors made a claim under section 191 to substitute the sale price for the values originally returned. The motive behind this was not inheritance tax driven. The objective, apparently, was to increase the capital gains tax base cost of the properties sold for capital gains tax.
Capital gains tax link
Section 62, Taxation of Chargeable Gains Act 1992 provides that executors receive the assets held by the deceased at their current market value. Section 274 provides that:
'Where on the death of any person inheritance tax is chargeable on the value of his estate immediately before his death and the value of an asset forming part of that estate has been ascertained (whether in any proceedings or otherwise) for the purposes of that tax, the value so ascertained shall be taken for the purposes of this Act to be the market value of that asset at the date of death.'
For some years there had been speculation as to whether it might be possible to take advantage of section 191, Inheritance Tax Act 1984. The issue more usually arose in the context of inherited real estate by a surviving spouse. The objective would be to increase the capital gains tax base cost with no attendant increase in inheritance tax. The principle here was the same, although it is not clear why it was so important to increase the capital gains tax base cost. Presumably the gain on disposal by the charities would have been covered by the charity exemption in section 256, Taxation of Chargeable Gains Act 1992. Had the executors sold the properties themselves during the course of administering the estate, without first having appropriated them to the charities, the capital gains tax exemption would have been unavailable: see Prest v Bettinson 53 TC 437. In such an instance the base cost would have been highly relevant.
In seeking to increase the base cost in this way the executors had to clear a number of hurdles. Firstly, they had to ensure that they were eligible to make the claim. The usual objection raised by the Revenue is that no claim is possible if no person is liable to pay inheritance tax on the testamentary gift. This would be the case where the unrestricted spouse exemption applied or where a gift to a charitable legatee came within the exemption in section 23, Inheritance Tax Act 1984.
In the context of section 274, Taxation of Chargeable Gains Act 1992, the Revenue's usual argument was that as no inheritance tax was chargeable it had not been necessary to ascertain the value of the assets concerned. Accordingly, it was not possible to substitute any increased property value for capital gains tax purposes.
The arguments
Mr Bowles, a solicitor with Cooper Son & Caldecott, appeared for the executors. He argued that the reference to the person liable for inheritance tax in section 190(1), Inheritance Tax Act 1984 did not mean the person who had paid inheritance tax. The provision simply identified the right person to pay the tax. The executors would have been the appropriate persons to pay the tax had the residuary beneficiaries not all been charities, or if the value of the remaining part of the estate that did not pass to the charities had exceeded the nil rate band.
Peter Twiddy, assistant director of Inland Revenue: Capital Taxes, appeared for the Revenue. His primary argument was that section 191(1) could only apply where the value of land fell after death. In doing so, he relied upon R V Schildkamp [1971] AC 1 in order to take into account the provision's heading 'The Relief'. He then argued that, by implication, the statutory provisions could only apply where the value of land dropped following death.
In addition, he suggested that Pepper v Hart [1992] STC 898 applied, contending that the argument raised by the taxpayer was absurd. As there was a lack of clarity, ambiguity or absurdity, he sought to rely upon statements made at the time the original provisions where introduced. These, he suggested, made it clear that the clause was designed to grant relief where the value of land fell after death. Accordingly, the relief had not been intended to enable higher base costs to be substituted purely for capital gains tax purposes. Hence, the appropriate person to make the claim under section 191, could only be the person liable to pay the tax, and paying the tax.
Turning to section 274, Taxation of Chargeable Gains Act 1992, he emphasised that value first had to be 'ascertained'. This implied that there first must be some requirement to ascertain the values. Also, he highlighted the 'purpose' behind section 274. The effect of a claim under section 191, Inheritance Tax Act 1984 was to reduce the charge to inheritance tax, while at the same time the base cost of the asset would be reduced in line, leaving open the possibility of a capital gain being levied at some future date.
The decision
Dr Brice found for the Revenue, and in doing so addressed a number of interesting issues. Firstly, she felt it was clear from the side note or heading of section 191 that the purpose of the section was to grant relief from inheritance tax where there was a fall in the value of land after death.
Next turning to the phrase the person liable for inheritance tax in section 190(1), she felt it was clear that it meant 'the person who either has paid the tax or has an obligation to pay it'. Accordingly, no one was liable to pay the tax if there was no tax to pay. As a result, no one could validly make a claim under section 191 in this case.
On the final point, Dr Brice agreed with Peter Twiddy that the term 'ascertained' carried with it 'an implication that some formality or agreement is required and that a simple claim would not suffice'. She considered her view supported by the fact that section 274 only applies where 'inheritance tax is chargeable' on the value of the estate. In the present appeal most of the transfers of value were exempt and so tax was not chargeable.
Finally, she felt that the symmetry of the tax provisions, and the way that section 191, Inheritance Tax Act 1984 and section 274, Taxation of Chargeable Gains Act 1992 were designed to operate, further supported her view.
In summary, the decision has covered a number of interesting points. Many of these may not come as an undue surprise to some readers, albeit the suggestion that section 191 is in fact a one-way street may have come as a greater surprise.
