In the case of Peter L Drown & Mrs R E Leadley as executors of Jeffrey John Leadley deceased v HMRC (TC04007, published on 21 September 2014), the First-tier Tribunal (FTT) provided some useful clarity on the tax position for executors wishing to make negligible value claims in respect of the period before the deceased death.
The facts of the case
The deceased (JJL) invested £50,000 for shares and made a loan of £334,784 to three separate companies prior to his untimely death on 11 May 2010. HMRC had accepted that no later than 5 April 2010 the shareholdings were valueless and the loan was irrecoverable.
The executors subsequently filed a tax return for 2009/10 claiming relief against income arising in that year under s131 ITA 2007 on the basis a capital loss was realised under the negligible value rules of s24 TCGA 1992. They also claimed for remaining capital losses to be carried forward to set against future capital gains including the loss on the loan under s253 TCGA 1992 (relief for loans to traders).
HMRC took the view that neither claims under s131 or s253 could be made as the executors did not own the shares at the time they became of negligible value and did not make the loan. In relation to the former claim, the executors could not make a claim under s24 because the shares had become of negligible value before they were owned by the executors. The appellants’ position was that the personal representatives stood in the shoes of the deceased and could make the claims effectively as if they were the deceased himself.
The FTT confirmed that although the claim was made with the tax return in early 2011, the date of the claims was 5 April 2010 as set out in the return and supporting computations. They dismissed HMRC’s “overly literal interpretation of s24” in that the deceased must be alive at the time that the claim was submitted because s24 presupposes he owns the asset at the time the claim is submitted.
The FTT took a more purposive approach. In their view the ability within the legislation to back date negligible value claims by two years meant that it was necessary for the deceased to have owned the asset at the date it had become of negligible value and at the date of the claim. No purpose was fulfilled by requiring the deceased to remain the owner of the asset after that date.
In relation to the personal representatives’ capacity to make claims, legislation under s74 and s77 TMA 1970 confirmed that the PR’s were liable to tax chargeable on the deceased which clearly implied that exemptions and rates applicable to the deceased could be claimed. This did not however extend to optional claims the deceased could have made had he lived. For this part, Parliament’s intention would have to be examined and for this they turned to s62 TCGA 1992 which states amongst other things that assets acquired on death are uplifted to market value. The logic of the legislation is that there is a cut-off at death and the same logic suggests that pre-death losses were intended to be available to reduce the deceased chargeability to tax.
In conclusion, the view of the FTT was that the PR’s are treated as the deceased in so far as they are returning the deceased own liability and can make appropriate claims under s131 on the basis the deceased was the owner of the shares at the date of death. This approach did not extend to claims covering a period after the date of death where PR’s would look to set off losses against their own liabilities. The assets had already become of negligible value when ownership passed to the personal representatives so s24 did not apply. In relation to the loans, the same considerations applied in respect of s253 in that the PR’s could make claims which the deceased could have made if he had lived but this did not extend to claims against the PR’s own liability arising out of any gains in the period of executorship. In that extent the appeal failed but in relation to all other aspects the FTT confirmed that the losses could be claimed.
Why this matters
For those practitioners acting in relation to a deceased’s estate this case provides comfort that the courts support a purposive approach to the set off of losses arising pre-death and the making of claims by executors. In essence the case confirms that losses which could have been made by the deceased if he had lived could be made by the executors but such claims were restricted in that they could only be set against the income and gains of the deceased.