On 24 March 2017, the Upper Tribunal released its decision to allow the appeal lodged by HMRC in respect of the First-tier Tribunal’s decision to allow certain claims made by the Executors of Mr Jeffrey Leadley deceased. The case will be of interest to those who act on behalf of deceased individuals, especially where certain investments have been made during their lifetime of the deceased which have subsequently became valueless.
Mr Leadley had invested £50,000 in two companies by subscribing for shares in those companies. In addition, he had made a loan of £334,784 to another company.
By 5 April 2010, the shares had become of negligible value and the loan had become irrecoverable. Before Mr Leadley had a chance to make the relevant claims for relief in respect of the failed investments, he was killed in a motor accident on 11 May 2010.
When preparing Mr Leadley’s tax return for the year ended 5 April 2010, his Executors made a claim for relief under ITA 2007, s131 in respect of the shares following a claim under TCGA 1992, s24 to treat those shares as having become of negligible value. A claim under TCGA 1992, s253 was also made by the Executors in respect of the loan that had become irrecoverable.
HMRC disallowed the claims, arguing that the Executors were not entitled to make such claims on behalf of the deceased. The Executors appealed to the First-tier Tribunal and the appeal was allowed. HMRC subsequently appealed against that decision to the Upper Tribunal.
The First-tier Tribunal decision
HMRC’s argument was that in order to make the relevant claims, the shares and the loan had to have been owned by Mr Leadley at the time they became valueless and still be owned by him when the claims were made. As the shares and the loan were owned by the Executors at the date the claims were made, but were owned by Mr Leadley at the date they became valueless, HMRC argued that only Mr Leadley himself could have made the relevant claims.
The First-tier Tribunal did not agree with HMRC. They believed that HMRC were taking an “overly literal interpretation” of the current legislation and if a purposive approach was used, the Executors of the deceased should stand in the shoes of the deceased such that they are in effect treated as the same person in terms of the ability to make such claims.
The Upper Tribunal decision
HMRC’s view was that the date of a negligible value claim in relation to the shares must be the date the claim is submitted. While TCGA 1992, s24 allows for an earlier time to be specified in a negligible value claim, there is a difference between the date an asset is deemed to be sold and then reacquired and the date the negligible value claim is in fact made. HMRC believe that the purpose of the legislation is to allow for situations where an individual still owns an asset but it has become of negligible value.
The other argument put forward was that while the absence of a negligible value claim could result in a larger liability for the Estate of the deceased, alternatively if the deceased stood to make a substantial capital gain on the disposal of another asset while alive, the capital gain would subsequently be extinguished on death due to the provisions of TCGA 1992, s62 which allow for the tax free uplift of an asset’s base cost.
In terms of the loan, a similar approach was taken by HMRC who argued that the Executors could not make a claim for relief under TCGA 1992, s253 as it was Mr Leadley who had made the loan and not the Executors. Furthermore, HMRC argued that s253 does not allow a claimant to assign their right to recover an outstanding amount, where an individual dies HMRC take the view that there is an assignment of the debt to the Executors.
The Upper Tribunal therefore allowed HMRC’s appeal, ruling that the Executors were not entitled to claim relief for either of the shares or the loan.
This decision will be of interest to those dealing with the income tax affairs of deceased persons. This ruling should serve as a reminder to make such claims while the individual is alive, rather than delaying matters with the result that valuable reliefs are lost.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Sean Eastwood.