Leasehold interest in house — Disposal of assets — Taxpayer and sister appointed executors and inheriting father’s house — Lease for under 50 years — Whether statutory right to extend term of lease — Whether wasting asset — Revenue holding that capital gains tax computation was on the basis of wasting asset under section 37 of and Schedule 3 to the Capital Gains Tax Act 1979 — Taxpayer’s appeal dismissed
A property known as Red Lodge, 11 Elwyn Road, Exmouth, Devon, belonged to the appellant taxpayer’s parents. The freehold was owned by the mother but was subject to a lease in favour of the father for a term of 99 years commencing on September 29 1904 and expiring on September 29 2003 at an annual rent of £8. The mother died in 1982 and the freehold interest in the property was inherited by and became vested in the appellant and his sister. The father died in 1985. At the date of his death the unexpired term of the lease was 18 years and two months. By his will he appointed the appellant and his sister as his executors and they inherited the leasehold interest. Neither the appellant nor his sister were resident in the property at the date of their father’s death or subsequently. During the tax year ended April 5 1987 they let the property unfurnished. On November 5 1987 they sold the 16 years left of the leasehold interest and the freehold interest to the same purchaser for £107,500. The leasehold and the freehold interests merged. At the date of the father’s death the leasehold interest was valued by the district valuer at £40,000. On the sale of the property the district valuer and the executors agreed that the sale proceeds should be apportioned £82,500 in respect of the leasehold interest and £25,000 in respect of the freehold interest. The tax inspector calculated a capital gain of £40,364 on the basis that the lease of the property disposed of by the executors was a wasting asset within section 37 of and Schedule 3, para 1, to the Capital Gains Tax Act 1979. Consequently the value of the lease at the date of acquisition had to be written down. The general commissioners for the division of Sidmouth held that it was a wasting asset. The appellant appealed against that decision to the High Court contending that the lease was not a wasting asset given that the Leasehold Reform Act 1967 enabled him to extend his lease for another 50 years. The effect of Schedule 3 para 8(5) and (6) to the 1979 Act was that to ascertain the duration of the lease, it was necessary to refer to the facts known or ascertainable at the time when the lease was acquired by those whose disposal of it gave rise to the charge to capital gains tax. In this case the lease was acquired as executors on the death of their father in 1985 and under para 8(5) there could be an extension of the lease beyond a given date by notice given by the tenant, because the Leasehold Reform Act 1967 gave to a tenant the right to extend his lease for a further term of 50 years. As a result, at the date of disposal, the duration of the lease for capital gains tax purposes was not 16 years but 66 years. It was not therefore a wasting asset.
Held The appeal was dismissed.
1. The appellant’s arguments did not accord with the true construction of the statutory provisions. The lease of the property as granted in 1904 did not contain any express term providing for the extension of the lease beyond a given date by notice given by the tenant. The words of para 8(5), read in their ordinary and natural way, required that the provision for the extension of the lease should be included among “the terms of the lease”. The provision relied on by the appellant was not “in the terms of the lease” but in the 1967 Act. The right to acquire an extension was conferred by statute directly on a tenant who satisfied the prescribed conditions. It was not conferred either by an express term in the lease as granted in 1904 or by a term to that effect implied into the lease by the 1967 Act.
2. Even if the statutory right in the 1967 Act was to be regarded as a “term of the lease” for that purpose, it would not constitute a provision “for the extension of the lease beyond a given date” within para 8(5). Although the statutory right was referred to in section 1(1) of the 1967 Act as a right to acquire “an extended lease”, it was clear from sections 14 and 15, which dealt with extension, that an extended lease was a grant which the landlord was bound to make of a “new tenancy of the house and premises for a term expiring 50 years after the term date of the existing tenancy” and was “in substitution for the existing tenancy”. The new tenancy would not be an extension of the lease within para 8(5). It was a new and separate lease acquired for the first time on the occasion of a grant to the tenant under section 14 following the giving by the tenant to the landlord of written notice of his desire to have an extended lease: see Bayley v Rogers [1980] 53 STC 420.
3. The effect of the application of para 8(5) was a deemed extension of the term of the lease “for as long as it could be extended by the tenant”. On the facts of this case, the term of the lease acquired by the appellant and his sister as executors could not be extended by them. Their father had not during his lifetime given notice to the landlord of his desire to have any extended lease. The executors could not therefore claim that a right of the father arising from service of a notice by him as tenant inured for their benefit as executors: see section 5(1) of the 1967 Act. The executors, after their father’s death, could not claim the right to acquire an extended term as members of his family succeeding to the tenancy on his death. Such a right was available only in cases where, on the death of the tenant while occupying the house as his residence, a member of his family who was “resident in the house” became tenant of it under the same tenancy: see section 7. The result was that although the appellant and his sister acquired the lease and became tenants on their father’s death, the terms of the lease could not be extended by them either under the terms of the lease or under the 1967 Act, whether they were acting as executors or claiming as members of his family succeeding to the tenancy.
The appellant appeared in person; and Roger Ter Haar (instructed by the solicitor for the Inland Revenue) appeared for the Inland Revenue Commissioners.