Capital gains tax — Retirement relief — Disposal of business — Surrender of agricultural tenancy — Tenant receiving capital payment — Tenant continuing to farm under licence — Finance Act 1985 section 69 — Whether surrender of tenancy constituted the disposal of the whole or part of a business — Whether tenant entitled to retirement relief on chargeable gain
Prior to March
29 1990 the respondent occupied and farmed a holding of 326 acres. He owned 100
acres, held 90 acres under a licence and was a tenant of a further 136 acres
under a tenancy protected by the Agricultural Holdings Acts. Following the
service of a notice to quit the tenanted land, given pursuant to case B of
Schedule 3 to the Agricultural Holdings Act 1986, the respondent entered into a
deed of surrender of the land; he received the sum of £120,000 and was given a
temporary licence to retain occupation of some of the tenanted land until it
was required by the landlord. The licence ended on September 29 1991. In
respect of the rest of the holding, farming operations ceased on September 29
1992 and the business ceased on April 5 1993. The respondent was assessed to
capital gains tax in respect of the chargeable gain on the receipt of the
£120,000. His appeal to the General Commissioners was allowed; he was allowed
retirement relief on the chargeable gain on the basis that the business which
continued after the surrender was wholly different from the previous business.
On the application of the appellant inspector of taxes, the commissioners
stated a case for the opinion of the High Court.
section 69(2)(a) of the Finance Act 1985. The General Commissioners did
not apply the statutory test in deciding whether the respondent disposed of the
whole or part of a business. The fact that the future of the business became
precarious, in relation to the land that had been tenanted, did not mean that
the respondent ceased to carry on the same business activity afterwards. The
subsequent cesser of the farming business could not be treated as part of the
disposal effected by the deed of surrender. The respondent had not disposed of
the whole or part of his business by the deed; he was therefore not entitled to
retirement relief.
This was an
appeal by way of a case stated on the application of the appellant inspector of
taxes, Gordon Dennis Barrett, from a decision of the General Commissioners, who
had allowed an appeal by the respondent, Robert James Powell, against an
assessment to capital gains tax.
Timothy
Brennan (instructed by the solicitor to the Inland Revenue) appeared for the
appellant; the respondent appeared in person.
Giving
judgment, Lightman J said:
I have before me an appeal by way of case stated by the inspector from the
decision of the General Commissioners that the taxpayer (Mr Powell) is entitled
to retirement relief from capital gains tax in respect of his receipt of a
payment of £120,000. This payment was made by his landlord on his surrender to
the landlord of an agricultural tenancy of farmland. On the date of the
surrender, the landlord granted to Mr Powell a licence to farm the land in
question as he had done previous to the surrender, and this licence continued
in force for two seasons. It is common ground that in respect of the receipt of
£120,000 the taxpayer made a chargeable gain, agreed at £49,672. (This figure
contains an arithmetic error and the correct figure is £47,672.) This
chargeable gain gives rise to a potential liability for capital gains tax. The
issue raised is whether in the circumstances of this case the surrender of the
tenancy constituted the ‘disposal of the whole or part of a business’ within
the meaning of section 69 of and Schedule 20 to the Finance Act 1985. If the
answer is (as was held by the General Commissioners) in the affirmative, retirement
relief is available to Mr Powell and the effect of this relief is to eliminate
the liability for capital gains tax.
Facts
Prior to March
29 1990 Mr Powell had for many years farmed partly as landowner, partly as
tenant and partly as licensee, Southside Farm, Milton Keynes Village (the
farm). The farm consisted of approximately 326 acres of which he owned 100
acres (the owned land), he held 90 acres (the licensed land) under licence from
Milton Keynes Development Corporation (the corporation) and he held 136.2 acres
(the tenanted land) as tenant of the corporation under an agricultural tenancy
agreement (the tenancy). The tenanted land accordingly accounted for 41.7% of
the farm. The tenancy enjoyed protection under the Agricultural Holdings Act. The
farm’s business consisted of growing grain, in particular wheat, barley and
rape, and keeping 10 cross Hereford steers.
On February 22
1990 the corporation served notice to quit in respect of the tenancy pursuant
to Schedule 3 case B to the Agricultural Holdings Act 1986 on the ground that
the tenanted land was required for a use other than for agriculture for which
permission had been granted under section 7(1) of the New Towns Act 1981, and
required Mr Powell to give up possession on April 25 1990. Thereafter, Mr
Powell was compelled to enter into negotiations with the corporation, which
concluded (without any intermediate contract) with the execution on March 29
1990 of a deed of surrender (the deed). The material terms of the deed were as
follows:
2.3. It has
been agreed that the Tenant will surrender all his estate and interest in the
two pieces of land shown edged red on the plan annexed hereto containing One
hundred and thirty six decimal point two acres (136.2) or thereabouts together
with the farmhouse buildings erected thereon …
3. In
consideration of the sum of One hundred and twenty thousand pounds
(£120,000.00) paid by the Landlord to the Tenant … the Tenant as beneficial
owner surrenders and yields up and releases to the Landlord all his estate
interest and rights in the Surrendered Land …
5. the Tenant
shall be entitled to retain the 4 bay dutch barn and corn store … and shall
remove the same from the Surrendered Land on or before the 29th September 1991
…
At the same
time Mr Powell and the corporation agreed that the corporation would grant to
Mr Powell a temporary licence without any security rights under the
Agricultural Holdings Act to use the whole of the tenanted land (apart from
that required for the construction of new roads) and to occupy the farmhouse on
the land until they were required by the corporation. Mr Powell’s licence in
respect of the tenanted land and the licensed land continued until September 29
1991 when he was required to deliver up possession to the corporation. Accordingly,
he continued to farm the tenanted land together with the licensed and owned
lands for a further two seasons after the surrender, and it is agreed that the
level of his farming operations before and after execution of the deed on March
29 1990 remained unchanged until September 29 1991.
Thereafter,
for a short period, he continued to farm the owned land.
Farming
operations ceased on September 29 1992 apart from the sale of harvest from
storage. The business ceased on April 5 1993.
Mr Powell’s
Schedule D case II profits assessable for the six years to April 5 1993 were as
follows:
|
|
|
|
|
|
£ |
£ |
|
Year ended April 5 |
1988 43,206 |
total sales 187,210 |
|
Year ended April 5 |
1989 49,419 |
total sales 131,213 |
|
Year ended April 5 |
1990 46,701 |
total sales 123,780 |
|
Year ended April 5 |
1991 38,199 |
total sales 109,606 |
|
Year ended April 5 |
1992 39,470 |
total sales 102,757 |
|
Year ended April 5 |
1993 53,470 |
total sales 74,615 |
On March 27
1991 Mr Powell was assessed to capital gains tax for the year ended April 5
1990 in respect of the chargeable gain. On April 22 1991 Mr Powell appealed to
the General Commissioners who allowed his appeal. On February 14 1997 the
General Commissioners stated a case for the opinion of the High Court whether
they were entitled to reach this decision.
Mr Powell has
on this appeal appeared in person and (save for handing in a piece of paper to
which I shall refer) has left it to the court to decide the issue raised on the
appeal. In the circumstances, I have thought it right to consider with
particular care the authorities so as to elicit any support for his case that
can be found and set out my reasoning fully and clearly.
Legislation
Section 69 of
the Finance Act 1985 (so far as material) provides as follows:
69. Relief for disposals by individuals on retirement from family
business
(1) Relief
from capital gains tax shall be given, subject to and in accordance with Schedule
20 to this Act, in any case where a material disposal of business assets is
made by an individual who, at the time of the disposal, —
(a)
has attained the age of 60 …
and sections
124 and 125 of the Capital Gains Tax Act 1979 shall not apply to any disposal
made on or after 6th April 1985 unless it is a disposal in respect of which, by
virtue only of paragraph 5(1) of Schedule 20 to this Act, relief in accordance
with that Schedule cannot be given.
(2) For the
purposes of this section and Schedule 20 to this Act, a disposal of business
assets is —
(a) a
disposal of the whole or part of a business, or
(b) a
disposal of one or more assets which, at the time at which a business ceased to
be carried on, were in use for the purposes of that business, …
(4) A
disposal of assets such as is mentioned in subsection (2)(b) above is a
material disposal if —
(c)
the date on which the business ceased to be carried on falls within the
permitted period before the date of the disposal.
Schedule 20
provides that ‘permitted period’ means a period of one year or such longer
period as the board may, in the particular case, by notice in writing allow.
Decision
It is common
ground that Mr Powell in this case satisfied the age condition in section
69(1)(a) and (as I have already said) the amount of the chargeable gain
is agreed. Mr Powell is accordingly entitled to tax relief in this case if the
disposal of the tenancy was the disposal of ‘the whole or part of a business’.
The relevant
part of the decision of the General Commissioners reads as follows:
We accepted
the contentions of the taxpayer in concluding that the enforced termination of
the tenancy led to a position in relation to the taxpayer’s farming business
which was wholly different from that which had obtained before the surrender.
We considered that none of the tax cases cited on behalf of the Inspector
paralleled the facts in this case. Upon the basis of all the evidence put
before us we decided that the taxpayer was qualified to receive retirement
relief under the provisions of Section 69 of the Finance Act 1985. Accordingly
we determined the assessment at nil.
The
construction of section 69(2)(a) is one of some difficulty and this is
apparent from a consideration of the authorities on the section. As Mr Timothy
Brennan has confirmed to me, there is no statutory definition of the word
‘disposal’ as used in the section. This has given rise to the problem of
determining its meaning in the context of section 69(2)(a). An
authoritative ruling by the Court of Appeal is much to be desired.
The guidance
provided by the authorities (all at first instance) is to the following effect:
(1) It is
clear from the language of the section and the authorities on it that a
distinction is drawn between the sale of an asset used in a business (which may
fall within section 69(2)(b) if the sale of the asset is after the
cesser of the business in which it was used) and the sale of the whole or part
of a business (which may fall within section 69(2)(a) if the business is
still subsisting up to the date when the sale takes place);
(2) A disposal
of an asset used in a business (and this includes an interest in farmland used
for the purpose of a farming business) does not necessarily constitute or give
rise to a disposal of the whole or part of a business: see McGregor v Adcock
[1977] 1 WLR 864*. This is clearly brought out in a passage in the judgment of
Peter Gibson J in Atkinson v Dancer; Mannion v Johnson
(1988) 61 TC 598, at p607E–F:
*Editor’s note: Also reported at [1977] 1 EGLR 105;
(1977) 242 EG 289
the fact that
a farmer sells some land alone which he has been using for a farming business prima
facie will not amount to the sale of his farming business or any part
thereof because it is only the sale of a chargeable business asset and not in
itself the sale of the business or any part of it, this notwithstanding that it
will be virtually inevitable that the sale of land on which the business has
been conducted will reduce the activity of the farmer and probably his profits.
(3) The
language of section 69(2)(a) is apposite to a disposal of the whole or
part of an undertaking or business as a going concern, and this construction is
reinforced by the contrast with the language of section 69(2)(b). But
rightly or wrongly the section has not been construed as limited to such a
disposal (see eg Pepper v Daffurn (1993) 66 TC 68*) and this has
led to difficulties in giving a clear and coherent construction to the section.
The construction of the word ‘disposal’ has been adopted which embraces the
disposal of an asset used in the business, which has the effect (by disabling
the taxpayer from continuing the business or part of it or otherwise) of
bringing an end to the whole or part of the business. The inspector has not
invited me to decide what is the true construction of the section, but rather
to adopt the ‘conventional’ construction. Since this is in the interests of Mr
Powell as favouring the success of his case, and Mr Powell is unrepresented, I
have acceded to this request;
*Editor’s note: Also reported at [1993] 2 EGLR 199;
[1993] 41 EG 184
(4) The
disposal must be a disposal of the whole or part of the business carried on at
the date of the disposal. It is not sufficient that what is disposed of was a
part of the business carried on at some previous date but has since ceased to
be such, whether on a change in the character of the business carried on (see Pepper
v Daffurn (supra) and Wase v Bourke (1995) 68 TC
109*) or the cessation of any business;
* Editor’s
note: Also reported at [1996] 1 EGLR 164; [1996] 25 EG 170
(5) The
appropriate exercise to be undertaken is to look at the position before and
after the disposal and then ask what (if any) changes the disposal occasioned
to the business and whether as a matter of fact this amounts to causing a
cesser of a whole or part of that business: see Atkinson v Dancer
(supra);
(6)
Substantially simultaneous disposals of assets used in a business may be viewed
together in judging whether there has been a disposal of a whole or part of a
business. It may also be permissible to take account of later disposals, if so
connected with the previous disposals as may fairly be treated as part of the
same transaction. It may be found as a fact that there has been a disposal of
the whole or part of a business notwithstanding that all the assets in the
business or part of the business are not disposed of: see Jarmin v Rawlings
(1994) 67 TC 130.
I turn now to
the facts of this case. It is not, and cannot be, suggested that section 69(2)(b)
has any application, for Mr Powell’s business did not cease to be carried on
before the relevant disposal took place. Mr Powell is accordingly confined to
relying on section 69(2)(a). The issue in this case is, accordingly,
whether there was in this case a disposal, not merely of an asset used in the
business but of ‘a part of the business’, and this involves the question
whether the surrender of the tenancy caused a cesser of the business carried on
by Mr Powell. This is an issue of fact. The General Commissioners are the body
entrusted with the responsibility for deciding this question of fact, but in so
doing they must direct themselves correctly in law and, in particular, ask
themselves the correct question.
The question
(or test) applied by the General Commissioners was whether the disposal by way
of surrender of the lease ‘led to a position in relation to the taxpayer’s
farming business which was wholly different from that which obtained before the
surrender’. The General Commissioners do not explain what they mean in saying
that the ‘position’ in relation to Mr Powell’s business was ‘wholly different’.
I can only think that their meaning is that, with the substitution of a
temporary licence for a statutorily protected tenancy, the business (at any
rate so far as it was carried on at the tenanted land) could only be carried on
so long as the corporation held their hand and continued their licence in
favour of Mr Powell, and there could accordingly be no certainty as to its
future duration.
In my view,
the test applied by the General Commissioners was not the statutory test. The
fact that the future of the business so far as it was carried on at the
tenanted land became precarious, did not mean that Mr Powell ceased to carry on
the same business activity afterwards as before or that he had made any
disposal of any part of his business. There was no change in the character of
his business and no abrogation of a separate part of his business: compare Jarmin
v Rawlings (supra). As I have already pointed out, this is agreed
between the parties. I do not think that the subsequent cesser of his farming
business by Mr Powell, whether treated as effective on September 29 1991 (when
the licences expired) or (more correctly) September 5 1993 (when Mr Powell
ceased farming), can be treated as part of the disposal effected by the deed.
Such cesser was the result of a decision to this effect made long afterwards.
Mr Powell, in
the document he handed to me, submitted that his continued farming over the
period after the deed was executed was part of the process of winding up his
business. There is no support for this contention in the evidence and Mr Powell
cannot adduce new evidence at this stage. In any event, the cesser of his
business more than two seasons after the disposal of the tenancy is far too
remote in both time and causation to be treated as part of the same transaction
as the surrender of the tenancy so as to render the surrender a disposal of
part of his business.
Conclusion
It is clear in
this case that the disposal was of ownership of an asset used in the taxpayer’s
business; by virtue of the new licence granted by the corporation, however, he
was enabled thereafter to carry on exactly the same business, albeit the use of
the tenanted land was now precarious, and he did so carry on his business
profitably for two seasons. In the circumstances, in the light of the
misdirection by the General Commissioners, their decision cannot stand, and
since the only decision properly open to them was to hold that Mr Powell was
not entitled to the relief claimed, I so hold and allow the appeal.
