Capital gains tax — Retirement relief — Agricultural land — Family farming company — Disposal of agricultural land but not of company shares — Whether ‘material disposal’ of business assets — Whether retired farmer entitled to retirement relief from capital gains tax
On 29 January 1988 H, who was then over 60 but who
died before the appeal, disposed of a farm consisting of 163 acres of
agricultural land. Until its disposal, it was used for the farming business
carried on by the family trading company. H was a full-time working director of
the company, and the company paid a rent to him for the use of the land. On the
disposal of the land, the company ceased to trade. H did not dispose of any
shares in the company. In the court below, Lightman J dismissed the taxpayer’s
appeal from a decision of a special commissioner, who had disallowed retirement
relief from capital gains tax on the sale of the land. The personal
representatives of H’s estate appealed, contending that there had been a
disposal of business assets for the purposes of section 69 of the Finance Act
1985.
allowed. Section 69(2)(b) in effect raises, but does not conclusively
answer, the crucial question: when there is a disposal of assets formerly used
in a discontinued business, to whom must that business have belonged if relief
is to be granted? The language of section 69(4)(a) was clear, specific
and directly in point, and answered the crucial question posed by subsection
(2)(b) in favour of H.
The following cases are
referred to in this report.
Frankland v Inland
Revenue Commissioners [1997] STC 1450
Marriott v Lane
(HMIT) [1996] 1 WLR 1211; [1996] STC 704; [1996] BTC 297
Pepper v Daffurn
[1993] 2 EGLR 199; [1993] 41 EG 184; [1993] STC 466; (1993) 66 TC 68;
[1993] BTC 277
Plumbly (Personal Representatives of) v Spencer [1997] STC 301; [1997] BTC 147
Rye v Rye [1962]
AC 496; [1962] 2 WLR 361; [1962] 1 All ER 146, HL
This was an appeal by the
personal representatives of Mr
J, who had dismissed their appeal from a decision of a special commissioner
disallowing retirement relief from capital gains tax to the deceased following
an assessment by the respondent HM tax inspector.
Patrick Soares (instructed by Cameron McKenna)
appeared for the appellants; and Michael Furness (instructed by the solicitor
to the Inland Revenue) represented the respondent.
Giving the judgment of the court, ROBERT WALKER LJ said: This is the
judgment of the court on an appeal from an order of Lightman J (whose judgment
is reported at [1997] STC 301; [1997] BTC 147) dismissing a taxpayer’s appeal
from a decision of a special commissioner. The appeal relates to an assessment
of capital gains tax for 1987-88 made on Mr SC Harbour. Mr Harbour has since
died, and the appellants are his personal representatives.
The appeal is concerned with retirement relief.
That relief has formed part of the capital gains tax since its inception:
originally it was contained in section 34 of the Finance Act 1965, consolidated
as section 124 of the Capital Gains Tax Act 1979. It has been developed by
successive amendments, some giving statutory effect to what had started as
extra-statutory concessions. The provisions in force for the 1987-88 year of
assessment were subsections 69 and 70 of, and Schedule 20 to, the Finance Act
1985. Those provisions were amended by the Finance Act 1991, and have now been
consolidated as subsections 163 and 164 of, and Schedule 6 to, the Taxation of
Chargeable Gains Act 1992, with yet further amendments made by the Finance Act
1996. The following references to statutory provisions are to those of the
Finance Act 1985.
The facts set out in the special commissioner’s
decision were not in dispute, and are quite straightforward. On 29 January 1988
Mr Harbour (who had attained the age of 60 years) disposed of 163 acres (about
65ha) of agricultural land, known as Mayfield Farm, Besthorpe, Norfolk. The
farm was, until the disposal, used for the farming business carried on by a
private company, SC Harbour (Besthorpe) Ltd (the company). The company had
owned the business for some 40 years, and at all material times it was a
trading company: it was Mr Harbour’s family company and it had Mr Harbour as a
full-time working director (in each case, within the meanings in Schedule 20
para 1). The company paid rent to Mr Harbour for the use of the land. On the
disposal of the land the company ceased to trade. Mr Harbour did not dispose of
his shares in the company or make any other disposal capable of constituting an
‘associated disposal of assets’ within the meaning of section 70(7).
The general legislative purpose of retirement
relief is reasonably clear; that is, to afford special relief to an individual
at or near retirement age who has devoted a part of his or her working life to
a trading enterprise, either as a sole trader or as a partner or as a full-time
working director of a family company. The relief is granted in respect of a
‘material disposal’ of ‘business assets’ by an individual who has attained a
specified age (60 years for 1987-1988, but since reduced to 50 years) or has
retired on ill-health grounds below that age.
However, by 1987-88 the relief had become quite
complex, and the statutory provisions call for careful study (and study of them
as a whole) in order to discern their effect. It would be a mistake to suppose
that all the most important provisions are in sections 69 and 70, and that
those in Schedule 20 are merely ancillary. Sections 69 and 70 set out the
minimum conditions for obtaining some measure of relief, but the extent of the
relief to be granted in any particular case depends on Part
20. Part I of that Schedule contains interpretation provisions applicable both
to sections 69 and 70 and to Part II of the Schedule. The definitions of
‘qualifying disposal’ and ‘qualifying period’ in Schedule 20 para 4(1) and (2),
which draw together much of the detail in sections 69 and 70, are particularly
important. Thus, although section 69 focuses on the minimum period of one year,
it becomes apparent from the definition of ‘qualifying period’ in Schedule 20
para 4(2) and from the ‘basic rule’ in para 13(1) of that
measure of relief. A reader who looks only at the references in section 69 to
‘a period of at least one year’ might suppose that parliament had been
excessively preoccupied with the possibility of changes in the structure of a
business (sole trader, partnership or family company) during the last year
before its disposal or cessation.
Most of the relevant statutory provisions are set
out in the judgment under appeal and it is not necessary to repeat them at
length. But they do call for some commentary by way of explanation. The general
scheme of section 69 is (as already noted) to lay down the minimum conditions
in which some measure of retirement relief may be obtained by an individual who
makes a material disposal of business assets: the extent of the relief being
regulated by Schedule 20 Part II. Subsection (1) lays down the requirements as
to the individual’s age or ill health. Subsection (2) defines a disposal of
business assets:
(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, or
(c) a disposal of shares or securities of
a company…
The expression ‘part of a business’ has been
considered in several reported decisions of which the most recent is Pepper
v Daffurn [1993] STC 466; [1993] BTC 277*. In that case, Jonathan Parker
J suggested (at pp471 and 283 respectively) that para (a) is intended to
relate to the disposal of the whole or part of a business as a going concern.
That is plainly its primary purpose. Para (a) does not in terms refer to
a disposal of assets whereas para (b) is in terms directed to a disposal
of assets following on cessation of a business. Nevertheless, it is clear that
under both paragraphs the relief is linked to a disposal of ‘chargeable business
assets comprised in a qualifying disposal’: Schedule 20 para 6. The definition
of ‘chargeable business asset’ is in Schedule 20 para 12(2), to which it will
be necessary to return.
*Editor’s note: Also reported at [1993] 2 EGLR
199; [1993] 41 EG 184
Subsections (3), (4) and (5) of section 69 then
spell out what is a material disposal under paras (a), (b) and (c)
respectively of subsection (2). Subsection (3) requires that, under para (a),
the business must have been owned throughout the qualifying period by the
individual making the disposal (a condition extended by subsection (8) to
include the disposal of a partnership interest) or by a company meeting the
requirements of subsection (3)(a) and (b). Subsection (4)
provides that, under para (b), there are three requirements: (a) the
business must throughout the qualifying period have satisfied the same
ownership conditions as are set out in subsection (3); (b) the individual
making the disposal must have satisfied the age or ill-health requirement at
the time of cessation of the business (as well as at the time of the disposal);
and (c) the period between cessation and the disposal must not exceed one year
or such longer period as the Board of the Inland Revenue may allow: see the
definition of ‘permitted period’ in Schedule 20 para 1(2). Subsection (5), as
supplemented by subsections (6) and (7), imposes similar requirements in
relation to a disposal of shares in a family trading company. It is not
necessary for present purposes to go into the detail of those requirements.
Subsection (8) operates to equate a partner with a sole trader for the purposes
of section 69.
Section 70 extends retirement relief in three
ways. Subsections (1) and (2) extend the relief to certain employees and
office-holders. Subsections (3), (4) and (5) (together with provisions in
Schedule 20) extend the relief to material disposals of business assets by
trustees. The detail of those provisions is not relevant to this appeal. But
subsections (6) and (7) are important. Where an individual obtains relief under
section 69 for a disposal of a partnership interest or of shares in a family
company, section 70(6) extends the relief so that it also covers an ‘associated
disposal of assets’, meeting the three requirements in section 70(7):
(a) the associated disposal takes place ‘as part
of a withdrawal’ of the individual from participation in the business of the
partnership or family company;
(b) the asset was used for that business
immediately before the disposal (or earlier cessation of the business); and
(c) the asset was used during all or part of the
individual’s period of ownership, either for the last-mentioned business or for
another business falling within section 70(7)(c).
Where section 70(7)(c) is only partly
satisfied, Schedule 20 para 10 operates to reduce the extent of the relief. It
is also reduced, under para 10(1)(c), if the availability of an asset
for business use depended on the payment of rent.
A typical example of the operation of section
70(6) and (7) would be the case of a farmer (like Mr Harbour) who is the sole
owner of freehold agricultural land but permits it to be occupied and farmed by
a partnership or family company of which he is a member. The freehold land does
not appear in the balance sheet of the partnership or company, but it is used
for the purposes of the farming business, and its disposal may be eligible for
relief for an associated disposal. Since Mr Harbour did not during his lifetime
dispose of his shares in the company, it is common ground that his disposal of
the farm cannot qualify as an associated disposal. But the provisions of
section 70(6) and (7) may be material to the understanding of section 69, and,
in particular, the reference in section 69(2)(b) to ‘assets which, at
the time at which a business ceased to be carried on, were in use for the
purposes of that business…’. As the judge said, it is not to be expected that
the sale of an asset used in another person’s business should fall within
section 69(2)(b) when it is subject to the express provisions in section
70(6) and (7). Nevertheless, complex legislation does sometimes, by design or
by accident, provide for different cases that overlap. Subsections (6) and (7)
of section 70 plainly cover a number of cases that cannot fall within section
69(2)(b), such as where, on the taxpayer’s withdrawal, the partnership
or family company remains in existence and continues to trade (so that the
business does not cease).
The judge rightly stressed the importance of
reading section 69(2)(b) in its context and with due regard to the
overall scheme of sections 69 and 70 and Schedule 20. On that approach, he came
to the clear conclusion that the business referred to in section 69(2)(b)
must be the business of the individual making the disposal. He therefore
dismissed the appeal from the special commissioner, who had reached the same
conclusion.
The judge set out his main reasons in three
numbered paragraphs. The first paragraph analysed the structure of section
69(2), and found a parallel between paras (a) and (b) of that
subsection. He said:
In short section 69[(2)] in the two [paragraphs]
is concerned with two different scenarios, either of which may occur when the
businessman decides to retire from his business; he may dispose of his business
as a going concern or he may merely dispose of the assets used in such
business. The tax relief is rendered available in both cases. In both cases the
expression ‘a business’ is used to denote any business of the individual making
the disposal.
The judge’s second numbered paragraph drew
attention to the overlap (on the taxpayer’s construction) between section
69(2)(b) and section 70(6) and (7). His third paragraph drew attention
to the fact that relief under section 69(2)(a) and (b) is limited
(Schedule 20 para 6) to gains on the disposal of ‘chargeable business assets’,
which are defined in Schedule 20 para 12(2) as excluding ‘shares or securities
or other assets held as investments’. He noted that para 12(2), unlike para
10(1)(c) and (2), made no specific reference to rent. The judge saw
these two points as confirming his initial view. He added that it was clear
(and common ground) that section 69(3) and (4) contained nothing inconsistent
with that view. However, Mr Patrick Soares, for the appellants, has, in this
court, relied heavily on section 69(4). The judge’s reference to what was
common ground may have been based on a misunderstanding.
Before coming to counsel’s main submissions, it is
convenient to note some peripheral points. Mr Soares has pointed out that in Marriott
v Lane (HMIT) [1996] STC 704; [1996] BTC 297 (which was not cited below)
Sir Richard Scott V-C appears (at pp710 and 303 respectively) to have read section
69(2) in the sense for which Mr Soares contends. But the point was not argued
(the issue was as to a temporary cessation
view cannot carry the same weight as it would if there had been argument on the
point.
Mr Soares also based some submissions on section
69(8). Partnerships presented the parliamentary draftsman with some technical
problems because of their particular characteristics: an English partnership is
not a separate legal entity, but it is a familiar trading vehicle, and a
landowner can grant a lease or tenancy to a partnership of which he is a
member. We accept the submission of Mr
Inspector of Taxes) that section 69(8) does not go so far as to deem a partner
to be in the same position as a sole trader for all purposes connected with
retirement relief. Its general effect is that, as one would expect, ownership
of chargeable business assets by partners is to be treated as transparent,
unlike ownership by a family company, where different provisions (Schedule 20
para 7) are needed to produce broadly similar economic results. There are
various other differences between the positions of a partner and an individual
who is a shareholder and director of a family company; for instance, as to the
requirement for full-time attention to the business. It seems reasonably clear
that parliament has recognised that it would be impossible to achieve complete
uniformity and symmetry between the three types of trading enterprise (sole
trader, partnership and family company), and has not attempted to do so.
Both counsel made submissions directed to the
policy considerations that may be supposed to underlie Schedule 20 paras 6 to
11, taken together with the definition of ‘chargeable business asset’ in para
12(2). That definition is in the following terms:
an asset (including goodwill but not including
shares or securities or other assets held as investments) which is, or is an
interest in, an asset used for the purposes of a trade… carried on by–
(a) the individual concerned; or
(b) that individual’s family company; or
(c) a member of a trading group of which
the holding company is that individual’s family company; or
(d) a partnership of which the individual
concerned is a member.
Para 6 gives relief for gains on qualifying
disposals of chargeable business assets up to the appropriate percentage (see
para 13(1)) of a maximum sum: £125,000 for 1987-1988. The exclusion of ‘shares
or securities or other assets held as investments’ (an exclusion that goes back
to the Finance Act 1965) seems to be intended to withhold relief from assets
(such as quoted investments, tenanted cottages or life policies) that may
appear in the balance sheet of a business but are not used functionally in that
business; so distinguishing between what can be loosely described as a
business’s trading assets and its investment assets. Para 6 restricts the
relief in that way on a disposal by a sole trader or partner, and para 7 (as
extended by paras 8, 9 and 11) does the same in the case of a disposal of
shares in a family company.
Para 10 applies, in some circumstances, to
restrict relief on an associated disposal. Para 10(1)(a) and (b)
spell out the implications of ‘the whole or part of the period’ in section
70(7)(c) and restrict relief by a process of time-apportionment in cases
where the two relevant periods (the period of use and the period during which
the individual owner has met the statutory requirements) do not coincide. Para
10(1)(c) may impose a different type of restriction linked to whether,
and to what extent, the asset’s ‘availability for that use was dependent upon
the payment of rent’, as explained and extended by the following provisions of
para 10. In this case, the company paid rent to Mr Harbour (there is no finding
as to whether it was a full commercial rent), but the Revenue has not contended
that Mr Harbour held Mayfield Farm as an investment, and no finding to that
effect was made by the special commissioner.
The court was not given any wholly satisfactory
explanation of the policy considerations underlying para 10(1)(c). In
relation to an asset comprised in an associated disposal, it applies in
addition to (and not instead of) the exclusion of investment assets under para
12(2), since that definition is (as the judge noted) of general application. It
is relevant to an associated disposal as well as to other types of qualifying
disposal.
A possible explanation is that when relief for
associated disposals was introduced by the Finance Act 1985, the definition in
para 12(2) was regarded as inadequate, or inapposite, as the only test for
distinguishing between a business’s trading and investment assets, since
associated disposals relate to assets that are not in the balance sheet at all,
but are in separate ownership. So para 10(1)(c) imposed a further test
by reference to whether the individual owner made the relevant asset (in this
case, Mayfield Farm) available gratuitously, or at a modest rent, or at a full
rack-rent, with relief being restricted or lost completely as the terms become
progressively more commercial. This further test is akin to the investment test
embodied in para 12(2), but it is simpler to apply, and may (as the Revenue’s
attitude in this case shows) produce a different result. It is only because of
that potentially different result that the relief accorded to an associated
disposal is, as Mr Furness emphasised in his written and oral submissions, more
restricted than the relief on other types of qualifying disposals.
We have dealt with this point at some length
because it is puzzling, but it does not in the end have any decisive effect on
the outcome of this appeal. We come back to the judge’s reasons for preferring
the Revenue’s construction. We readily accept the general point that paras (a)
and (b) of section 69(2) are concerned with two alternative situations;
the sale of a business as a going concern and the sale of assets formerly used
in a discontinued business. If a sole trader sells the business as a going
concern, then, obviously, he owns the business that he sells. But that is by no
means so obvious with a sale of assets formerly used in a discontinued
business. Unless the sale and cessation are absolutely simultaneous (which is
improbable in practice, and does not fit well with the language of section
69(2)(b) or section 69(4)(a)), the business does not belong to
anyone at the time of the disposal of assets; it has ceased to exist. It is the
assets formerly used in the discontinued business that must necessarily belong
to the individual who is disposing of them. The parallel that the judge seems
to have discerned (in his first numbered paragraph) is not clearly made out.
Mr Furness sought to support the judge’s main
conclusion by drawing a parallel between section 69(2)(a) and (3), on
the one hand, and section 69(2)(b) and (4), on the other hand. He argued
that since a sole trader who sells a business must own it at the time of sale
(an obviously correct proposition, which can be derived from section 69(2)(a)
on its own), section 69(3) is concerned only with the past history of ownership
of the business; therefore, he said, section 69(4) must similarly be concerned
only with past history, not with ownership at the time of cessation. We cannot
accept that submission. It assumes a higher degree of symmetry than can exist
between provisions directed at two different factual situations. It ignores the
essential difference between those two situations.
In his second and third numbered paragraphs the
judge said that an overlap between section 69(2)(b) and section 70(6)
was not to be expected, and he examined the structure of the restrictions
(partly by reference to ‘chargeable business assets’ and partly by reference to
rent) in Schedule 20 paras 6 to 11. He pointed out that the definition in para
12(2) made no specific reference to rent. That was consistent with his view on
the construction of section 69(2)(b), because a man who owned both the
business and the land and other assets used in it would not (and indeed could
not) pay rent to himself for the use of his own assets.
If there is even a partial overlap between the
cases that may fall within section 69(2)(b) and section 70(6), that is
untidy and, perhaps, anomalous, but it is not so strikingly anomalous as to
amount to or even approach absurdity. On any view, there is a limit for the
relief available to an individual in respect of all his material disposals of
business assets (Schedule 20 para 13), and he cannot get relief twice on the
same business assets. On any construction, the statutory provisions contain
oddities or anomalies (as with almost any complex relief: see Frankland
v Inland Revenue Commissioners [1997] STC 1450, especially the
observations of Peter Gibson LJ at pp1459-1460 and of Chadwick LJ at
pp1463-1464). Questions of statutory construction should not be decided by
balancing competing anomalies of that sort.
We are not persuaded that the judge’s Rye v
Rye point (see Rye v Rye [1962] AC 496) takes the matter
much further. A sole owner of land cannot grant a lease to himself, but he can
(and in practice quite often does) grant a lease or tenancy to a partnership of
which he is a member, and section 69(8) does not operate to deem the grant to
be a nullity. The additional restriction in Schedule 20 para 10(1)(c)
may have been intended to resolve a doubt as to whether a landowner’s receipt
of rent for business use of the land by another entity automatically gives that
land the character of an investment in the landlord’s hands. Conversely, the
reference to investments in para 12(2) is capable of covering a variety of
assets that might be held by a family business as investment assets rather than
trading assets (for instance, a vacant building, a vintage motor car or a life
policy) but which do not produce any rent or other income; it is therefore not
surprising that para 12(2) does not refer expressly to rent.
We do not think it is necessary to resolve all
these puzzles in order to dispose of this appeal. Having looked at the scheme
of the relief and at some of its intricacies, we come back to the provisions in
section 69(2) and (4). They are, in our judgment, of central importance to this
case. Section 69(2)(b), in effect, raises, but does not conclusively
answer, the crucial question: when there is a disposal of assets formerly used
in a discontinued business, to whom must that business have belonged if relief
is to be granted? Section 69(4)(a) answers that question: the
requirement is that:
as throughout a period of at least one year
ending with the date on which the business ceased to be carried on… either the
business was owned by the individual making the disposal or paras (a)
and (b) of subsection (3) above apply.
We do not see how that can be read as imposing one
strict condition (individual ownership) at the moment of cessation and another
less strict condition (individual or family company ownership) during the
preceding period of at least a year. We have for simplicity omitted some
verbiage about the ‘relevant conditions’, but the words omitted (including the
emphatic ‘at any time’) provide further support for this reading.
The statutory provisions that the court has had to
consider are something of a labyrinth. But we have come to the conclusion that
the Revenue’s points as to the improbability of an overlap between section
69(2)(b) and section 70(6), and as to the uneven results capable of
being produced under Schedule 20 paras 6 to 11, cannot overcome the language of
section 69(4)(a). That language is clear, specific and directly in
point.
We would therefore allow this appeal. We do not
regard that result as in any way absurd or even as particularly anomalous. It
might be thought more anomalous if Mr Harbour had been denied any business
relief, after the company had been farming for 40 years, because of his (or his
advisers’) omission to take one or other of two otherwise fairly pointless
steps: that is, the transfer of the farming business to Mr
just before its cessation or the disposal of his shares in the dormant company.
Appeal allowed.
