Capital gains–Land owned on April 6 1965–Computation of chargeable gain–Time-apportioned basis or formula based on April 6 market value–Latter basis applicable if case fell within paragraph 23(1)(b) of Schedule 6 to the Finance Act 1965–Land without planning permission for development, but with substantial hope value, at date of sale–As development would in any case have been unlawful without permission before disposal, could it be said to have ‘become’ unlawful within the statutory hypothesis in paragraph 23(1)(b)–Held that the hypothetical absolute prohibition of development applied–Market value formula applicable–Decision of Fox J upheld
This was an
appeal from a decision of Fox J, who had upheld a ruling by the special
commissioners for income tax dismissing an appeal by the taxpayer, William
Henry Watkins. The appeal related to 22 acres of farmland, part of a larger
area which the taxpayer had inherited known as Westhill Farm, Brackley,
Northamptonshire, on the death of his father in 1962. The value of the 22 acres
on the death of the taxpayer’s father in 1962 was £1,581. The taxpayer sold the
22 acres in 1972 for £260,000. At the date of the sale no planning permission
for development had been obtained, but there was a hope or expectation of
permission and permission was in fact subsequently obtained. The issue in the
case was as to whether the computation of the capital gain should be in
accordance with paragraph 23 of Schedule 6 to the Finance Act 1965 or whether,
as the taxpayer contended, the time-apportionment basis should be applied.
D C Potter QC,
A E Park and D G Robins (instructed by Speechly Bircham) appeared on behalf of
the appellant; J E Vinelott QC, A Fletcher and B J Davenport (instructed by the
Solicitor of Inland Revenue) represented the respondent.
Giving
judgment, STAMP LJ said: The judgment I am about to read is the judgment of the
court.
This is an
appeal from an order of Fox J dated February 25 1977, whereby the judge, being
of the opinion that the determination of the Commissioners for the Special
Purposes of the Income Tax Acts was correct, dismissed an appeal by way of the
case stated by the taxpayer, Mr Watkins.
The case is
reported in [1977] 3 All ER 545. The learned judge there sets out the facts in
full and it is unnecessary therefore to recite them. The proceedings relate to
an assessment to capital gains tax for 1971-72 in respect of a gain of
£258,961. It relates mainly to the gain accruing on the disposal of 22 acres of
land under a contract of January 26 1972. As appears from the learned judge’s
judgment the 22 acres are to be treated as having been acquired by Mr Watkins
in January 1962 for £1,581. It was sold for £260,000. The price paid reflected
the hope or expectation that the planning authorities would be willing to grant
planning permission authorising residential development of the land. No
planning permission authorising such development had, however, been obtained.
Section 19(1)
of the Finance Act 1965 charged the capital gains tax on ‘chargeable gains
computed in accordance with this Act and accruing to a person on the disposal
of assets.’ When this new capital gains
tax was introduced by the Finance Act 1965 it was not the policy to tax gains
which had accrued prior to April 6 1965 (see, eg section 22(10) of the Act and
paragraph 24(2) of Schedule 6). Accordingly on a disposition made after April 6
1965 of property which had been acquired prior to that date provision had to be
made for ascertaining how much of any profit had accrued prior to that date and
how much of it subsequently. Only the latter part was made taxable.
Two methods of
achieving this result were laid down by the Act. Except where otherwise
provided the profit was to be treated as accruing at a uniform rate over the
whole period of the taxpayer’s ownership: see paragraph 24 of Schedule 6. By
the effect of a rising rate of inflation, or because subsequent to April 6 1965
there has been a sharp rise in the development value of the land disposed of,
this method of ascertaining the taxable gain favours the taxpayer, for it
throws back part of the gain which in truth accrued after April 6 1965 to the
earlier non-taxable period. It is this method of ascertaining the post-April 6
1965 gain which in the instant case is favoured by the taxpayer. There can be
no doubt, on the facts of the case, that the value of the land rose far more
sharply after the relevant date than it did before.
The other
method of ascertaining the post-April 6 1965 gain–and it is that for which the
Revenue contends in the instant case–is to ascertain what was the market value
of the asset on April 6 1965, which is a very tiresome process except in
relation to such assets as quoted investments, and compute the post-April 6
1965 gain accordingly: see paragraph 23(2) and the following subparagraphs of
Schedule 6. Where the case fell within paragraph 23 it was mandatory to adopt
the last-mentioned method of computing the post-April 6 1965 gain. Whether
paragraph 23 did or did not apply depended on whether the case fell within subparagraph
1 of paragraph 23, and that in turn depended on whether the consideration for
the disposal exceeded what the market value of the land would be upon the
hypothesis specified in paragraph 23(1)(b).
Paragraph
23(1) was in force in relation to disposals at the relevant time. It appeared
under the cross-heading ‘Sales of land in United Kingdom reflecting development
value,’ and provided as follows:
23(1) This paragraph shall apply in relation to a
disposal of an asset which is land in the United Kingdom, or an estate or
interest in land in the United Kingdom–
(a) if, but for this paragraph, the expenditure
allowable as a deduction in computing under this Schedule the gain accruing on
the disposal would include any expenditure incurred before April 6 1965, and
(b) if the consideration for the asset acquired
on the disposal exceeds what its market value would be if, immediately before
the disposal, it had become unlawful to carry out any development in, on or
over the land other than development of the kinds specified in Schedule 3 to
the Town and Country Planning Act 1962 (for land in England and Wales or
Northern Ireland) or Schedule 3 to the Town and Country Planning (Scotland) Act
1947 (for land in Scotland).
In this
paragraph ‘development’ has, in relation to land in England or Wales or
Northern Ireland, the meaning given by the Town and Country Planning Act 1962
and, in relation to land in Scotland, the meaning given by the Town and Country
Planning (Scotland) Act 1947.
(2) For the purposes of this Part of this Act,
including Part 1 of this Schedule, it shall be assumed in relation to the
disposal and, if it is a part disposal, in relation to any subsequent disposal
of the asset which is land in the United Kingdom or an estate or interest in
land in the United Kingdom that that asset was sold by the person making the
disposal, and immediately reacquired by him, at its market value on April 6
1965.
We have not
hitherto mentioned paragraph (a) of paragraph 23(1) because it is common ground
that in the instant case it was satisfied.
Mr Potter, on
behalf of the taxpayer, fastening on the words ‘it had become unlawful to carry
out any development . . .’ submits that paragraph (b) is only intended to apply
to a case where, at the date of the disposition, it was lawful to develop the
land. What the legislature had in mind was the case where the value of land has
been dramatically increased by the effect of any actual planning permission
which made it lawful to develop it and not to a case where, as here, no
planning permission had been obtained at the time of the disposal and it was,
as well before as after the disposal, unlawful to develop the land. The expression
‘had become unlawful,’ so the argument runs, imports a change of condition–that
is, the entry into a new state or condition by a change from some former state
or condition. Here, it is submitted, because it was unlawful as well before as
after the disposition to develop the land there was no such change.
There would be
much to be said for Mr Potter’s submission were it not for the fact that
paragraph (b) is drawn upon the assumption that the arithmetical exercise of
deducting the hypothetical value from the actual consideration is one that can
be performed: for only by performing it can you ascertain whether subparagraph
(2) does or does not apply to the case which you are considering. Paragraph 23
in terms directs that the paragraph shall apply if the two conditions
set out in paragraphs (a) and (b) are satisfied, and you can only find out
whether the condition in paragraph (b) is satisfied by doing the arithmetic
there contemplated. And so the language of the paragraph must, if possible, be
construed so as to enable the exercise to be done.
We find no
difficulty in so construing it. When one comes to analyse the wording of the
hypothesis it is not a change in the law whereby some particular development
had become unlawful which is supposed but a change in the law by the effect of
which it had become unlawful to carry out any development in or over the land.
The judge in the court below thought that the words ‘any’ and ‘unlawful’
required, for the purpose of the hypothesis, the absolute prohibition of all
development of the land with or without planning permission except what has
been referred to as Schedule 3 development, and we agree with him. Here it was
lawful, at the time of the disposition, to carry out a development subject to
obtaining planning permission, and there is no difficulty in supposing a
situation when it had become unlawful to do so. And so the expression ‘had
become’ is satisfied. So read, paragraph (b) will always operate to determine
whether a particular case did or did not fall within paragraph 23(2).
The appeal is
dismissed.
The appeal
was dismissed with costs. The court directed that three counsel on each side
should be allowed (a planning junior counsel was added to each side as planning
law was involved in addition to tax law). Leave to appeal to the House of Lords
was refused.