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Cite as: [2004] UKSC SPC00438, [2004] UKSC SPC438

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T & Anor v HM Inspector of Taxes [2004] UKSC SPC00438 (04 November 2004)

SPC00438

CAPITAL GAINS TAX — retirement relief — whether appellants made material disposal for purposes of s.163 TCGA 1992 when they made gifts to their three children of interests in assets of farming partnership — if so, sale of certain building land was associated disposal for purposes of s.164 and appellants qualified for retirement relief — appeal allowed

THE SPECIAL COMMISSIONERS

MR T and MRS E A TODD Appellants

- and -

KENNETH FAWCETT

(INSPECTOR OF TAXES) Respondent

Special Commissioner: J David Demack

Sitting in public in Carlisle on 15 October 2004

Mr N Ginnif of counsel instructed by Messrs Armstrong Watson, chartered accountants, Carlisle, for the Appellants

Miss J Kennerley of the Inland Revenue for the Respondent

DECISION

The Appellants, Mr Thomas Todd and Mrs Elizabeth Ann Todd, his wife, claim to be entitled to retirement relief from capital gains tax for gains arising to them from the sale of certain building land. Their entitlement to relief depends upon whether the gift by each of a share in their farming business to their children amounted to the disposal of an interest in the assets of their farming partnership for the purposes of s.163(8), Taxation of Chargeable Gains Act 1992 (the 1992 Act). If not, there will be no material disposal of business assets within s. 163(1) as a prerequisite for an associated disposal within s. 164.

The respondent Inspector of Taxes contends that the gifts did not constitute material disposals as Mr and Mrs Todd's interest in the farm land, which had been included in the partnership balance sheet as partnership property, was excluded from the gifts. It is common ground that the sale of the building land by Mr and Mrs Todd will meet the conditions of an associated disposal for the purposes of s. 164 of the 1992 Act if they made a material disposal within s. 163.

The relevant parts of section 163 are the following:

(1) Relief from capital gains tax shall be given … 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 50, or

(b) . . .

(2) For the purposes of this section., a disposal of business assets is –

(a) disposal of the whole or part of a business, or

(b) . . .

and the question whether such a disposal is a material disposal shall be determined in accordance with the following provisions of this section

(3) A disposal of the whole or part of a business is a material disposal if, throughout a period of at least one year ending with the date of the disposal, the relevant conditions are fulfilled and, in relation to such a disposal, those conditions are fulfilled at any time if at that time the business is owned by the individual making the disposal . . .

(8) For the purposes of this section –

(a) any references to the disposal of the whole or part of a business by an individual includes a reference to the disposal by him of his interest in the assets of a partnership on the business; and"

Insofar as it deals with assets other than shares or securities in a company, section 164 provides that:

"(6) In any case where-

(a) by virtue of section 163, relief falls to be given, in accordance with Schedule 6, in respect of a material disposal of business assets which either consists of the disposal by an individual of his interest in the assets of a partnership …, and

(b) the individual making that material disposal makes an associated disposal of assets, as defined in subsection (7) below,

relief from capital gains tax shall also be given, subject to and in accordance with that Schedule in respect of the associated disposal.

(7) In relation to a material disposal of business assets, a disposal of an asset is an associated disposal if —

(a) it takes place as part of a withdrawal of the individual concerned from participation in the business carried on by the partnership referred to in subsection (6)(a) above or, as the case may be, by the company which owns the business as mentioned in section 163(5)(a); and

(b) immediately before the material disposal or, if it was earlier, the cessation of the business mentioned in paragraph (a) above, the asset was in use for the purposes of that business; and

(c) during the whole or part of the period in which the asset has been in the ownership of the individual making the disposal the asset has been used —

(i) for the purposes of the business mentioned in paragraph (a) above (whether or not carried on by the partnership or company there referred to); or

(ii) for the purposes of another business carried on by the individual or by a partnership of which the individual concerned was a member; or

(iii) for the purposes of another business in respect of which the conditions in paragraphs (a) and (b) of subsection (3) of section 163 were fulfilled."

It is also common ground that Mr and Mrs Todd have both attained 50 years of age.

The Facts

I take the facts from an agreed statement (which is in a number of respects less than satisfactory), and the parol evidence of Mr Todd himself, Mr Richard Joseph Todd, his son, and Mr Alfred Harrington, his accountant.

Mr and Mrs Todd traded in partnership as arable and sheep farmers from Tiffenthwaite Farm, Wigton, Cumbria, for many years. In the absence of a partnership agreement, in the period to 10 March 2000 their partnership was governed by the Partnership Act 1890. Tiffenthwaite Farm is over 100 acres in area, and its land ("the co-owned land") is owned by Mr and Mrs Todd "in equal shares". Whether that expression is intended to indicate ownership as joint tenants or as tenants in common, I know not. In any event, it is irrelevant. In the 1999 partnership accounts, the co-owned land was included in the balance sheet at a value of £257,077, and was the principal asset.

Following a meeting with their professional advisers on 6 October 1999, Mr and Mrs Todd determined to withdraw the co-owned land from the partnership, so that it was no longer to be regarded as partnership property. They so determined in connection with an intention by each to dispose of 30 per cent of the business assets of the partnership to their three children. Withdrawal of the co-owned land, which required no contemporaneous formal steps or documentary evidence, took place before 10 March 2000. (I accept Mr Todd's evidence that he and his wife effected withdrawal mainly to ensure that if any of their children were ever to be divorced the co-owned land could not form part of a divorce settlement. I do so not only because I found him to be an honest and credible witness, but also because no questions whatsoever were put to him in cross examination, so that his evidence stood unchallenged. Mr Todd's evidence was confirmed by his son and Mr Harrington, neither of whom was challenged in cross-examination).

In 1986, Mr Todd inherited another 39.65 acres of land at Tiffenthwaite from an aunt. Small parcels of it were sold between 1986 and 1996. 10.291 acres of the remaining inherited land was on 25 October 1996 the subject of a Deed of Gift. By that deed, Mr Todd declared that he retained a 35 per cent interest in the land, gave 35 per cent to Mrs Todd, and gave 10 per cent to each of his children. (The Deed of Gift does not appear to deal with the legal estate in the land, but, since it is of no matter in the present context, I may ignore it). The land the subject of the Deed of Gift was used by Mr and Mrs Todd as part of the farming business for grazing purposes, and continued to be so used after the deed was made.

The Todd family obtained planning permission for residential development of 6.065 of the 10.291 acres included in the Deed of Gift. Those 6.065 acres were then sold to Alfred McAlpine Homes Holdings Ltd ('McAlpines') for £495,000, less £8,684.21 for a single plot retained by the Todd family. Contracts for the sale of the land to McAlpines were exchanged on 10 March 2000, and completion of the sale took place on 23 March 2000. The net proceeds of sale amounted to £482,202.29.

Also on 10 March 2000, Mr and Mrs Todd each gave a 30 per cent interest in their assets of the farming partnership to their three children, so that each parent and child then had a 20 per cent interest in what I find to be a partnership of the five members of the Todd family. An interest in all partnership assets as at 10 March 2000, namely plant and machinery, livestock, dead stock, goodwill and cash at bank, was transferred by Mr and Mrs Todd to and became the property of the new partnership. Each child later contributed his or her entire share of the net proceeds of the sale of land sold to McAlpines as partnership capital, as did Mr and Mrs Todd. No partnership agreement was entered into by Mr and Mrs Todd and their children, so that again the partnership was governed by the Partnership Act 1890.

The co-owned land remained outside the partnership assets, but continued to be used for the farming business.

Prior to 10 March 2000, the farming partnership bank accounts were held in the joint names of Mr and Mrs Todd. That arrangement continued after the children were admitted into partnership. I am satisfied, and find, that the failure to change the signatories on the bank accounts to include their children did not mean that the children were not so admitted.

Mr and Mrs Todd each returned a capital gain (after adjustment for taper relief and the annual exemption for 1999/2000) of £135,045, in respect of which they claimed retirement relief .

Mr Todd is not in the best of health, and, although he has not retired from farming, his medical condition is such that he has to have help with his work. Some of that help is provided by his children. Although Mr Richard Joseph Todd is a veterinary surgeon practising in Wigton, he lives within 300 yards of Tiffenthwaite Farm, and helps out there when he can. Mr Todd's other son suffers from ill health, but may be available to help at times. Mr Todd's daughter, Cheralynne, lived in Nottingham in March 2000, so that she was unable to help her parents on the farm. But notwithstanding that more than one child may have been a "sleeping partner", I am also satisfied that the five person partnership was carrying on business in common with a view to profit, there being no evidence whatsoever of any other motive. The five assumed the legal obligations of partners.

Miss Kennerley, for Mr Fawcett, submitted that the events of 10 March 2000 (ignoring the sale of the land to McAlpines) did not amount to the disposal by either Mr or Mrs Todd of an interest in the assets of the farming partnership: it was not sufficient for them to have made a disposal that in some way reduced each of their interests in some of the assets but not in others, as she maintained had happened in the instant case. For her claim that in those circumstances Mr and Mrs Todd did not qualify for retirement relief, she relied on paragraph 63552 of the Inland Revenue's Capital Gains Tax Manual which reads:

"Relief may also be available in respect of an asset owned by the partner personally and used in the partnership business under the associated disposal rules . . .

But relief will NOT be available for disposals of partnership assets, unless the disposal constitutes the disposal of part of the partnership business . . .".

Although she accepted that Mr and Mrs Todd could withdraw the co-owned land from the partnership, Miss Kennerley maintained that the evidence showed the withdrawal of the co-owned land and the admission of the Todd children to the new partnership to have occurred simultaneously. As simultaneous disposals, she submitted that the following passage from the judgment of Knox J in Jarmin v Rawlings 67TC 130 at p. 143 was binding on me and dealt with the situation before me:

"In my view it is legitimate to have regard to simultaneous disposals entered into of other assets used in the business in assessing whether or not a particular disposal can be categorized as a sale of part of a business".

Assuming I were to adopt that approach, Miss Kennerley further submitted that I should conclude that Mr and Mrs Todd did not make a material disposal for the purposes of s. 163 of the 1992 Act, and consequently were not entitled to the retirement relief they had claimed.

Mr Ginnif, counsel for Mr and Mrs Todd, submitted that any change in the activities of a business carried out before and after the disposal in question was immaterial where the disposal amounted to a reduction of an interest in the partnership carrying on the business. (The Inland Revenue interpret the disposal of a part of a business by an individual who is a partner in it as a reduction in his interest in that business, Inland Revenue manual CG63551).

He further submitted that Jarmin v Rawlings was irrelevant because it addressed the question whether the assets disposed of were part of a business: that question, in the case of the disposal of an interest in a partnership, was answered by statute.

Mr Ginnif contended that Mr and Mrs Todd's disposals for 10 March 2001 were prima facie material disposals for the purposes of s. 163 of the 1992 Act: the Inspector was challenging the purely factual contention that the disposals of the interests in the partnership occurred at all, and Mr and Mrs Todd's children became partners on that date. Having observed that the existence of a partnership is question of law and fact, Mr Ginnif contended that if a business was run by one or more persons on behalf of themselves and others, a partnership – the relationship subsisting between persons carrying on a business in common with a view to profit (Partnership Act 1890 s.1(1)) -might be held to exist. He added that a sleeping partner might be carrying on a business for the purposes of the Partnership Act, Ward v Newalls Insulation Co Ltd [1998] 1 WLR 1723 at p. 1730; and only if there were no motive to make a profit or some other reason could be shown to be the sole reason for the creation of the partnership could its existence be questioned, Newstead v Frost [1980] 1WLR 125 at p. 140.

Mr Ginnif submitted that factors to be taken into account by the Inspector in determining whether a new partnership existed as from 10 March 2000 were: the stated intention of the parties, the advice received from professional persons, the agreement between the parties, the legal obligations assumed by the incoming partners, the introduction of capital by the incoming partners, the acceptance by others of the new partnership's existence, the published accounts, and any other surrounding circumstances.

Finally, Mr Ginnif submitted that the evidence before the Inspector established that a partnership between Mr and Mrs Todd and their three children existed as from 10 March 2000, and accordingly Mr and Mrs Todd had made a material disposal within the terms of s. 163 of the 1992 Act.

Conclusion

As a matter of courtesy, I have dealt with the submissions of the parties in some detail. It was unnecessary for me to do so for my findings of fact clearly indicate the outcome of the appeal.

In my judgment, the Inspector's position in this case could have been justified only had the five-person Todd family partnership been unable to carry on trading on the co-owned land as farmers after 10 March 2000; and, as it did continue so to trade and continued to have use and unrestricted access to the co-owned land, that situation did not arise. A share in all the assets of the partnership as they existed at 10 March 2000 - its plant and machinery, livestock, dead stock, goodwill and cash - was transferred to the new partnership. That was all that was required for there to be a material disposal for the purposes of s. 163 of the 1992 Act.

Since it is common ground that if there was a material disposal for the purposes of the 1992 Act on 10 March 2000, the sale of the land to McAlpines on that date was an associated disposal, it follows that Mr and Mrs Todd have satisfied the conditions for retirement relief contained in s.163 of the 1992 Act. I therefore allow their appeal.

I need not give any further reasons for my decision, but should perhaps say that I accept the case presented by Mr Ginnif in its entirety.

I cannot conclude without commenting on the aggressiveness of the tone of some of the Inspector's correspondence. At one stage Mr and Mrs Todd were threatened with penalties for negligence or fraud (I accept that Mr Todd failed to apply for roll-over relief following his making the 1996 Dead of Gift, but that failure did not warrant the approach adopted by the Inland Revenue).

Mr and Mrs Todd were merely seeking relief from capital gains tax to which they were legally entitled, and for which I have determined they were eligible.

DAVID DEMACK

SPECIAL COMMISSIONER

Release Date: 4 November 2004