#2410 - Capital Gains Tax

Capital Gains Tax

There must be:
- a chargeable gain (TCGA, section 1(1) and (3)) and
- a chargeable person (section 2(1)).
CGT is charged on any gain resulting when a chargeable person makes a chargeable disposal of a chargeable asset. Tax is charged on so much of the gain as is left after taking into account any exemptions of reliefs and after deducting any allowable losses.
Chargeable persons inc indivs who are resident/ ordinarily resident in the UK; trustees, PRs and partners.
Chargeable assets: apart from a few exceptions all forms of property are assets for CGT purposes including options, debts, incorporeal property, any currency (other than sterling), milk quota and property that is created by the person disposing of it (e.g. goodwill that is built from nothing by a trader).
Chargeable disposal: ‘disposal’ is extended to include cases where a capital sum is derived from an asset.
The chargeable gain is found by taking the disposal consideration of the asset and deducting from that figure allowable expenditure. The disponer’s acquisition cost is usually the main item of expenditure.
If the allowable expenditure exceeds the disposal consideration, the disponer has made a loss for CGT purposes which may be used to reduce the chargeable gains he has made on disposals of other assets.

Chargeable Gain

There has to be a disposal of assets and a chargeable gain accruing to a person on that disposal: s 1(1) and (3).
That raises three main questions:
- What constitutes a disposal of assets?
- What is the point of time at which the disposal occurs?
- How is a chargeable gain computed?

Disposal of assets

There may be actual disposals (sale or gift) or deemed disposals (e.g. sections 22, 23, 24, and 70). Disposal includes a part disposal: section 21(2).
Section 22: there shall be a deemed disposal where a capital sum is derived from an asset.

s22 Disposal where capital sums derived from assets.

Subject to ss 23 and 26(1) there a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, in particular

capital sums received by way of compensation for any kind of damage etc to assets;
capital sums received under a policy of insurance of the risk of any kind of damage to assets;
capital sums received for forfeiture or surrender of rights/ refraining from exercising rights; and
capital sums received as consideration for use or exploitation of assets.

In the case of a disposal within paragraph (a)-(d) above, the time of the disposal shall be the time when the capital sum is received as described in that subsection.
“capital sum” means any money or money's worth which is not excluded from the consideration taken into account in the computation of the gain.

IRC v Montgomery

A building owned by the trustees was damaged by fire and they became entitled to recover insurance money.
The husband of one of the trustees paid them for an assignment of the trustees' rights under the policies. In due course the insurers paid the husband sums totalling 75,192. As the law then stood rights under insurance policies were not “assets” for CGT purposes. The Crown contended that the money was a “capital sum derived from assets”, i.e. the damaged property, and was therefore liable to CGT by virtue of what is now s22(1).
Walton J
From what asset of the trustees was the capital sum derived? From sale of the rights under policy not property.
s22 is confined to cases where no assets are acquired. (a)-(d)= examples where there was no acquisition of an asset.

Marren v Ingles

A contingent right to receive a further sum is a chose in action and thus an ‘asset’.
Ingles agreed to sell 60 shares in a private co for 750 per share payable immediately plus a liability to pay additional consideration (calculated by reference to future profit levels) subject to certain contingencies.
The contingencies were satisfied two years later and a further 2,825 per share became payable. The Crown contended that the contingent right to the further payment was a separate asset.
Held, the taxpayer's right to the deferred consideration was an 'asset' within s22(1) Finance Act 1965. The payment of the deferred consideration to the taxpayer was a capital sum derived by him from that asset.
Furthermore where a capital sum was derived from an asset there was a disposal of the asset under s 22(3) whether or not the person paying the capital sum had acquired the asset (disagreed with Walton J).

O'Brien v Benson's Hosiery (Holdings) Ltd

All legal rights that can be turned to account by the extraction of a capital sum are ‘assets’. The test is whether such rights can be converted into money or money’s worth and the mere act that rights are non-assignable does not matter so long as consideration can be obtained in some other way (for instance, by surrendering the right).
X was sales director of the taxpayer co under a seven-year service contract. The company released him from his service contract in consideration of 50,000. The Crown relied on what is now s 21(1) and s 22(1)(c).
Revenue argued that rights under service contract were assets. Taxpayer argued that since rights are incapable of being assigned so incapable of being an asset.
Lord Russell
If, as here, the employer is able to exact from the employee a substantial sum as a term of releasing him from his obligations to serve, the rights of the employer appear to me to bear quite sufficiently the mark of an asset of the employer, something which he can turn to account, notwithstanding that his ability to turn it to account is by a type of disposal limited by the nature of the asset. It is erroneous to deduce from s 22(4) a principle of general application for the purposes of capital gains tax that an asset must have a market value.

Davis v Powell

A tenant farmer’s tenancy was surrendered in consequence of a notice to quit served by the landlord. The landlord paid to the tenant 591 by way of compensation for disturbance under s 34(1) of the Agricultural Holdings Act 1948. The Crown contended that the 591 was a capital sum derived from an asset, viz the lease.
Lord Templeman
Compensation for disturbance paid under s 34 was not 'derived' from an asset, but was simply a sum which, by statute, had to be paid for expense and loss unavoidably incurred once the tenancy had been terminated.

Davenport v Chilver

The taxpayer’s mother owned Latvian property. All the Latvian property was confiscated without compensation during the war. The mother died in 1966 and by her will she left to the taxpayer a half share of any compensation which might become due to the mother in respect of her expropriated property.
In 1926 the taxpayer's estate became entitled to compensation from the UK gov in respect of the confiscated Latvian property. The Revenue claimed the compensation was a capital sum derived from an asset, namely the rights created by the 1969 Order, and that therefore there was a deemed disposal under section 22(1).
S22(3) applied only to assets which had been owned by the person treated as disposing of them. The taxpayer had never been the owner via her mother's estate as her mother had no such property at her death, and the taxpayer, by the will, acquired no more than a hope that she might at some time receive compensation.
However, the Order conferred on the taxpayer a right which was itself property and an asset within s 22(1). The compensation payment was thus a capital sum derived from that asset within the general words of s 22(3).
It was acquired by the taxpayer otherwise than by way of a bargain made at arm's length and accordingly, by virtue of s 22(4)(a), was to be deemed to have been acquired for consideration equal to its market value.
Nourse J
In our view the decision of Templeman J in Davis v Powell is authority for the proposition that a statutory right to compensation in respect of property which has already been lost does not give rise to capital gains tax liability.
Decision amounts to saying that a bare statutory right is an asset for CGT purposes. Why can’t this lead to double taxation in respect of the daughter’s own property. Two separate assets here.
NB that the distinction to be drawn between this case and others, inc Davis, is that there was a separate, distinct, fund (whether or not that is a satisfactory distinction)

Drummond v Austin Brown

Davis v Powell applied.
The taxpayer was a solicitor who had a tenancy of his business premises protected by Part II LTA 1954. The landlord served notice to terminate the tenancy. The tenant was entitled to compensation under the Act.
Held, the taxpayer's right to compensation on the termination of the lease was not derived from his lease, but from the 1954 Act and since in creating that right the Act did not require any provision to be written into the lease, it could not be said that the compensation received by the taxpayer was derived from his lease.
Fox LJ
We do not think the sum can be said to be derived from any asset. It was, as Templeman J said in Davis (Inspector of Taxes) v Powell, simply a sum which Parliament said should be paid.

Zim Properties Ltd v Procter

The taxpayer co contracted to sell some properties for 175k. The contract was not completed because the co was unable to show a good title to one of the properties; in consequence, the purchaser repudiated the contract.
The taxpayer co took the view that the repudiation was the result of negligence on the part of the firm of solicitors who were acting for it in respect of the sale...

#2410 - Capital Gains Tax - Tax Law

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