Andy Keates reviews two tax cases concerning negligible value claims which had surprising results.
When and why
A negligible value claim (NVC) is made under s24(2) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992 s 24(2)). The NVC (if accepted by HMRC) allows the owner of an asset which has become essentially worthless to crystallise a capital loss without actually disposing of it.
The date on which the loss crystallises is either the date of the claim or a specified date up to two years previously (as long as the asset had also been of negligible value on that earlier date).
The capital loss can then be offset against either other capital gains or, by virtue of ITA 2007 s131 (share loss relief), against the taxpayer’s income. TCGA 1992, s 253 has similar provisions where a qualifying loan becomes irrecoverable.
There is no specified format for making a NV claim, which does not have to be made in a tax return. For these two cases, the most significant requirement of the relief is that the taxpayer must still own the asset when making the claim.
Richard Steven Ward
This case (TC05919) was heard by the First Tier Tribunal (FTT) as an appeal against assessments and penalty notices.
Ward disposed of shares in May 2011; it was accepted by all parties that the shares were valueless. Before assigning the shares, he decided to make an NVC to the effect that the shares realised a loss in the 2010/11 tax year. This could be offset against his income for that year, saving income tax and Class 4 NIC of around £92,000. The question was: had he made a valid claim before the shares left his ownership?
What he did, from his solicitor’s office shortly before assigning the shares, was to lodge a postponement application for a payment on account via the HMRC online portal, showing capital losses of £194,500. He received an electronic confirmation showing the reduced tax. In his opinion, that showed that the claim had been made on 12 May 2011, while he still owned the shares.
HMRC argued that no valid claim was made until he submitted his SA tax return on 27 January 2012, by which time Ward no longer owned the shares. He had failed to make a proper NVC, and calculating his 2010/11 self-assessment on the basis of including the capital loss was a “careless” error subject to a 30% penalty. They referred to the Taxes Management Act (TMA 1970 s 42(1A)) which requires any valid claim to be “quantified” at the time of its making.
However, HMRC conceded to FTT that they could not have executed the postponement application if Ward had not quantified how much he was claiming; they also conceded that if they had any doubts at the time about the claim’s validity, they should have queried it.
Ward had made a valid NVC. Although he did not refer specifically to the negligible value provisions, his postponement application contained enough detail for it to be clear what he intended. It was clearly quantified, showing the effect of an offset loss of £194,500. Ward had done everything asked of him by HMRC’s helpsheet HS286, which says: “the relief is given by deducting the allowable loss from your total income from all sources, before any deduction for your personal Income Tax allowances”.
The appeal was allowed, and the assessments and penalty notices were quashed.
HMRC v Executors of Jeffrey John Leadley
This case was an appeal to the Upper Tribunal (2017 UKUT 0111) against an earlier FTT judgement in the taxpayers’ favour.
Leadley had held shares which had indisputably become of negligible value, and he had made a loan which had become irrecoverable. It is likely that he would have included an NVC in respect of both assets in his 2009/10 tax return. Unfortunately, he was killed in a motoring accident on 11 May 2010 before being able to do so.
His executors filed his 2009/10 tax return, including relief for £24,000 capital losses offset against his income tax liability under ITA 2007, s 131, and £334,784 to be carried forward against future capital gains.
While the FTT found in the executors’ favour, it gave HMRC leave to appeal to the Upper Tribunal. Since the tax at stake was small by comparison with the potential costs of fighting on, the executors withdrew, leaving only HMRC to appear before the UT.
The executors took the view (not unreasonably) that, as they were standing in Leadley’s shoes when filing his SA tax return, they should be entitled to make any claims to which he would have been entitled in person. At the time of filing the return, the shares and the loan were vested in them as legal personal representatives.
The FTT agreed and took the view that the effective date of the claim was 5 April 2010 (the end of the period covered by the return), when Leadley was still alive.
HMRC argued that the only conceivable date for a claim is the date on which it was made (in this instance, January 2011). That is why the legislation allows the claim to specify an earlier date for the loss to have arisen. By January 2011 Leadley had died and no longer owned the shares. The legislation is clear that the claimant must own the asset both at the time of the deemed loss and at the time of making the claim.
The UT considered the possibility of identifying Leadley’s and the executors’ periods of ownership as one and the same. This would have enabled the executors to make a valid claim in January 2011 crystallising a loss for Leadley on 5 April 2010. However, HMRC talked them out of this (it is perhaps regrettable that there was no-one on behalf of the executors to challenge HMRC’s arguments). Section 62 of TCGA 1992 specifies that, on a taxpayer’s death, the personal representatives are deemed to acquire the deceased’s assets at market value.
The claim was made in January 2011, when Leadley no longer owned the shares. In the words of the Tribunal, “the beginning of the personal representatives” ownership period is demarcated as a matter of law and fact and with specified consequences as regards the application of TCGA…. The possibility of a negligible value claim... died with Mr Leadley. If that seems an unsatisfactory outcome, there are other situations... where the death of an owner of an asset can produce a tax liability lower than would have been the case had the deceased person survived”.
The timing of negligible value claims is important, and a review of any potential claims should be included in the pre-tax year end planning. Leaving this review until filing the tax return may be too late.
Based on the Leadley decision, it seems that personal representatives don’t stand quite as fully in the shoes of the deceased as we may previously have believed, and there are some things they cannot do on his behalf.
The good news (based on Ward) is that NVCs can take many forms, and don’t need to specify the statutory references: as long as they show what’s being done and get the numbers right, they should be valid. Unless, of course, HMRC now amend HS286 to demand more detail.