Secretan v Hart

[1969] 3 All ER 1196

---

(Judgment by: Buckley J.)

Secretan
v. Hart (Inspector of Taxes)

Court:

Judge: Buckley J

Judgment date: 16 July 1969

---

Judgment by:
Buckley J.

The following judgment was delivered.

This case raises an interesting point, which appears to be entirely novel, on the law relating to capital gains tax. The appellant taxpayer, Mr Secretan, between the years 1932 and 1944 inclusive, bought six parcels of shares in a company called Hampton Gold Mining Areas, Ltd at varying prices. The purchases totalled 39,000 shares, and the aggregate price that the taxpayer paid for them was £768 7s 5d. He held those 39,000 shares until October 1967, when he sold them for £80,943 5s 5d. The investment seems to have been a very successful one. He was assessed to capital gains tax in respect of this transaction. In the assessment, the deductions that were made from the price which he received, £80,943 5s 5d, included an allowable loss, which he had incurred in respect of other assets, amounting to £1,404, and the sum of £768, the amount which he had paid for the shares when he bought them. Deducting the sum of these two amounts from £80,943, a figure of £78,771 is arrived at, and the taxpayer was assessed as being liable to pay capital gains tax on that figure.

He objects to the assessment because, he says, between the time when he bought the shares and the time when he sold them the value of the pound had seriously decreased; and he has produced a letter from the Central Statistical Office which states that, taking the purchasing power of the pound to be 20s in 1932, which was the earliest year in which the taxpayer bought any of these shares, its value in July 1967, which was a few months before he sold the shares, would be 5s 3d. So the taxpayer says that, instead of deducting the sum of £768 only, in respect of the price he paid for the shares, from the price which he received, the figure of £768 ought to be multiplied by a suitable factor to take account of the change in the value of the pound between the time when he paid the £768 and the time when he received the proceeds of the sale of the shares in October 1967.

It is a point of view with which, I think, any taxpayer would feel a certain degree of sympathy, for it is very irritating to think that if one buys a piece of property--say, for instance, a plot of land--and holds it for a number of years during which nothing occurs to affect the market value of that piece of land at all, but the price for which it is sold exceeds the price originally paid for it because of a change in the value of money, one will then be taxed on a gain which, it is true, in a sense, one has made but to which one has not contributed in any way and which has not been brought about by any circumstance other than merely a change in the value of money. But one has to look at the Act and see in what way this tax is charged, in what circumstances liability arises and what the liability is.

Capital gains tax was brought into existence by the Finance Act 1965, s 19(1) of which provided that there should be a tax charged in accordance with the Act--

"... in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets."

Section 20(1) provided that, subject to certain exceptions--

"a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom."

Section 22, the first of the sections in the part of the Act dealing with chargeable gains, provides in sub-s (9) that--

"The amount of the gains accruing on the disposal of assets shall be computed in accordance with Part I of Schedule 6 to this Act ... "

subject to certain provisions in other schedules.

So one turns to Sch 6 and finds that in para 4 it is provided as follows:

"(1) Subject to the following provisions of this Schedule, the sums allowable as a deduction from the consideration in the computation under this Schedule of the gain accruing to a person on the disposal of an asset shall be restricted to--(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset, (b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset, (c) the incidental costs to him of making the disposal."

Those are the matters which a taxpayer who has disposed of an asset is entitled to deduct from the consideration which he received on the disposal.

There are provisions in the Act which allow the taxpayer to elect whether he will be treated as having acquired the asset, if he acquired it before 6 April 1965, at the price which he in fact paid for it or at its value as at 6 April 1965, whichever is more favourable to the taxpayer; but nothing of that kind arises in the present case, for the quoted market value of the taxpayer's 39,000 shares in this company as at 6 April 1965 was £731 7s 5d, and it was therefore more advantageous to him to include in the deduction the actual price which he paid rather than the market value at the appointed day.

The argument which has been put forward by the taxpayer in support of his appeal is that this tax is a tax on capital gains, that in order to establish that a charge to tax arises it must be proved that some capital gain has been made by the taxpayer, and that in order to ascertain the amount on which the tax should be assessed the amount of the gain must be established. He says that "capital gains" must for this purpose mean gains in true money terms, and must be proved. He says that the capital gain which he has made here is not one which can be properly ascertained by deducting from the price which he received for the shares merely the original price that he paid in terms of pounds sterling. I am omitting for the moment consideration of the allowable loss which he was also entitled to deduct in respect of other assets, because that does not affect the question I have to consider. He says that the real gain can be discovered only by comparing like with like, and that in order to compare like with like one has to reassess the price that he paid by taking into account the fact that in the years 1932 to 1944 every pound which he paid for one of these shares was worth much more than the pound which he received on the sale in 1967.

I think the point really turns on the meaning of para 4 of Sch 6, which deals with the permitted deductions, and particularly on para 4(1)(a) of that paragraph of the schedule, which refers to--

"the amount of value of the consideration, in money or money's worth, given by him ... for the acquisition of the asset ... "

The taxpayer draws attention to the reference to "money's worth", and he might also, perhaps, have drawn attention to the use of the words "value of the consideration". The expression "consideration, in ... money's worth" is, of course, one which is very familiar to lawyers as being a way of expressing the price or consideration given for property where property is acquired in return for something other than money, such as services or other property, where the price or consideration which the acquirer gives for the property has got to be turned into money before it can be expressed in terms of money. The use here of the words "money's worth" does not, I think, indicate that Parliament had any idea in mind, when enacting this part of the Act, relating to a change in the value of money in the course of the passage of time. Nor, I think, does the reference to "value of the consideration" indicate that any such idea was in mind.

If the intention had been that the effects of inflation were to be taken into account in determining whether or not a capital gain had been made, and the amount of such a gain, there would clearly have been in the Act some explicit statement to that effect and some machinery provided for ascertaining the effect of inflation on the relevant considerations. There is nothing anywhere in the Act of that kind. What is referred to in sub-para 4(1) (a) of Sch 6 is "the amount or value of the consideration" given by the taxpayer "for the acquisition of the asset". The time which is looked at for the purpose of discovering what sum is a legitimate deduction is the time when he gave the consideration for the acquisition of the asset; and it is the consideration which he then gave in terms of money, or, it was not given in money, turned into terms of money as at that date, which is the legitimate deduction.

If support for this view is required, I think some support is to be found in para 4(1)(b) of Sch 6, where there is a reference to the amount of expenditure incurred by the taxpayer "for the purpose of enhancing the value of the asset". The amount of such expenditure can be discovered only by looking at the bills which he paid, for whatever he did or had done, for the purpose of enhancing the value of the asset. There is no suggestion there that any adjustment is to be made to take account of inflation. Indeed, if the taxpayer's submission were the right one, it seems to me that it would lead to conclusions of the utmost difficulty and confusion in the administration of this Act, for the value of the pound fluctuates constantly, and it would involve complicated research and calculation to arrive at the amount of profit made in respect of any particular asset before a capital gain could be discovered on the lines that the taxpayer suggests ought to be adopted.

Although I feel sympathy with him in his approach to this problem, I am afraid I feel unable to come to the conclusion that hie view is the correct one, and I think that the decision of the commissioners in the present case was right. They dismissed the taxpayer's appeal against the assessment that was made on him, and I think that in doing so they came to the right conclusion. I shall also take a similar course, and dismiss the taxpayer's appeal.

Appeal dismissed.