The importance of negligible value claims for capital gains tax (CGT) has been highlighted in agricultural circles by the fact that milk quotas ceased to exist from 31 March 2015. As a result there will be a flurry of such claims made by farm professional advisors. This is combined with a time of various farm gains through land sales.
HMRC interpret ‘negligible value’ to mean ‘next to nothing’. A taxpayer cannot make a claim if an asset is worth significantly less than previously – the asset must be literally almost worthless. Milk quota is now worthless.
A negligible value claim can be made retrospectively, up to two years from the beginning of the tax year in which the claim is made – provided the taxpayer can show that they owned the asset at the time it became of negligible value. This question of timing and ownership was examined in the recent tax case of Peter L Drown and Mrs R E Leadley as executors of J Leadley deceased (TC4007).
Recent case on retrospective claim
The taxpayers were the executors of Jeffrey Leadley (deceased) who was killed in a motoring accident in May 2010. Mr Leadley had invested £50,000 into two companies and made a loan of £334,784 to another. HMRC accepted that the shareholdings had become of negligible value by 5 April 2010 and also that the loan had ceased to exist as an asset on 3 November 2009, the borrower company having gone into liquidation. The executors submitted claims for relief for the loss on shares under ITA 2007, s131 and TCGA 1992, s24. The executor claimed relief in respect of the loan under TCGA 1992, s253.
In the frequently asked questions (FAQ) section of HMRC’s website for personal representatives, it clearly states that ‘income that the deceased received and capital gains that he made for the period to the date of death are taxed in the normal way’. It presents further examples of risk surrounding this subject stating that if the executors ‘fail to claim a repayment due to the estate, they may have to make good the loss to the estate’.
The executors claimed negligible value relief. However, due to the precise wording, – where it is stated that a claim may be made by the owner of the asset and that the asset has become of negligible value whilst owned by that person – the claim, in part, failed. The assets were deemed to be owned by the executors (from date of death) and had become of negligible value before they took ownership and any loss in value for the estate of the deceased was restricted to the loss to the date of death.
The validity of the negligible value claim was not ordinarily disputed by HMRC and all of the claims would have been accepted in full if such action had been made by the deceased himself. HMRC therefore refused the claim, the taxpayer appealed successfully to the First-tier Tribunal. It applied a purposive interpretation, saying “the personal representatives of the deceased are treated as the deceased in so far as they are returning the deceased’s own tax liability”.
Consider the eligibility of the claim
Taxpayers who own shares in a failed company, or any other asset that has become worthless, should consider making a negligible value claim to crystallise the loss for CGT purposes. Executors have to consider this as part of their review.
With the farming community enjoying various capital gains on land and building sales, the negligible value claim currently available on expiring milk quotas could be very timely indeed.