Andrew & Shirley Smith v Commissioners of Inland Revenue

As well as the price referred to above the Corporation will also pay to the sellers the sum of THIRTY FIVE THOUSAND POUNDS (£35,000) Sterling (inclusive of VAT, if any) as full and final compensation in respect of any loss incurred on the forced sale of stock and equipment.

(a) The date of entry to the subjects shall be First February Nineteen hundred and Ninety one notwithstanding the date hereof.

This Officer is conditional upon the Firm of A&S Smith, Farmers, obtaining from Coal Contractors Limited a waiver of Coal Contractors Limited’s option rights in respect of the subjects and that within one month from the date of conclusion of Missives of which this Offer forms part and in the event of the said Firm failing to obtain such a waiver, the Corporation will be entitled to resile from the bargain and that without any costs and expenses due by or to either party.

…

The sellers will remain responsible for the rates and any charges for services applicable to the respective parts of the subjects until the Corporation’s occupation thereof. The rates applicable to the houses and buildings for the year when occupation thereof is taken by the Corporation will be apportioned according to the respective periods of occupation during that year.

(a) The Corporation will pay the sellers’ professional advisers’ fees, expenses and outlays amounting to £4,176.25 (excluding VAT) for negotiating the sale. The Corporation will not be responsible for payment of VAT on said fees, expenses and outlays.

SCHEDULE OF CONDITIONS

There are no leases, subleases or rights of occupation affecting the subjects or any part thereof other than the lease by the sellers to the said Firm of A&S Smith. Said lease will be validly terminated prior to the date of settlement and evidence thereof exhibited to the Corporation. In the event of the sellers failing to obtain a valid termination of said lease prior to the date of settlement, the Corporation will be entitled to resile from the bargain and that without any costs and expenses due to or by either party.

…

The sellers will be wholly reasonable for protecting and maintaining the subjects in their existing condition until the date of occupation.

The existing insurances covering the subjects extended as may be required by the Corporation, shall be maintained by the sellers at their own expense until the date of cessation of occupation by the sellers and the policy or policies of insurance will be endorsed to show the interest of the Corporation and held for their benefit.

…………

In exchange for the purchase price the sellers will deliver a validly executed Disposition in favour of the Corporation together with a valid marketable title ……………………..

………………..

Notwithstanding the delivery of the Disposition in favour of the Corporation these Missives of Sale, in so far as unimplemented, will remain in full force and effect for a period of three years from the date of conclusion of missives and may be founded upon. A clause to this effect will be included in the said Disposition.

The transaction settled on 15/8/91, when the purchase price was paid and a duly executed Disposition delivered to the purchaser. The sum paid at settlement included compensation of £35,000 for forced sale of livestock and equipment, and the sum of £10,000 expended to achieve purification of clause 3 of the missives.

The Disposition in favour of the Corporation provided inter alia as follows:-

“WITH ENTRY as at First February Nineteen hundred and ninety one notwithstanding the date or dates hereof and with actual occupation to the subjects as at First February Nineteen hundred and ninety two all subject to our said disponees and their contractors being entitled to carry out prospecting operations or to gain access to the subjects hereinbefore disponed without hindrance or without obstruction for whatever purpose may be determined by our said disponees from the said date of entry; And we bind ourselves to flit and remove from the said subjects on said First February Nineteen hundred and ninety two and that without any warrant or process of removal; ……Declaring that the missives of sale and purchase relating to these presents constituted by letters between us and our said disponees or our respective Agents dated Twenty third and Twenty ninth days of May Nineteen hundred and ninety one shall for a period of three years from the Twenty ninth day of May Nineteen hundred and ninety one form a continuing and enforceable contract notwithstanding the delivery of these presents except insofar as fully implemented hereby and except insofar as they are founded upon in any court proceedings which have commenced within the said period …”

By letter to the Revenue dated 29/11/91 Mr Whitehouse advised that under the terms of the agreement with British Coal Mr Smith was to be allowed to rent Lanehead until February 1993 and that his firm had been engaged to compute the chargeable gain arising on the sale of Lanehead.

For a considerable period after 1^st February 1992, the Appellants have resided at the farmhouse at Lanehead by virtue of the grant of short assured tenancies in favour of Mr Smith. As at September 1998, the firm had not removed from Lanehead.

Since at least 1997 the Appellants through their advisers have been in discussion with the Revenue in connection with the capital gains tax consequences of the missives and conveyance of Lanehead. In about September 1999, following negotiations, the Appellants and Scottish Coal Company Ltd as successors to British Coal Corporation entered into a “Letter of Understanding.” That letter referred to the missives and the Disposition and narrated that the wording in the Disposition (“And we bind ourselves to flit and remove from the said subjects on said first February 1992 and that without any warrant or process of removal”) did not reflect the true intentions of the parties as set out in clause 2(d) of the missives. The letter went on to record, in paragraph 3(a), their agreement that the Appellants would not petition the court under section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 to seek rectification of the Disposition on the basis that it did not reflect the common intention of the parties as evidenced by the parties. It was further agreed that the Appellants would flit and remove themselves from Lanehead on 31/10/99 and “thus complete the contract of sale” of Lanehead. By Clause 3(c) Scottish Coal agreed to allow the Appellants to remain in occupation of the farmhouse after 31/10/99 under a short assured tenancy and to allow them to graze part of the farm on terms to be agreed. Various other claims were agreed in the letter which concluded in paragraph 3(i) by stating “By signing this letter of understanding (the parties to it) agree that on 31/10/99 the obligations placed on each by the missive letters…. have now been fulfilled and that as a result the contract for the purchase and sale of Lanehead …. has been completed.”

When the Letter of Understanding was written, there was already in existence a dispute with the Revenue over the Capital Gains Tax liability arising from the sale of Lanehead.

Law

The relevant provisions of the Capital Gains Taxes Act 1979 are as follows:-

Submissions

Mr Whitehouse, for the Appellants, invited me to answer the question set out above in the negative. He relied upon a report prepared by Mr IO Robertson, solicitor, Johnstone. He submitted on the basis of that report which he adopted for the purposes of his argument, that the contract constituted by the missives could not be said to have been completed until 1999. He relied on clause 2(d) of the missives. The absence of the obligation on the part of the Smiths to buy a new farm, in effect gave them an option which brought section 27(2) into play. The Disposition was in conflict with clause 2(d). He relied on paragraph 3(a) and (i) of the Letter of Understanding. This, he said, was putting the Appellants’ occupation on a formal footing. He submitted that there were seven possible candidates for “the time the contract is made” within the meaning of section 27 of the 1979 Act, namely (i) 29/5/91, the conclusion of missives; (ii) 21/8/91, the registration of the Disposition; (iii) 29/5/94, the date the missives fall per clause 13 of the Schedule of Conditions and in terms of the Disposition itself; (iv) 1/2/92, the date of actual occupation specified in the Disposition, (v) 1/2/91, the date of entry in the Disposition, (vi) 15/8/91 the date of settlement of the transaction; and (vii) 31/10/99, the date when the option conferred by clause 2(d) of the missives was by implication, abandoned. He discarded all these dates except the last one. He further submitted that if a section 8 Petition under the 1985 Act would have the effect of altering the time of disposal, which he seemed to think it did, then the Letter of Understanding had the same effect. A rectified Disposition would have reinstated clause 2(d) of the Missives. He added that I should disregard the letter dated 29/11/91 because it was incorrect.

Mr Pate, for the Revenue, invited me to answer both branches of the question in the affirmative in relation to both Appellants. He submitted that the answer to the question was to be found by an examination of section 27 of the 1979 Act and agreed facts 4-6. Section 27(2) applied because of clause 3 of the missives and for no other reason. It was agreed that the condition was purified on 15/8/91. The disposal of the dominium utile occurred at latest when the Disposition was registered (Sharp v Thomson 1997 SC(HL) 66, 1997 SLT 636, 1995 SLT 837 Burnett’s Tr v Grainger 2002 SLT 699 paras 12 and 13, Titles to Land Consolidation (Scotland) Act 1868 section 15). This was the key element in the missives. There was nothing to dispose of in 1999. Section 27(2) applied to conditions which suspended contractual obligations. He illustrated this point by reference to Hatt v Newman 2000 72 TC 462. Clause 2(d) of the missives was not an option. Mr Robertson’s views were unsound. Clause 2(b) and (d) can be read consistently one with the other if the reference to “other date” is explained by reference to clause 2(b) ie an earlier date than 1/2/92. Clause 2(b) was consistent with the Disposition which Mr Robertson apparently had not seen when he gave his opinion. Other clauses in the missives did not negate his interpretation. Mr Robertson’s opinion does not address the statutory phraseology but the question whether the contract has been completed. Even if clause 2(d) is construed as an option it has nothing to do with the disposal in issue. The option concerns, at best, personal rights of occupation not the disposal of heritable rights. All the contemporary correspondence proceeded on the basis that the Smiths’ personal rights of occupancy ceased on 1/2/92 when other arrangements were put in place. The Letter of Understanding was an ex post facto attempt to reorganise the taxpayers’ affairs after the capital gains tax issue was in issue. Even if the Appellants had a right to remain in occupation forever, that did not affect the unconditionality of the agreement to sell the heritage which was transferred in August 1991. Any conditional element was rendered unconditional when the part of the contract relating to the disposal of the dominium utile was implemented. Clauses in missives dealing with personal obligations are severable and may continue to be governed by the missives (Winston v Patrick 1980 SC 246). These personal rights which the Smiths might have continue not by virtue of their ownership of Lanehead but by virtue of the contract with the purchasers. There could be said to be two separate assets, the dominium utile and the personal rights of occupation granted by British Coal Corporation. Even if the personal rights were disposed of in February 1992 that is still within the tax year 1991/92. Insofar as relevant it was questionable whether rectification proceedings would have succeeded. The terms of the Disposition should be regarded as conclusive unless they have been rectified under section 8 of the 1985 Act. The Revenue would have an interest to recall any order for rectification under section 9(7) of the 1985 Act.

Decision

It is plain from the clear terms of section 27 of the 1979 Act that unless the contract is conditional, the disposal is regarded as having been made at the time the contract was made. This point in time is expressly distinguished from the date of conveyance or transfer. If the contract is conditional, then the disposal is regarded as having been made when the condition is satisfied. Tax will only be charged if there has been a disposal of an asset (section 1(1) of the 1979 Act). Accordingly, it is necessary to ascertain whether there has been disposal under a contract, the date that contract was made, whether the contract was conditional and if so when the condition was satisfied.

In the present appeal the contract was constituted by the missives. Missives were concluded on 29/5/91 (see agreed Statement of Fact 4). The missives were subject to a suspensive condition, namely clause 3. It was not a condition suspensive of the whole contract. That condition was purified on 15/8/91 (see agreed Statement of Fact 4). There was no other term in the missives which rendered the contract conditional in either sense in which conditionality is used in relation to contract terms in Scots Law. It can hardly be disputed that the dominiumutile in Lanehead was transferred to British Coal Corporation on 21^st August 1991. This was achieved by the settlement of the transaction on 15/8/91, when a duly executed Disposition of Lanehead was delivered to the Corporation, and the subsequent registration of that disposition on 21/8/91 in the Register of Sasines (see Agreed Statement of Fact 6; finding-in-fact 12; Sharp v Thomson at 857H-I, Burnett’s Trs at paras 12 and 13). In terms of section 27(2) the disposal is regarded as having been made on the date the condition became satisfied. The condition in question, if it is one to which section 27(2) applies, became satisfied on 15/8/91. I do not derive much assistance from Hatt as it was, as here, unnecessary to decide whether the clause in question made the contract conditional (see pages 464F and 468F-I); for what it is worth I do not consider that the contract was conditional. If section 27(2) applies that date must be taken as the date the disposal of the dominium utile or the heritable right and title to Lanehead. If section 27(2) does not apply, then section 27(1) applies and the time at which the contract is made and the disposal taken to be made is 29/5/91. Each date falls within the year of assessment 1991/92. So it is unnecessary to decide whether clause 3 rendered the contract conditional. On this straightforward analysis the question for determination must be answered in the affirmative in both its branches at least insofar as the disposal in question is the disposal of the dominium utile.

Mr Pate suggested that the occupancy rights, which the Appellants had until 1/2/92, were granted by British Coal Corporation. However, that cannot be correct because, if those rights are referable to the missives then the Corporation had no rights of ownership from which they could grant rights of occupation. If those occupancy rights are referable to the Disposition then they cannot have been granted by the Corporation because they did not grant the Disposition. I consider the better analysis to be that the Appellants reserved to themselves in the Missives and in the Disposition a right of occupation until, at latest, 1/2/92. On that date, the right of occupation was given up and passed to the Corporation. For the purposes of section 27, insofar as that right of occupation is an asset which has been disposed of, it is disposed of under a contract, namely the missives which were “made” on 29/5/91 when the bargain was concluded or on 15/8/91 if section 27(2) applies for the reasons discussed in the preceding paragraph. The time at which the disposal of such an asset is made is taken to be 29/5/91 or 15/8/91. Even if it were taken to be 1/2/92 it would still fall within the year of assessment 1991/1992.

The Appellants contend that the date of completion of the contract did not occur until 1999. The date of completion of the contract, whatever that may in precise terms mean, is not relevant for the purposes of section 27. In my view the Appellants’ construction of the missives is unsound. As Mr Pate submitted, clauses 2(b) and (d) of the missives can be reconciled if the reference in clause 2(d) to “other date” is taken to be a date earlier than 1/2/02 as contemplated in clause 2(b). The effect of that construction is that the Appellants are entitled to occupy Lanehead up to but not beyond 1/2/92. That is a commercially sensible solution. It is stretching credulity to accept that parties intended that on receiving over £400,000 for the sale of their farm, the appellants would expect to be entitled to occupy the whole farm indefinitely if they so chose; and that the purchasers expected that they might never be able to enter into actual occupation of the farm in spite of having paid the sellers over £400,000. That would be a commercial nonsense. The commercially sensible solution is supported by at least one other clause in the missives, the Disposition itself, and for what they may be worth the subsequent actings and writs of the parties to the contract.

By Clause 1 of the missives, the purchasers paid an additional £35,000 as compensation for loss on forced sale of stock and equipment. This is inconsistent with the prospect of the Appellants’ continued long term occupation. Whether it is also inconsistent with the contemplated purchase of a “new farm” (on the basis that there would be no need to sell stock and equipment, when it could simply be transferred to the new farm) does not matter. Clause 2(f) contemplates surrender of occupancy at 1/2/92 at the latest; it requires notice to be given if the Appellants intend to vacate at an earlier date. Clause 5 is not easy to construe. However, it does not support the possibility of indefinite occupation. Rather, it contemplates a change of occupancy with the Appellants being responsible for services while in occupation and possibly for the payment of rates but the ultimate liability therefor being apportioned according to periods of occupation. The reference to “year” could be to the calendar year or the local authority year from March to March. Clause 7 of the Schedule of Conditions (maintaining subjects in existing condition until occupation) is a common clause in missives and is neutral on the interpretation of clauses 2(b) and (d).

Moreover, the Disposition expressly deals with occupancy rights which in terms thereof come to an end on 1/2/92. It should also be noted that clause 2(d) directs that specific provision is to be made in the Disposition in relation to occupation rights. The Disposition, insofar as it deals with matters covered in the missives, supersedes the missives. This is a document which, in the ordinary course of things would be revised by the Appellants’ solicitors. The clause dealing with entry is not a standard clause. In the first place, entry and actual occupation are normally given and taken on the same date. In the second place, entry is retrospective. In the third place, the purchasers are given access for limited purposes between 1/2/91 and 1/2/92, and in the fourth place, the Appellants retain occupancy rights for a year after the date of entry. It would be surprising if these somewhat special arrangements did not reflect the true intentions of the parties. The Disposition deals comprehensively with entry and occupation and must be taken to supersede what the parties may have said about this topic in the missives (Lee v Alexander1883 10R (HL )91 at 96). It has not been rectified in accordance with the statutory procedure.

For what it may be worth, if clauses 2(b) and 2(d) are thought to create ambiguity, the conduct of the parties supports the view that it was never intended that the Appellants should retain occupancy rights under the missives after 1/02/92. The agreed documents produced show that by November 1991 it had been agreed that the Appellants should rent Lanehead until 1993 (see finding-in-fact 14). Mr Smith was granted a short assured tenancy of the farmhouse with entry at 1/2/92 (see finding-in-fact 15). The firm paid for their occupation of the land after 1992 (see agreed statement of fact 7). None of this is consistent with the submissions of the Appellants. This is also inconsistent with the Letter of Understanding.

The precise purpose and reasons for the Letter of Understanding were not explored at the Hearing. Its existence does not mean that a court would have granted decree of rectification. It cannot be regarded as the equivalent of an order for rectification. It is inconceivable that British Coal Corporation would have agreed to rectification of the disposition so as to reflect the Appellant’s submissions on the missives. What they appeared to have agreed to in the Letter of Understanding was a package which inter alia resolved what was perceived to be uncertainty over the status of the Appellants’ (and possibly their firm’s) continued occupation of Lanehead. Moreover, in terms of section 9(7) of the 1985 Act the Revenue might well have had an interest to seek reduction of any rectifying order. It would be surprising if ex post facto a taxpayer could retrospectively rearrange his affairs so as to minimise his tax liability, particularly, as here, after an assessment had been raised.

Furthermore, even if the missives fall to be construed so as to give the Appellants a right to remain on the farm indefinitely unless they chose to move elsewhere, and the Disposition falls to be ignored for some reason, the result does not confer on the Appellants an option within the meaning of section 27(2). Even if construed as the Appellants contend, the contract does not become conditional upon the exercise of any option. The Appellants would merely have a right to stay or go. Whatever choice they made would not affect the conditionality of the contract. Nor would the making of such a choice create or discharge contractual obligations.

Summary

On a proper construction of the missives the heritable property known as the farm and lands of Lanehead and Marshallmark, Dalleagles, New Cumnock, Ayrshire, was disposed of within the meaning of section 1 and 27 of the Capital Gains Taxes Act 1979, by the Appellants either on 29/5/91, when the missives were concluded, or on 15/8/91 when clause 3 of the missives was purified.

The Appellants’ retained rights of occupation were, for the purposes of section 27, disposed of on 29/5/91, when the missives were concluded, or 15/8/91 when clause 3 of the missives was purified.

Soundly construed the missives did not confer on the Appellants a right of indefinite occupation.

The Letter of Understanding, insofar as relevant and the Appellants’ construction of the missives, either separately or together, do not have the effect of making the contract constituted by the missives conditional on the exercise of an option within the meaning of section 27(2) of the 1979 Act.

Result

I answer both branches of the question set forth above in the affirmative in relation to both Appellants. Accordingly, I determine that

I appoint parties to lodge and intimate written proposals for further procedure within eight weeks of the date of release of this Decision.