SMITH (INSPECTOR OF TAXES Vs. SCHOFIELD

JUDGEMENT

(1.) THE taxpayer, Mrs. Schofield, inherited a Chinese cabinet and a French mirror under her fathers will. The combined market value of these items at the time of her fathers death, which occurred on 19 April 1952, was 250. On 10 February 1987 the taxpayer sold the cabinet and the mirror at auction in London for a combined price of 15,800. The auctioneers charges and other incidental expenses at the sale amounted to 1,462. The difference between the value of the two items on 19 April 1952 and the net proceeds of sale received by the taxpayer on 10 February 1987 was therefore 14, 088.

(2.) IT is not in dispute that for capital gains tax purposes the taxpayer must be taken to have acquired the cabinet and the mirror, which for present purposes may be treated as a single asset, on 19 April 1952 for a consideration of 250. Further, although the Act does not spell this out in term, it is not in dispute that where an asset is disposed of by way of a sale at arms length, as in the present case, the first step in calculating the gain, or loss, on the disposal is to take the consideration for the sale -in this case 15,800 - and to deduct from it the sums described in what in now section 32(1) of the Act of 1979, that is to say, putting it shortly, (a) the cost of acquisition, in this case deemed to be pound 250; (b) the amount spent on improving the asset or defending the owners title to it prior to sale, in this case nil; and (c) the costs of disposal, in this case pound 1,462. Finally it is not in dispute that the net figure of 'gain' thus established - pound 14,088 - falls to be reduced for the purposes of the charge to tax by two factors. One i the restriction on the amount of chargeable gains accruing on the disposal of assets owned on 6 April 1965, which has been in force since the Act of 1965 was passed. The other is the 'indexation allowance' which, so far as individuals are concerned, applies to any disposal of an asset on or after 6 April 1982. These results follow from the provisions of Chapter II of and Schedule 5 to the Act of 1979 as amended Chapter II is headed 'Computation', and begins with section 28 which provides :

(3.) IN the present case, the taxpayer did not make an election under paragraph 12 of Schedule 5 and therefore her chargeable gain fell to be computed on the straightline or time -apportionment basis. So computed, the full amount of the gain being pound 14,088, the period of ownership before 6 April 1965, P, being 12 11/12' and the total period of ownership, P + T, being 34 10/12' the taxable element as calculated by the taxpayer is pound 8,864. But this, in the terms of section 28(1), is 'subject to' the indexation allowance for which provision is made by section 86 and 87 of the Finance Act 1982. These sections were very substantially amended by the Finance Act 1985. I set them out in the amended form in which they were in force at the time of the disposal by the taxpayer in the present case. Section 86 provides :