NOLAN L. J. - (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. Capital gains tax was introduced by the Finance Act 1965 with effect from 6 April of that year. Section 19(1) of the Act of 1965, now re -enacted as section 1(1) of the Capital Gains Tax Act, 1979, provided, inter alia : 'Tax shall be charged in accordance with this 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.'
(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 : '(1) The amount of the gains accruing on the disposal of assets shall be computed in accordance with this Chapter, and subject to the other provisions of this Act [and sections 86 and 87 of the finance Act 1982]. (2) Every gain shall, except as otherwise expressly provided, be a chargeable gain. (3) Schedule 5 to this Act (which restricts the amount of chargeable gains accruing on the disposal of assets owned on 6 April 1965) shall have effect.' Section 29, so far as material, provides by sub -section (1) that 'the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain'. Section 29A provides for disposals or acquisitions to be treated as if they were made at market value if, inter alia, they were effected by way of gift. There then follows a sub -heading 'Computation of gains', followed by section 30 which provides : 'The following provisions of this Chapter, and Schedule 5 to this Act, shall have effect for computing for the purposes of this Act the amount of a gain accruing on the disposal of an asset.' One of those 'following provisions' is section 32, to which I have already referred. I turn next to the provisions of Schedule 5 which deal with assets held on 6 April 1965. The broad purpose of these provisions is to ensure that the charge to capital gains tax is confined to gains accruing after that date - to ensure, in other words, that the charging provisions introduced by the Act of 1965 do not have retrospective effect. This purpose is achieved in one or other of two ways. The first way is to treat the asset as if it were sold and immediately required by the owner at its market value on 6 April 1965. This method is compulsory in the case of certain specified assets, such as shares quoted on the stock exchange, or land with development value. It could also be adopted in the case of other assets if the taxpayer so elected, under what is now paragraph 12 of Schedule 5. If no such election has been made the chargeable element in the gain is calculated on the 'straightline apportionment' basis, set out in what is now paragraph 11 of Schedule 5. It is, I think, sufficient to quote sub -paragraphs (2) and (3) of paragraph 11, which provide : '(2) On the disposal of assets by a person whose period of ownership began before 6 April 1965 only so much of any gain accruing on the disposal as is under this paragraph to be apportioned to the period beginning with 6 April 1965 shall be a chargeable gain. (3) Subject to the following provisions of this Schedule, the gain shall be assumed to have grown at a uniform rate from nothing at the beginning of the period of ownership to its full amount at the time of the disposal so that, calling the part of that period before 6 April 1965, P, and the time beginning with 6 April 1965, and ending with the time of the disposal T, the fraction of the gain which is a chargeable gain is T/P + T.'
(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 : '(1) This section applies to any disposal of an asset -(a) which occurs on or after 6 April 1982. ... (2) In relation to a disposal to which this section applies - (a) the unindexed gain or loss means the amount of the gain or loss on the disposal computed in accordance with Chapter II of Part II of the Capital Gains Tax Act 1979 and, if there is neither a gain nor a loss on the disposal as so computed, the unindexed gain or loss shall be nil; and (b) relevant allowable expenditure means..... any sum which, in the computation of the unindexed gain or loss, was taken into account by virtue of paragraph (a) or paragraph (b) of sub -section (1) of section 32 of that Act...... (4) The following provisions of this Chapter have effect to provide for an allowance (in those provisions referred to as the indexation allowance) which, on a disposal to which this section applies, is to be set against the unindexed gain or, as the case may be, added to the unindexed loss so as to give the gain or loss for the purposes of the Capital Gains Tax Act 1979 as follows. - (a) if there is an unindexed gain, the indexation allowance shall be deducted from the gain and, if the allowance exceeds the unindexed gain, the excess shall constitute a loss; (b) if there is an unindexed loss, the indexation allowance shall be added to it so as to increase the loss; and (c) if the unindexed gain or loss is nil, there shall be a loss equal to the indexation allowance.' Section 87 provides : '(1) The provisions of this section have effect for the purpose of computing the indexation allowance on a disposal to which section 86 above applies. (2) The indexation allowance is the aggregate of the indexed rise in each item of relevant allowable expenditure; and, in relation to any such item of expenditure, the indexed rise is a sum produced by multiplying the amount of that item by a figure expressed as a decimal and determined..... by the formula (RD - RI) v RI where - RD is the retail prices index for the month in which the disposal occurs; and RI is the retail prices index for March 1982 or the month in which the expenditure was incurred, whichever is the later.... (5) For the purposes of this section - (a) relevant allowable expenditure falling within paragraph (a) of sub -section (1) of section 32 of the Capital Gains Tax Act 1979 shall be assumed to have been incurred at the time when the asset in question was acquired or provided;......' ;