J Blackwell v HMRC [2017] EWCA Civ 232

Facts

• Mr. Blackwell owned development land that he decided to dispose of in a commercial transaction.
• To progress the disposal, he engaged solicitors to negotiate contractual terms, to review planning conditions and restrictive covenants, and to deal with completion and registration formalities.
• He also instructed a chartered surveyor to prepare a formal valuation of the land. The valuation served primarily to inform the asking price and negotiate with the purchaser but, inevitably, it also assisted Mr. Blackwell in broader estate planning and financing discussions.
• The combined professional fees were substantial and were shown in the computation of the gain as deductible expenditure under section 38(1)(b) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) as “expenditure wholly and exclusively incurred on the disposal.”
• HMRC opened an enquiry and concluded that only part of the invoices related strictly to the sale. It therefore restricted the allowable deduction.
• On appeal, the First-tier Tribunal (FTT) accepted HMRC’s apportionment, finding that the taxpayer could not establish that the whole of the fees were incurred “entirely for” the purposes of the disposal.
• The Upper Tribunal (UT) dismissed a further appeal, broadly endorsing the FTT’s approach that where expenditure has more than one purpose an apportionment is generally required.
• Mr. Blackwell obtained permission to appeal to the Court of Appeal, contending that the lower tribunals had applied an unduly narrow test and had focused on objective effects rather than the taxpayer’s subjective purpose.

Issues

1. Whether, for the purposes of section 38(1)(b) TCGA 1992, the phrase “wholly and exclusively incurred on the disposal” is satisfied when the taxpayer’s dominant purpose is to effect the sale, notwithstanding ancillary advantages.
2. Whether a tribunal must look principally to the taxpayer’s subjective motive or may instead rely on the objective consequences of the expenditure.
3. If expenditure has a dual function, what threshold of secondary benefit will disqualify the whole amount from deduction or require an apportionment?

Decision

• The Court of Appeal (Patten LJ, with whom Davis and Henderson LJJ agreed) allowed the appeal and restored the taxpayer’s original computation.
• The Court reaffirmed that, in the CGT context, the correct inquiry is into the purpose for which the taxpayer incurred the expenditure, not the collateral benefits that may flow from it.
• Drawing on authority in both income-tax and CGT jurisprudence, the Court emphasised that the statutory language “incurred on the disposal” directs attention to the subjective intention of the payer at the time the liability is undertaken.
• Where the taxpayer can show that the sole or main reason for instructing advisers is to bring about the sale, the presence of incidental or inevitable by-products (such as knowledge that may assist in future transactions) does not taint the expenditure.
• Only where a significant independent purpose can be identified will the expenditure fail, in whole or in part, the “wholly and exclusively” test.
• Applying those principles to the facts, the Court found that HMRC had not discharged the burden of showing a distinct non-sale purpose of sufficient weight. The UT therefore erred in law by endorsing an apportionment that was not justified on the evidence.

Legal Principles

• Section 38(1)(b) TCGA 1992 allows deduction of “incidental costs of acquisition or disposal,” including professional fees, provided they are “wholly and exclusively” attributable to the transaction.
• The test is primarily subjective: what was the taxpayer’s real, operative purpose? Authority for this approach includes dicta in Mallalieu v Drummond (albeit an income-tax case) and later CGT decisions.
• Incidental or minor secondary benefits—such as being better informed about market value—do not of themselves create a dual purpose sufficient to defeat a deduction.
• Tribunals should avoid a mechanistic apportionment merely because expenditure produces more than one consequence; they must consider whether any non-sale purpose is substantive or merely incidental.
• Proper contemporaneous documentation (engagement letters, file notes, valuation reports) remains critical. Such evidence assists in demonstrating that, at the time of incurring the expense, the dominant purpose was the disposal of the asset.

Conclusion

J Blackwell v HMRC [2017] EWCA Civ 232 confirms that, for CGT, professional fees are deductible when the taxpayer’s principal intention in incurring them is to effect a disposal, even if modest collateral benefits arise. The decision provides authoritative guidance on the “wholly and exclusively” test, stressing the centrality of subjective purpose and limiting routine apportionment where non-sale purposes are merely incidental.