PPR, 2nd residence within permitted area

PPR, 2nd residence within permitted area

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Individual owns house + garden. Garden falls wholly within permitted area, and whole area is "occupied" by the owner as PPR for several years.
Several years after acquisition, individual builds a small, second residential "studio apartment" within the garden, which is immediately let out. The new building is never occupied by the landlord as own residence subsequent to the new construction. The new building (plus a bit of garden) is then sold several years later for a gain. For the purposes of this question assume that the gain is chargeable to CGT not IT.

If sustainable, the vendor would like to argue that the area on which the building is situated did qualify as his PPR at some point (ie prior to the construction of the dwelling) and on that basis the gain on the final 3 years would be exempt. Furthermore, he would like to argue that the gain on the residence and underlying land accrued over the entire period of ownership of the land, so that although the economic reality is that the majority of the gain accrued over the period since the residence was built, the statute makes no such distinction (apparently supported by the manuals at CG64771). That being the case, the proportion of the gain attributable to the let period is modest and would in fact be covered entirely by s.223(4).

The alternative interpretation is that S.224(2) requires a just and reasonable apportionment of the gain separately attributable to the land and to the building situated upon it, with the latter qualifying for no PPR whatsoever, as the building itself was never occupied by the landlord as part of his residence.

Any views on which is correct? It seems a common enough situation, so may be there is a decided case? I couldn't find anything in the CG manuals which is unequivocal.
Clint Westwood

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By Paul Soper
04th Jul 2008 13:46

Point Overlooked?
The legislation refers to a dwelling-house but that does not, necessarily, mean a single building - consider IRInt 73: no building can form part of a dwelling house with a main house unless it is appurtenant to, and within the curtilage of the main house. So on construction the studio apartment could have been merely an extension of a part of the dwelling house - as a granny flat would even though having a separate entrance. As outbuildings generally are where within the interpretation. This is supported by the studio apartment and its land being part of the permitted area.

So you could be looking at a letting of part of the main residence followed by a sale where, although an apportionment would be required, the letting exemption of £40,000 could apply. Of course the fact that it is immediately let out might not help this argument but in principle it seems a potential interpretation. In the old days of rateable values it would have been helpful if the houses were rated as a single dwelling. Then when separately rated that would point to the appropriate proportion for a just and reasonable apportionment. Presumably area (it is "small" we are told) might be a suitable method combined with time. Either way the mere building of the house on the land does not, in itself, mean that it is no longer part of dwelling house and its permitted area.

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By gbuckell
27th Jun 2008 16:56

That residence
If your client occupies the property as a residence for a little while before sale (opinions differ on length of stay - some say 3 months, others suggest at least 6 months - my view is that a shortish period is possible provided that the quality of occupation is as a residence and evidence is kept to support this), he could claim the final 3 year's ownership plus possibly up to another 3 years for the letting exemption.

However, there remains the issue in my second main paragraph. To illustrate

Property bought in 2000 and occupied as residence until 2010
Apartment built in 2005
Apartment let to 2010
Apartment occupied as residence to 2011
Apartment sold in 2011

So total ownership period is 11 years. Exemption claimed for the final 3 years plus 3 years letting (assume less than £40k). No exemption can be claimed for the first 5 years because the grounds were not part of "that" residence, i.e. the apartment, because the apartment did not exist during that period.

I have not seen any commentary on this issue nor am I aware of any test cases on it. However, I cannot see a flaw in this logic. If you can see one I would love to know!

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By AnonymousUser
26th Jun 2008 19:50

I suspect I am being "practised upon"
But I shall bite.
Yes I have been provided with the information from which to compute the gain. Quite possibly I have been provided with a lot of surplus irrelevant information in addition. It is the potential relevance of that surplus information that is in question, to whit, that which may be relevant to the computation of any PPR relief. But yes, I fully intend to claim any b/fwd losses and unused annual exemption against any gain remaining in charge after any available PPR relief.

You are right that our client has never lived in the building that is being sold, but I question the relevance of that statement. Like John R you persist in the myth that the building that is being sold is the "dwelling house" to which the statute refers. It is not. The dwelling house to which the statute refers is (I am suggesting) the house that has always been occupied by, is currently occupied by, and henceforth will remain occupied by, the vendor as the vendor's PPR. The land on which the building that is being sold is situated was "occupied" by the vendor "for the enjoyment etc" of the dwelling house (which is to say the house being retained) in the period prior to construction and letting of the building now being sold.

As I pointed out in the link 4 messages back, CG64203 expressly allows for the possibility that land being sold may contain buildings that do not form part of the dwelling house to which s.222 applies. Certainly there should be a restriction to the PPR for the period when the area was not occupied, although as it happens s.223(4) counters that effect.

We can bat back and forth alternative interpretations of the application of sections 222 to 224, but it should not be necessary. Either this will have been considered by the judiciary or at least HMRC's opinion should be set out in the manuals. If there is a decided case on all fours with these facts I should be interested to know. It can't be that uncommon a situation. As John R states, he has a couple of cases in the pipeline that are similar.

For the avoidance of doubt, I accept that denial of PPR relief is a reasonable interpretation of the legislation, and also a reasonable interpretation of an equitable result. I simply have yet to be convinced that it is the only reasonable interpretation and if PPR relief is available in law it is certainly not my position to deny it to the client. Indeed as PPR relief is automatic and not subject to a claim it is not even at the taxpayer's option or discretion to disclaim it if available.

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By AnonymousUser
27th Jun 2008 14:51

Graham, that is very helpful, thank you
All I was looking for really was the authority and chance to be convinced, which you have provided.

As I understand it, then, all that our client needs to do is to obtain vacant possession, prior to onward sale, so that the land and the building thereon (CG64203) are once again being enjoyed as part of the main residence by an application of a "present tense" test, and all should be hunky dory (subject to a disallowance for the earlier period of unavailability). Or have I got that wrong as well?

I have to say that I don't follow the logic of your second main paragraph. Perhaps this has been tested? At the time of selling the second residence the whole of the area being sold is part of the main residence (present tense test required by Varty v Lynes). So any restriction on Varty v Lynes principles fails. There may be a restriction for other reasons, such as because there might have been a period during which the land was not being enjoyed as a question of fact, at that time, as part of the main residence of the time, but there was no such historical period that meets that objection. Is this point addressed separately in the manuals (assuming not tested)? Not relevant to my case, of course, but just out of interest.

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By gbuckell
27th Jun 2008 12:12

PPR relief
I agree with John on this.

I accept that the land could have been sold with PPR relief at a time when it remained part of the garden or grounds of the house. By putting a new house on the land, the land ceased to be part of the garden or grounds of the original property and therefore ceased to qualify for PPR relief based on its link to the original property. The case of Varty v Lynes supports this view and that is HMRC's view (see http://www.hmrc.gov.uk/manuals/cg4manual/CG64377.htm). Varty v Lynes concerned a prior sale of the house but HMRC are also of the view that, if land formerly part of the garden is fenced off prior to a sale then the sale is not eligible for relief despite the retention of the original house (I would give you the manual reference but I cannot immediately locate it and the cross links in the manual appear to be messed up at present).

It struck me a while ago that this can work quite harshly. Consider the case where a house is owned for, say, 10 years. The owner then builds a new house in the grounds, moves in and sells the old house. The sale of the old house is exempt of course but what about the new house? If that is sold in, say, another 10 years, the land has been owned for 20 years but the new house has only existed for 10 years. It seems to me that only 10/20ths of the gain on the new house is eligible for PPR relief in the same way as if a plot of land was purchased and a house built on it 10 years later. The only solution is to engineer a disposal of the land just before the new house is built (i.e. whilst still part of the grounds of the old house and so eligible for PPR relief) so that the deemed acquisition date is immediately before the new house is built.

But how many clients will tell you their plans before they carry them out?

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By geoffwolf
26th Jun 2008 18:30

scenarios
I meant that your client never lived in the building that is being sold but simply gave you the means to calculate the gain to be charged from which any unused exemption for the year and any bfwd losses can be deducted.

You may also wish to reduce the gain on a time basis now that pooling is back in respect of gains occurring after 6.4.08

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By AnonymousUser
26th Jun 2008 17:04

I dunno, John
Subsections (a) and (b) of section 222 are separated by the qualifier "or", which implies that they operate independently of each other, and a claim may be made under subsection (b) without there being a claim under subsection (a) (yes OK I know that it is not a "claim" but an automatic relief). Indeed I am confident that had the parcel of land been sold without there being any building sitting on it then it would have qualified for PPR. That is a regular event in practice.

The confusion perhaps arises because subsection (b) refers to "THAT dwelling" (my emphasis) which can only mean the same dwelling as would qualify under sub (a) had there been a disposal of such a dwelling.

My point is that the dwelling to which section 222 applies, throughout the section, is in this case the dwelling that is retained by the vendor, and not the studio apartment that is being sold. The studio apartment that is being sold MIGHT qualify as a dwelling in its own right, but it is not "THAT" dwelling to which the relief under S.222 applies (or it is suggested applies) in this case.

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By User deleted
26th Jun 2008 15:58

S.222
How can S.222(b) apply if S.222(a) does not apply? Unless S.222(a) applies (i.e there is a qualifying residence within that subsection) there cannot be a "that residence" that is a requirement of (b).

A CGT computation would relate to a particular disposal of a dwelling. It is only land occupied with that dwelling that will be capable of exemption. The land in question is being sold with the new dwelling. When the original dwelling is eventually sold it will not be sold with the land in question and so will not form part of the computation.

I hope this clarifies the position. I would love to be proved wrong on this as I have two clients in this situation so any other views would be most welcome.

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By AnonymousUser
26th Jun 2008 15:12

John R
I am almost convinced by your reasoning. I just want to go that extra meter.

What is being disposed of, here, is a parcel of land on which there has been a considerable amount of enhancement expenditure. That parcel of land has not qualified for PPR throughout its period of ownership. That much is clear. That parcel of land has qualified for PPR for part of the period of ownership, that part being the period prior to the enhancement expenditure, at which time the land was being used for the enjoyment of the residence that is not being sold.

No part of the proposed claim is reliant on the enhancement expenditure being a "qualifying dwelling house" within S.222(1)(a). Sole reliance is placed on S.222(1)(b). Furthermore, it is fully accepted that PPR relief would be denied for that proportion of the gain accruing on the land during the period when it was not being used for the enjoyment of the RETAINED building. Nevertheless, it is the RETAINED building, not the one being sold, which it is suggested is the "qualifying dwelling house" for the purposes of S.222.

Indeed the CGT manuals are at pains to accept that the presence of a building situated on land does NOT of itself disqualify the disposal for PPR, as at
http://www.hmrc.gov.uk/manuals/cg4manual/CG64203.htm

The basic principle of computing the gain on a single disposal is that you take the original cost, add enhancement expenditure, and deduct the proceeds. In order to depart from this principle it would appear to me to be necessary to separate the disposal and to say that what is being sold is not one asset (land that happens to contain a building) but two (land on the one hand, and a building contained on it on the other), in other words to say that the enhancement expenditure is not enhancement of the original but creation of a new, separable asset. Maybe that is indeed the way to go, but I am still bogged down in the legislation and manuals trying to find definitive guidance, so far without success.

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By AnonymousUser
26th Jun 2008 14:47

At the risk of thread drift ...
... there is a sentence in CG64771 that I cannot follow. For convenience here is the link
http://www.hmrc.gov.uk/manuals/cg4manual/CG64771.htm

CG64771 highlights an example of a computation which, in the interpretation of HMRC, is incorrect. As part of their rebuttal they say that "Section 224(2) does not apply to these circumstances" I got to wondering, why not? Section 224(2) states

"If at any time in the period of ownership there is a change in what is occupied as the individual's residence, whether on account of a reconstruction or conversion of a building or for any other reason, or there have been changes as regards the use of part of the dwelling-house for the purpose of a trade or business, or of a profession or vocation, or for any other purpose, the relief given by section 223 may be adjusted in a manner which is just and reasonable"

In that example case (not in my OP), has there been a change in what is occupied as the individual's residence? Yes there has. In the period from June 1982 to June 1985 it was not being occupied as his residence. Afterward he was. What could be clearer than that? Is the reason or purpose for the change relevant? No it is not, because S.224(2) applies "or for any other reason" and "or for any other purpose".

So why does S.224(2) not apply in the example case?

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By User deleted
26th Jun 2008 14:38

Not a qualifying dwelling house
TCGA 1992, s 222 states:

"(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in—
(a) a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area."

As the dwelling house that is now being sold has never itself been an "only or main residence" of the vendor, it cannot be the subject of relief. Accordingly, unless the new dwelling becomes a main residence either as a question of fact or by election, no PPR (or letting) relief can be due.

There can be no relief on the land element as it has to be occupied and enjoyed with the particular dwelling that is being sold because of the words "with that residence" in subclause (b) above.

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By AnonymousUser
26th Jun 2008 14:13

Not sure that I follow you, Geoffrey
First off, I do not understand the significance in the "difference in scenarios" that you seek to draw. In my scenario the building is indeed occupying space that previously qualified for PPR.

Also, the mechanics of calculating the gain, and the mechanics of determining the available PPR relief are two separate issues. To be sure you may end up with a different amount of PPR relief if you vary the mechanics of calculating the gain.

You don't actually state in your response whether you think that any PPR relief on the building would be available in my scenario. Who is having their cake and eating it? HMRC or the taxpayer?

The only reference that I can find as coming close to providing guidance is, as I said before, CG64771. The facts are definitely not on all fours with the example in that section, but one sentence in it assumes considerable importance. "Even if it did [apply], Section 224(2) only adjusts the relief given by Section 223. It does not alter the method of computing the gain".

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By geoffwolf
26th Jun 2008 13:29

cake and eat it?
This is similar but not identical scenario to turning 1 dwelling house into 2 or more apartments all of which have separate access. In my opinion original cost of the whole needs to be apportionned the garden clearly not having any large value then add capital cost of the studio and deduct total from net proceeds to arrive at the gain on the studio.

The difference in scenarios is that the flats would occupy space that was previously part of the whole residence.

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