CGT exemption if main residence when tenant?

CGT exemption if main residence when tenant?

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My client was a tenant in his only home. About 10 years ago he then bought the property and let it out. He ceased to live there as soon as he bought it. He has now sold the property.

Can he still get CGT main residence exemption (last 3 years) and lettings relief? I think not but thought I would check with you guys.

Replies (26)

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By johngroganjga
02nd Apr 2014 13:29

No.  He has to have occupied

No.  He has to have occupied it as owner.

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By User deleted
02nd Apr 2014 14:25

Poor tax planning

He ought to have stayed in it for 1 day after purchasing it.

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By Montrose
02nd Apr 2014 14:34

   All is not lost ,

   All is not lost ,

 

HMRC  Manuals at CG64500  says

" If the flat is rented under a tenancy then it is a residence within Section 222. However the individual may not realise this ".

There may be an argumment that TCGA s224(3) would deny main residence relief in part.

Montrose

 

 

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Replying to pauld:
Red Leader
By Red Leader
02nd Apr 2014 14:55

not with a view to gain

Montrose wrote:

   All is not lost ,

HMRC  Manuals at CG64500 says

" If the flat is rented under a tenancy then it is a residence within Section 222. However the individual may not realise this ".

There may be an argumment that TCGA s224(3) would deny main residence relief in part.

Montrose

I think he's fairly safe on the prohibition under s224(3) as there was a 12 year gap between purchase and sale. The sale was only triggered by very serious illness.

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By User deleted
02nd Apr 2014 15:22

Agreed, Montrose

It took me a while to fathom out the intention behind the words of s222 but I think you're right.

[EDIT - changed my mind again, see below]

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By Steve Kesby
02nd Apr 2014 15:07

As has been stated...

... relief is only available if it has been occupied as the main residence during the period of ownership.

CG64500 deals with the need to make an election when someone has more than one residence. It simply makes the point that rented accommodation can be a residence for that purpose; it doesn't mean that such a property will attract the relief.

As BKD says, one day's residence at the beginning of the period of ownership would have secured 18 months worth of relief, plus an equivalent amount of lettings relief (up to £40K).

Without occupation as the main residence during the period of ownership though, all is very much lost.

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By User deleted
02nd Apr 2014 15:18

I've turned again

I think the problem is s222(7)

 

 

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By Steve Kesby
02nd Apr 2014 15:25

I don't think...

... that a tenant can ever be said to have an interest in a property as owner, which I believe are implicit words in s 222(7)

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By Steve Kesby
02nd Apr 2014 15:35

@ BKD

Are we agreeing or disagreeing?

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By Steve Kesby
02nd Apr 2014 16:04

Basil

Makes an exceptionally good point.

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By User deleted
02nd Apr 2014 16:08

@Steve

We are agreeing - as regards this particular case.

But if I am reading the whole of s222 correctly it seems to me that if an individual were to sell the leasehold of a property that has been his main residence during ownership of the lease he would be entitled to relief against any gain arising on the sale of that leasehold. That seems to be implicit in the combined words of ss(1) and(7). (But that's a discussion point for another day.)

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By User deleted
02nd Apr 2014 16:16

Basil does make a good point

Which I had already considered, but took the words in the OP at their face value - ie at the point the property was bought  (for CGT purposes) the taxpayer ceased, as a matter of fact, to live in it.

There may well have been a short period between date of purchase and moving out, who knows.

I also agree with Basil re his views on 'normal' residence. Whatever the taxpayer's future intentions, if he had continued to live in the property for only 1 day after purchase I would be arguing that provided there was nothing else evidencing the contrary the mere purchase of the property did not suddenly remove main residence status. 

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By tonycourt
02nd Apr 2014 16:36

PPR relief possibly possible

I've only scanned the responses briefly so forgive me if I am repeating anything said already.

Firstly,and,unusually, I disagree with Steve here; a tenancy can qualify a residence for PPR.

Section 222(7) defines the "period of ownership" where there has been different interests at different times as beginning when "the first acquisition taken into account....under Chapter III of Part II is allowable". i.e. costs that can be taken into account for the purpose of working out a gain. Since about 1981 HMRC has accepted that a tenancy can be ownership (CG64930). However this will only be the case where there is capital expenditure in securing the tenancy, i.e. a lease premium.

If there was capital expenditure in the OP's case then the period of ownership starts from that point, and as clearly the property was the PPR of the occupier, s.222 relief and all that follows will apply.

However if there's no capital expenditure then the period of ownership starts on the purchase of the freehold

Secondly, If the tenant subsequently occupied the property for even a day as a freeholder then PPR would apply. It's worth remembering that the date of expenditure for CGT purposes is the contract date - if the tenant didn't move out until after completion then s.222 relief applies. 

 

EDIT Basil got there while I was typing with one finger!

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By User deleted
02nd Apr 2014 17:07

Just to clarify, Tony

ss7 says that the period of ownership begins with the date of acquisition in respect of the gain in question. In this case, the gain relates to the OP's ownership of the property, so per ss7 the relevant period of ownership begins, IMO, when he bought he property and not when he first leased it even if he had paid a premium for it.

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By tonycourt
02nd Apr 2014 17:14

Chicken and egg?

@ BKD  yes but...

If a premium were paid then the gain being calculated for the purpose of s.222 would encompass the whole period of ownership of the asset. That is, the cost of the freehold is enhancement expenditure relating to the original leasehold and not a separate asset. I think that is what HMRC imply in their example at CG64930. Or am I missing a point there?

 

 

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By The Innkeeper
02nd Apr 2014 17:29

Dear all

This thread ,in my opinion, is exactly what Aweb is for - robust intelligent debate on a technical point. Not like some of the unwarranted mud slinging that has happened recently.

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By Steve Kesby
02nd Apr 2014 17:55

I think you're both right

I'd interpreted tenancy as a simple tenancy (occupation under licence), rather than a lease, but I do need to back-pedal a bit.; it is an interest in the property

In the case of a licence to occupy it would extinguish (a disposal) on acquisition of the freehold interest. So the old interest would have already been disposed of for nil consideration and a new period of ownership commenced. That's what I thought had happened.

In the case of a lease there are two possibilities; surrender of the lease (again a disposal) and acquisition of the freehold (with a new period of ownership commencing) or acquisition of the freehold reversionary interest, meaning that the two interests (being held by the same person) will then merge to give the freehold interest.

In that latter case the period of ownership would indeed have commenced when the original lease was acquired as Tony suggests.

PS I didn't say that a property occupied as tenant wasn't a residence. In fact I agreed that it was. I said that it wasn't an interest in the property, which I now agree, was an incorrect statement.

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By User deleted
02nd Apr 2014 18:01

Hmmm...

... I think it will depend on the exact facts of the case. I think the wording of CG64930 is a little ambiguous. It talks about any gain whereas ss7 refers specifically to the gain which is the subject of s222. Still, if that's what their guidance says I'd happily use it against them.

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By tonycourt
03rd Apr 2014 11:59

What is "the gain" ?

@ BKD

I think you are worrying too much; "the gain" that is subject to s.222 includes the gain (if there is one) resulting from the disposal of the amalgamation of the leasehold and the freehold - it's a single gain not two separate ones.

For example, If you were to buy a 60 year leasehold in an apartment for £200,000 and five years later purchased the freehold for say £20,000 and a year later sold the freehold for say £240,000 that would be a single CGT disposal the base cost of which would be £220,000 - the gain to which s.222 would apply is £20,000. You wouldn't attempt to split the gain between the leasehold interest and the freehold. 

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Replying to lionofludesch:
Red Leader
By Red Leader
03rd Apr 2014 12:26

update

Thank you all for your responses.

Some further facts:

-the client lived in the property as a council tenant for several years.

-he bought the property under "right to buy" in early 2000s.

 

I think I need to find out from the client:

-exact dates for exchange and completion of the purchase.

-exact date when he vacated.

-date that the property was put with a letting agent or otherwise made available to let.

My working assumption is that if he lived in the property after exchange and before making the property available to let, then on balance of probability CGT main residence exemption applies to last 3 years of ownership (he sold in 2013/14) + lettings relief.

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By User deleted
03rd Apr 2014 12:35

Sorry, Tony, but ...

... if it were always the case that a leasehold followed by freehold is treated as a single interest, what is the purpose of s222(7) referring to different interests at different times? As Steve indicated above, it is perfectly possible, in appropriate circumstances, for there to be a disposal of the leasehold (which would be subject to calculation of one gain) followed by acquisition of freehold and subsequent disposal (subject to a separate calculation).

In the OP's case, I assume that there was no capital expenditure on the lease so we're left with consideration of the timings.

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By tonycourt
03rd Apr 2014 13:30

I'm not really sure.....

@ BKD

......you're thinking it through properly or reading what Steve said:

if you pay a capital sum for a leasehold property which is your PPR and dispose of it you can claim s.222 relief on the gain if there is oneif you pay for a freehold of a property which is your PPR and you dispose of it you can claim s.222 .......

S.222(7) doesn't come into play in either situation described above, however it does where:

you pay a capital sum for a leasehold which subsumes into the freehold. In that situation there are different interests in the property at different times and so s.222(7) applies

What me and Steve are saying is that where the interests merge (amalgamate as I put it) there is a disposal of a single asset. 

In this case it seems that no capital sum was paid for the leasehold, but that wasn't known at the time I made my first post  - so it could have been relevant and although it was later discovered that it was irrelevant is, well,.... irrelevant to the subsequent debate over whether s.222(7) can be relevant.

 

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Replying to frankfx:
Stepurhan
By stepurhan
03rd Apr 2014 14:10

False assumption

tonycourt wrote:
What me and Steve are saying is that where the interests merge (amalgamate as I put it) there is a disposal of a single asset.
You are assuming that the leasehold and freehold will automatically merge in all cases. As Steve Kesby pointed out in his last post, that will depend on the nature of the lease arrangements. Some will cease, resulting in a deemed disposal and some will merge with the freeehold. It is only in the latter case that you have a continuous asset and PPR. In the former case there is a clear break (lease deemed disposed, freehold purchased) which means the property has to be occupied after purchase for PPR to apply.

Depending on the actual dates, the distinction may not matter to the OP's client. It was undoubtedly the PPR up to the time of the freehold purchase, so if they occupied it after that, even for a short period, it would be be their PPR during a period of ownership whatever the lease arrangements.

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By Steve Kesby
03rd Apr 2014 18:21

Basil

The problem is that when you say the freehold was purchased, do you mean that:

the existing lease was surrendered (disposing of the original interest) and the freehold interest purchased (meaning that a new period of ownership commences)? orthe freehold reversionary interest was purchased, such that the two interest merge (and the period of ownership started when the earlier interest was acquired)?

In the former case there is only one month's actual occupation as main residence (plus 36 months deemed, equals 37 months, out of 192 months of ownership). That will also limit the amount of lettings relief to below £40,000. I make it £23,125 on a simple £120,000 gain before reliefs.

In the latter case there are 49 months of actual occupation as main residence (85 months with the deemed period), and a full £40,000 of lettings relief is available.

In the former case, the base cost is £200,000 (plus the value of surrendering the original lease).

In the latter case the £200,000 spent on the freehold reversion is enhancement expenditure to the wasting £20,000. The £20,000 ceases to waste at that point and so the base cost is £200,000 plus the unwasted part of the £20,000 (I can't be bothered to work it out though).

Either way the gain before reliefs is £120,000 less a little bit.

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By tonycourt
04th Apr 2014 10:01

This is being made far more complex than it is + calculations

I'm a little apologetic for starting this aspect of the thread, it seems to be causing more trouble than it should. Before I get on to calculations I'll clarify my point of view.

From a legal standpoint a leasehold interest in a property and the freehold reversion can of course exist under the ownership of the same person in the same capacity. And unless the owner takes steps to merge these they will remain separate assets. The merger can be done using a few different legal mechanisms, but the result is the same - they become a single asset. 

However as far as the operation of s 222, in particular s.222(7) I don't think that's relevant. In effect the latter statute aims to "merge" (in hindsight I should have avoided this description - sorry, but I use it again for consistency)  the interests to establish a single period of ownership.

@ Steve, in your first example if you're saying that there was a hiatus between the surrender of the lease and acquisition of the freehold then I agree, but I think in practice that would be an unusual situation - I don't see a leaseholder who is intending to acquire the freehold surrendering or otherwise disposing of the leasehold before the freehold is purchased.

However if it did happen that way then, using Basil's scenario, the ultimate sale of the freehold would have no connection to the surrender of the leasehold, it's an entirely different transaction and might as well be for a different property. But in working out the gain on the leasehold disposal the occupation of the leasehold property as a residence that could qualify for s.222 is 1/1/1998 until date of surrender.

So, working from the position Basil describes, i.e. a merged interest,(but only where the merger occurred after acquisition of the freehold) the CGT position is:  

Sale price of freehold                         £320,000  

 

Less cost of lease - wasted to say    £    9,000

Less cost  of freehold                       £200,000

Gain                                               £111,000                                             

While the lease has expired by the time of the sale there has been different interest at different times in the property therefore s.222(7) applies and you must look at the whole period of occupation from 1/1/98

49 months 1/1/98 to 1/2/2002 - actual occupation 

36 Months to 1/1/2014 final period of ownershis.

s.222 relief  85/192 x 111,000 = £49,141

Chargeable gain re let period 107/192 x 111,000 £61,859

letting relief £40,000

Gain after reliefs  £21,859 

 

 

 

 

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By User deleted
04th Apr 2014 11:59

I agree, Tony

I was reading s222(7) far too literally. If one does have the case where there is a prior disposal of the leasehold then that disposal will be dealt with as a single and separate disposal - end of story. The subsequent acquisition (and subsequent disposal) of the freehold is an entirely separate matter. In other words, each is dealt with separately, as a separate asset, under s222. Although, strictly, the taxpayer has different interests at different times in the same asset, that is irrelevant when considering each of the separate gains. I now understand that s222(7) is in point only where the nature of the interest has changed during a continuous period of ownership. Not sure if any of that makes much sense, but at least I understand what I'm saying :)

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