I have read through s.222 - 226 TCGA but remain undecided over an issue relating to period of ownership.
Scenario. Mother and father owned house on large piece of land (within the permitted area). They built a new house in their own garden and moved into, at the same time selling their old PPR. No problems with PPR relief. They then subsequently, (several years later) sold the house they had developed for a large gain. No queries of quality of residence etc.
Only query is looking specifically at s223(1) is whether the period of ownership of the land means that the dwelling house could only qualify for a few years of PPR as it had not been an actual residence throughout the total period of ownership of the original land (old garden).
It seems unreasonable that there should be a taxable gain in this scenario. The underlying land, before development, had genuinely been a garden.
I believe the Henke and another v Revenue & Customs Commissioners 2.5.06 Spc 550 would suggest there is tax in this scenario. Richard Curtis Taxation article entitled Permission to land 5/10/06 again supports this.
However Paul Benney's article Gain in the Garden 31/8/11 suggests otherwise, that PPR applies throughout on such a 'downsizing' and surely the common sense approach is that there should be no tax with this one.
I would very much appreciate readers opinions and in particular any experience of HMRC's current views with any cases they may have dealt with.
Thank you in anticipation.
Replies (6)
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Paul wrong?
I vote with Richard and the Henke decision.
HMRC's view is that the period of ownership commences when land is acquired even if there is no house otherwise the part of ESC D49 dealing with building a hosue within one year of acquiring the land would be unnecessary.
To clarify, does it depend on order of events or ...?
Is the general conclusion as Steve's - every point made is valid because:
1) if sell house 1 after house 2 is occupied - the land has constantly been associated with PPR, as set out by BKD. House 2 can enjoy full PPR relief.
2) if sell house 1 before house 2 is occupied - there's a 10 year period for house 2 where it cannot enjoy relief as not associated with PPR, following Henke
or - as Graham suggests here and in other writing - is the period of land ownership of house 2 a standalone item; it was acquired 10 years previous to occupation of house 2, hence a 10 year period with no PPR relief?
This directly contradicts the view offered by Carl Bayley in his Tax Cafe writings, where both properties enjoy full PPR belief providing done in correct order and time scales.
A client has raised precisely the NorfolkFarmer scenario (gardens within permitted area) as a tax planning query where she proposes to move into residence 2 as her main residence once built and then sell her original home. I've read Henke that many times before finding this thread and originally concluded as did BKD. But also seeing Mr Buckell's interpretation throws me into uncertainty. Does she need to crystalise the gain on the land before building the new house?
I think not but paragraph 106(4) of the Henke write-up confuses me. http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=2393
Its stated objective is to remove PPR relief from land outside the permitted area (yes,I see that in the calculation) AND then eliminate the time frame prior-to-occupation of the original home for land ineligible for PPR. In the second part of the calculation (I am no mathmetician) the stated objective supports BDK's view that only the timeframe for land use which predates genuine residential use need be stripped out. I don't see the second part of the formula m/n achieving this; it appears to be leaving the PPR timeframe in charge. But as I said, I'm no mathmetician.
Paragraph 73 states:
" If the Crown’s interpretation was accepted, it followed that private residence relief had to be restricted on a time basis, in accordance with s 223(2), to eliminate relief for the gain arising before Mr and Mrs Henke occupied Old Oak House". This implies to me that the period after occupation of the original home IS eligible for PPR to the date of subsequent plot disposal. The commentary seems to be dealing with the holding of undeveloped plots of land prior to building a home and I don't follow the extrapolation of that commentary, to exclude from PPR relief, a time period in which the new main residence hadn't yet been built - provided the original home is not sold first and ESC D49 is used.
Sorry I'm late to this very relevant query. I'll raise it as a new one referring back to this thread if necessary. Thank you.
I agree with Graham and Richard.
The dwelling house and the land enjoyed with it are subject to separate legs of the exemption.
The [first] Taxation article refers to the Varty v Lynes decision where it was held that PPR didn't apply to a piece of land sold after the main residence had been disposed of. It was held that the exemption applied to the land at the time of disposal by reference to its use at that time.
I agree with BKD and Norfolk Farmer that logic says PPR ought to apply. That was my view too, but assuming house 1 was occupied as OMR for 10 years before house 2 was built and house 1 then disposed of.
On sale of house 1, OMR applies but it can't then subsequently apply to any land left that was enjoyed with house 1 (by virtue of Varty v Lynes). On disposal of house 2 there is now a 10 year period during which the grounds that house 2 occupies weren't enjoyed with house 2 as an OMR, because house 2 wasn't even there.
That seems to me to be the combined effect of Varty v Lynes and Henke.
Time apportionment
Not sure exactly you are thinking of. I do not believe you can split the house from the land and you cannot value the property at the time the house was built. Time apportionment must be used (a function of the way the legislation is dratfed).
My view ...
... is that PPR should be allowed. Henke and the first Taxation article appear to differ from this scenario in a number of respects. The Taxation article (I have not read it in full) seems to deal with treatment of land in excess of the permitted area. Henke dealt with the scenario where land was held before building any house on it. I believe that the latter Taxation article is the relevant 'authority' here.
In this case, I asume that the original house and gardens were purchased together, so that there is no question that both the house and the garden were treated in their entirety as PPR from the outset. I would argue therefore that the land in question has been used as main residence throughout ownership - originally as being part of the first main residence and then as the underlying land of the second residence. Or, turning it on its head - "when during ownership was the land not used as the owners' only or main residence?" I would say, "never".
Varty v Lynes
I agree with Graham and Richard.
The dwelling house and the land enjoyed with it are subject to separate legs of the exemption.
The [first] Taxation article refers to the Varty v Lynes decision where it was held that PPR didn't apply to a piece of land sold after the main residence had been disposed of. It was held that the exemption applied to the land at the time of disposal by reference to its use at that time.
I agree with BKD and Norfolk Farmer that logic says PPR ought to apply. That was my view too, but assuming house 1 was occupied as OMR for 10 years before house 2 was built and house 1 then disposed of.
On sale of house 1, OMR applies but it can't then subsequently apply to any land left that was enjoyed with house 1 (by virtue of Varty v Lynes). On disposal of house 2 there is now a 10 year period during which the grounds that house 2 occupies weren't enjoyed with house 2 as an OMR, because house 2 wasn't even there.
That seems to me to be the combined effect of Varty v Lynes and Henke.