Q. My client has a large house and garden that he has owned for 20 years and now that his children have left home he wishes to downsize. He intends to build a house on part of his garden which he will then occupy as his main residence and will sell the 'old' house with the remainder of the garden. There are no 'permitted area' problems. Any other problems?
A. On the facts, it seems that private residence relief (PRR) will cover any gain on the disposal of the old house and part of the garden. However, what about the future? The recent case of Henke v HMRC SpC 00550 commented that the period of ownership for PRR began when the land was first bought, but entitlement to relief ran only from the date of occupation of the dwelling house as a main residence. If your client does as he plans and then sells his new home in ten years' time, then following Henke the gain arising on the disposal will be chargeable to CGT as to 20/30 of that gain, taking into account the low base cost of the underlying land following the part disposal of the old house and garden and the cost of the new build. That is because the underlying land does not attract PRR by reference to the old house because it is not being sold with 'that' residence ' and it has only been the garden or grounds of the new house for 10 of the last 30 years. So your advice to your client has to be that he can do it, but in the absence of a concession from the Revenue (unlikely) or a change in the law (unlikely) or Henke being overturned (possible) he is converting a gain that would be wholly exempt now into a larger chargeable gain on a future sale.
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